Bailey's Home Loans (III)

I really should read Real-World Economics Review Blog more often.

Here's an interesting collection of quotes by central bankers about how banks really work. It is dated January 26, 2012, well in advance of the Keen/Krugman debate.

Jesse Frederik, its author/compiler, opens the selection with these words:

"Does the ‘money multiplier’, this core concept of monetary theory, exist? Do banks need reserves before they create money? Not according to central bankers. Banks can create money at will, even without reserves, though they will have to find or borrow these reserves afterwards. But as the central bank has to provide these, this is not any kind of  constraint, even when the central bank increases the rate of interest.
"Some quotes which imply that central banks can not control the amount of money by influencing reserves". (Emphasis in the original)

My preferred quote, as it is more direct and concise:

"In the real world, banks extend credit, creating deposits in the process, and look for the reserves later." Alan R. Holmes, Federal Reserve Bank of New York (1969)

It seems Holmes agrees with good ole' George Bailey, then (see here and here).

The Week that Was: Europe.

Last week was an ominous one for Europe.

Nicolas Sarkozy, junior partner of the Merkozy two-headed monster, seems set to lose the Presidency. After appealing (April 25) to a National Front audience of poor white voters ("Être traité de fasciste par un communiste, c'est un honneur!"; "To be called fascist by a communist, it's an honor!" My translation), Monsieur le Président ruled out any deal with far-right National Front (April 27).

Suggested slogan for M. Sarkozy's campaign:
Voter pour moi, pauv'con. [A]

The symbolism of Sarkozy's statement is hard to overstate: April 26 was the 75th anniversary of the bombing of the basque town of Guernica (north of Spain), by a combined Nazi-Fascist taskforce.

Acting in support of their local puppet, Francisco Franco, the German Legion Condor and the Italian Legionary Expedition were allegedly attempting to assess the effect of high explosive and incendiary aerial bombing on civilians. By most assessments, the experiment, considered a dress-rehearsal for Blitzkrieg, was highly successful.

Acting in support of her French junior partner, German chancellor Angela Merkel was quick to blast French "socialist" François Hollande's idea of changing the so-called "EU fiscal compact" (April 27). It's yet to be assessed what effect Madame Chancellor's statements will have on the French voter.

Combined with the resignation of Dutch PM Mark Rutte last Monday, one of her closest allies, Frau Merkel has her reasons to worry: observers believe the public might be tiring of the "expansionary fiscal contraction" (See here). Be that as it may.

----------

On both sides of the Atlantic, others have better reasons to worry.

USA GDP grew by a modest 0.5% quarter on quarter. Falling private investment and government spending seem to be driving the reduction. (See here)

But the US is still growing. British GDP shrank by 0.2% in the first quarter of 2012. The minister of State for Universities and Science, David Willets, clarified that it's not that the British economy is shrinking as a consequence of the Cameron/Osborne policies, but that the UK had an "unbalanced economy". (See here)

Moreover, "we have not deliberately taken the economy back into recession", said Willets. You have to understand them: it's not like anybody warned them what the consequences of their policies would be. Right?

But the prize goes to Spain. Last Thursday, S&P downgraded Spain's bonds two notches, to BBB+. Having previously forecast a Spanish GDP growth rate of 0.3% for 2012, S&P now forecasts it will shrink by 1.5%. Bank of Spain figures show that GDP contracted by 0.3%, QonQ, for the first quarter of 2012, while unemployment hits 24.4%.

Merkozy and their local representative Rajoy still have some reasons to celebrate, after all.

Image Credit:
[A] Nicolas Sarkozy. Wikipedia. Photo taken by Remi Jouan in May, 2007. No agreement of Jouan implied by my usage of the photo. For that matter, no disagreement implied, either!

The "Entitlements Debate"

Unlike similar sites overseas, in Australia comments to online pieces are usually pre-moderated: if you break the house rules, you are not published.

Well, I imagine yesterday must have been a busy day for the comments moderators of Fairfax Media. Have a look at this screen capture (apparently showing only op-eds/politics):

Click for a larger image

In my experience, highly commented pieces get something between 200 to 300 comments. You can see that there were two "entitlement" pieces above this range (one of them more than doubling it!).

Anyway, in my belief that one learns as much from the comments, as from the pieces themselves, I read most of the 377 comments to another of Peter Martin's pieces in the business section (not listed above): "The Painful Truth about Trying to Live on $35 a Day".

I'll pick a few of them for further comment.

After going into them, I'll point to a very good post by Matt Cowgill. If you are capable of rational thinking and believe most people are like you, you can skip the rest of my post: I dwell on irrationality.

Otherwise, you should read this first, and then jump to Cowgill's blog.

We Are Legion
The first comment:

 " 'the single Newstart allowance now barely meets the median rent of a one-bedroom flat in Melbourne and Perth'
"Since when is it expected that the unemployed 5% of the population should enjoy a standard of accommodation that is higher than that of 50% of the working population? The dole should be enough to cover the very bottom 5-10% rental range not the median rent.
"Kaz | Online | 09:49AM" (See here. You will need to click on "More comments")

"Kaz" is commenting on Martin's statement that in Perth and Melbourne, unlike Sydney, the whole of the Newstart Allowance plus Rent Assistance ($304.95 per week) would be enough to cover the median rent of a one-bedroom flat ($300 per week).

What caught my attention is that "Kaz" does understand the notion of median: in the case of rents, it means if the median rent is $300, then half the rents are less than $300, half are more, as correctly implied.

So, "Kaz" has some basic statistics knowledge. This, however, does not imply ability to reason: "Kaz" doesn't realize that paying $300 in rent would leave nothing for other expenses.

In its defence, one could argue that perhaps "Kaz" was angered, did not think properly and wrote too quickly. Fair enough.

But there's more: by implication, "Kaz" appears to believe that "dole bludgers" should move to cheaper accommodation. While "Kaz" does not say this explicitly, it is a recurrent theme and is said clearly by others:

"They should only get enough to cover rent in an outer suburb, 3 meals a day at home and rates. If they want anything more they should work for it. The survey above asks working people how much they live on a day. We deserve the luxuries because we work for it. "Tim | Sydney | 08:04AM"

But real estate agents/property managers have a fiduciary duty of care to landlords. To rent a place they require applicants to prove their income. That's what they are paid for. If they don't, they could be sued for lack of due diligence.

So, if you're not employed, basically you can't just move to another rented place. Unless your Mum and Dad agree to take you back, you're stuck in your place, paying what you were paying before you got sacked.

That might be news to both "Tim" and "Kaz", but it was said explicitly by many in that thread (the first I found was StBob | Melbourne | 08:55AM).

I could say more about "Kaz" and "Tim", but let's leave things at that.

The point is not to single two bozos out and ridicule them, even if they deserve it (and these two really do). The point is that these are basic failings in elemental logic, a lack of common sense and ignorance of how basic things work (like what one must do when applying for a place for rent).

That so many people fail so abysmally in this account, does not bode well for public debate on this matter, because the problem is much more complex than that.

Consider this:

1. some commentators appear to be deliberately lying (see bbb | Prague 08:22AM and check here or here, to open tax calculators and make your own mind);
2. some welfare cheating may be real (JSP Worker | 04:23PM), but how much of it (Margaret | Canberra 02:42PM), and what to do about it (Depressed | 01:34PM and 02:56PM, also see here)
3. people talk about "dole bludgers" milking the system, but what about job agencies? See here. Are they actually helping job seekers to get a job? And also P | 11:53AM.
4. a system of welfare payments that could not have been better designed to foster pettiness among welfare recipients: "WOW, the unemployed get paid MOAR [sic] to sit on their asses than I ever did to GET EDUCATED... what a system!" (Newstop | Sydney | 11:21AM); "Why shouldn't mothers WITH A JOB be paid some of their salary when taking time out to have a baby. Much better option than the baby bonus that hands out cash to any bogan that has a baby" (Money for working mothers, not dole | Sydney, 10:56PM). Note: I am assuming these two comments, however petty, are genuine opinions. As bbb's case shows, they may be just lies.
5. a welfare system that seems designed to throw you into poverty before paying you: Phillip Green | Frankston 03:12PM.
6. a welfare system where "customers" appear to be kept uninformed of their entitlements. See the discussion related to PBS, and health care card, where even supporters of welfare payments ignore that there is a health care card!

Cowgill's Post
Having said all that, I recommend this post by Matt Cowgill. He deals with numbers and does so comprehensively; for better or for worse, I deal with ideology.

Moving to Oz? (III)

Or, "it's a class hatred thing"

In a previous post, I mentioned that it's unusual to hear people talking about the experience of being a lower-class Aussie.

Well, I intend to touch part of this subject in this post. I will argue that Australian society is not as egalitarian as it is commonly believed.

Before starting: these posts provide details explaining why I feel "entitled" to speak on this subject. They also work as a warning: I am expressing personal views.

But instead of commenting myself, I will try to present mostly quotations from others. They reflect my personal experience, so you are free to disagree.

My first quotation comes from a reply to a recent post at Peter Martin's blog. I've commented on this subject before.

Martin reports that the Newstart Allowance (the notorious dole), plus AU$ 60.10 of rent assistance, add up to $304.95 per week. This is insufficient to pay for the $420 median weekly rent on a one-bedroom flat in Sydney (let alone any other expenses) and barely covers rent, leaving nothing else, in Melbourne or Perth, where rents are lower ($300). (See here)

An anonymous commentator replied to Martin (April 17, 2012):

"(...) None of this is coincidence. These policies are the way they are because both sides of politics despise unemployed people. It's a class hatred thing. And Labor is just as mean as the Libs on this. Listen for the dog whistle next time the Prime Minister refers to 'working' families". (My emphasis)

"But that's just one person's opinion", someone could say. "Can one find evidence of the contempt or class hatred this person speaks of?"

Let me try. Take shadow Treasurer Joe Hockey, who recently revealed his plan to end the "age of entitlement" in Australia (see here). Interviewed in ABC's Lateline, by Tony Jones, Hockey repeatedly refused to specify what entitlements he had in mind (see here):

"TONY JONES: OK, let's just try a couple of things. The baby bonus in Australia, would you keep that? Would you keep that or would you look at it because it's not means tested?
"JOE HOCKEY: Well I'm not going to get into cherry-picking Australian initiatives from London. What I'd say to you is that we need to continue to be vigilant. Welfare represents around a third of the entire Australian federal budget. It is an enormous cost burden."

"So, there may be a doubt", is a potential objection. "Maybe the entitlements to be cut are the so-called middle class and corporate welfare?"

Everybody else may have doubts here. Hockey's fans, however, did not have much difficulty guessing what entitlements were those and expressed that clearly in the comments section of Annabel Crabb's latest piece in The Drum (see 19 Apr 2012 5:32:51pm):

"Ahimsa_Fruitarian: The welfare parasites are there because the welfare is paid easily and for free. If the gov't stopped unemployment payment to the long-term unemployed then most of them would get a job fast. Employers can also help to make more jobs if that becomes an issue by being allowed to reduce wages so they can afford to employ more (U think this sounds crazy?) Think about it - it also means more productivity per employer so items become cheaper to make and buy. Farmers would be able to afford to grow fruits that now they say are too expensive in labour (wages) to grow. This means Australian farmers cannot afford to grow the world's best species of fruit trees, so that proves our present system of wage rises and taxes to pay welfare parasites does not work." (Emphasis added)

"Ah!", I can almost hear it, "That's just an isolated extremist".

Maybe. But if that was an extremist, it's not alone. In fact it has plenty company.

Say, News Ltd's Malcolm Farr:

"There was a chilling line in a Daily Telegraph piece on girl gangs back in 2008. Reporter Lauren Williams had a 2.30am chat with a Glebe teen called 'Carson' in the article.
" 'Carson' explained why she and her friends stole.
" 'If the government gave us more money then we wouldn't have to rob people,' she said, apparently satisfied she had delivered an impregnable justification for purse snatching, shop lifting and mugging".

After suggesting that dole recipients tend to criminality, Farr goes on to explain that the unemployed are not meant to be comfortable: "comfort" (i.e. having a roof over your head and some money left to eat) would deny them the incentive to look for a job. Like cattle en route to the killing floor, they need to be probed to overcome their laziness. [*]

If subtler and more articulate (Farr, after all, is a professional journalist) this is the same argument made by "Ahimsa_Fruitarian". So, it's hardly an isolated thing.

I could present more examples, but I will limit myself to one more quote. This is the Lord Mayor of Melbourne, Robert Doyle's 23-10-2011 opinion piece, entitled "Selfish Rabble Got What it Deserved". (See here)

Its title is self-explanatory, but by "what it deserved" Doyle was referring to this:

"Doyle's disgust was directed at the Occupy Melbourne protesters against inequality, not against the unemployed", will be the objection now.

True, that was his ostensible target. So, this means he was justified to use unnecessary force against peaceful protesters against inequality?

Further, as in Crabb's case, his supportive readers clearly understood that the message was not limited to the protesters:

"Rob of Melbourne (Posted at 12:29 PM October 23, 2011)
"great work robert doyle you have the support of the 99% and the losers who think they are will quickly realise they are nothing more than dole bludgers with too much time on their hands."
"too many passengers (Posted at 7:46 AM October 23, 2011)
"why does the media give these oxygen wasters publicity?. cut their dole,and give them a job. Until then they have no right to protest" (Emphasis added)

"Again, these are isolated extremists."

Well, if "isolated extremists" pop up everywhere, they don't seem "isolated" any more.

But extremists or not, these are Coalition voters, supporters or at the very least sympathizers. Are the Coalition politicians absolutely irresponsive to them?

I find it dubious. According to these last comments, dole bludgers have no right to protest. This is part of Hockey's speech:

"So perhaps what we are witnessing [the European welfare state] is a chronic failure of the democratic process.
"A weak government tends to give its citizens everything they wish for. A strong government has the will to say NO!"

This at least means that Hockey, like Farr, is an advocate of "tough love". From here to deny dole bludgers the democratic right to protest is a small step, one that Melbourne's Lord Mayor (a Coalition politician, if I am not mistaken) was only too eager to take.

It's time to face reality: it's not just the unemployed or the protesters. Watch the current affairs shows at channels Nine and Seven, listen to the talkback radio shock jocks, or read the so-called "right of centre" newspaper columnists. It's the "queue jumpers" (i.e. asylum seekers), the already mentioned "dole bludgers" (also "job snobs"), the "welfare queens", the "Bogans" and "Lebs", it's the low paid workers and the trade unionists ("union thugs"). Some years ago it was the "Wogs", "Chinks" and the "Abos".

If you are a poor Caucasian don't fool yourself into believing you are better regarded. (Overseas readers: Bogan is Aussie slang; basically, poor white trash). They won't call you that when asking your vote; they'll call you "battler", "aspirational Australian", "working families". But, deep down, they still see you as a Bogan, and you know it. So, let's quit pretending.

Chances are the objection now would be: "It's not right to bundle 'dole bludgers' and 'working poor' together".

Let me ask you, why not? Nowadays nobody is immune to graduating from "working poor" into "dole bludger" overnight. No one is more at risk than the working poor; but not even the so-called middle-class is free from that risk. In essence, if you work for someone else, you are one step away from turning into that most despised creature: the "dole bludger".

Don't get me wrong: I am a fucking wog and include myself in this "precariat" underclass and I do work, part-time (I lost my second part time a month ago, or so). I walk over a very thin line and any push could send me to the wrong side. So, now you'll understand that I use the pronoun "we" to refer to you and I.

In this sense, race and religion are the icing on the cake. It may make some of us even more hated and despised. But we all are already hated and despised! It's a "class hatred thing", as Martin's anonymous commentator put it.

And race and religion are used to divide us: to deliberately pit Bogans and Lebs against each other, for instance. (See here)

Having said that, does it mean every non-poor Australian (make no mistake, born here or "imported") hates and despises us? Clearly, that's not the case. There are genuinely egalitarian Aussies, perhaps most Aussies.

But this prejudice is by no means uncommon. It's not unusual at all among well-off Australians, whether locally born or "imported" (and the higher up the food chain, the more frequent it is). And, as far as I can tell, this applies regardless of religion, age, education, gender, sexual orientation.

That's why the Coalition will use this prejudice to get votes, while Labor either won't do shit about it, or might even join the bandwagon. Mark my words.

They will sell the view we are parasites, knowing full well that it's not a hard sale. So, for them, we are the parasites, not the miners who don't pay taxes, not the executives who get astronomical bonuses and tax concessions; not the equity fund that sold David Jones and ran away without paying taxes; not the swindlers from the "colleges"/"immigration agents" who took money from Indian students and forced them into slavery with their "permanent residence" courses: all of them deserve what they get, and, boy, do they get a lot! It's us who don't deserve crap.

The weather forecast? Incoming rhetoric thunderstorm in the months ahead: "Aussie battlers" this or that (even Abbott's or Hockey's battlers, for Christ's sake!), "aspirational Australians", "working families", pensioners vs "dole bludgers", "welfare queens".

Just watch the current affairs shows or listen to the radio in the coming months, count the number of times they mention those words and how many times people will mention that Fortescue Metals Group did not pay corporate income taxes until this year, and remember what I just said.

In fact, and to be fair, even some in our so-called Marxist/anarchist left are not immune to this (trust me on this).

Whether you are thinking about moving to Australia or already living here, the sooner you understand this, the better for you.

Further reading:
Parnell Palme McGuinnes (April 1, 2012). "Justice isn't Blind, it's Biased".
Mark Metherell (March 30, 2012). "When it Comes to Oral Standards, Poor Face Their Moment of Tooth".
Ben Butler (March 23, 2012). "Law Too Soft on White-Collar Criminals, says Former Judge Finkelstein".
Guy Standing (February 9, 2012). "Those Running Just to Stand Still Will one Day Turn and Fight".

Notes:
[*] I suppose this would surprise Farr, but his account of unemployment ignores that perhaps unemployment exists because bosses sack people and then, well,  don't want to fill the positions left vacant.
Others have argued abundantly, and much better than me, about this. Pick at random pretty much any of Bill Mitchell's posts, for example.

Updates:
22-04-2012. Okay, I'll cheat. I'll add one more quote. But it's for a good reason: it's very funny.

Fairfax Media's Tom Reilly (October 10, 2010) on our youngest billionaire, Nathan Tinkler:

"Clearly none of his cash has been spent on media training. When The Sunday Age called him on Friday about his interest in the Bathurst team, Tinkler exploded.
" 'You're a f---ing deadbeat, people like me don't bother with f---ing you,' he said. 'You climb out of your bed every morning for your pathetic hundred grand a year, good luck'.
"Angered by a previous story about his horse racing interests, he added: 'There's a tall poppy syndrome; you would have heard of that because you hang around with the deadbeats and the losers who have done nothing with their lives'." (See here)

If Tinkler looks with contempt at a journo, whom he thinks earns "one hundred grand a year", imagine what he would have said of people, like yours truly, who'd see a "hundred grand a year" as winning the lottery!

On top, Tinkler, who supposedly was once an electrician, has been mischievously described as a "bogannaire" (a portmanteau of bogan and billionaire).

Paraphrasing the TV add: "a professional soccer team, $X million. Good humour:, priceless!"

Chronicle of a Death Foretold. (II)

I've kept Tim Colebatch's article "Swan's Foolish Surplus Fetish" (30-03-2012) in mind.

This is a paragraph from Colebatch's article:

"This budget is Labor's last chance to get it right. Its complacency about the real state of the economy is breathtaking; 60 of its 72 MPs are in the south-eastern states, which are being flattened to allow the mining boom to go full speed without triggering high inflation". (See here)

October 12, 1929.

Stanley Bruce. [A]

After a period in the political wilderness, the Australian Labor Party won the October House elections by a landslide. Labor's 46 MPs (out of 75) had control of the House. [1]

The 36-seat Senate remained in control of the Coalition Nationalist Party/Country Party (29 seats).

The preceding Prime Minister, Stanley Melbourne Bruce, 1st Viscount Bruce of Melbourne (Nationalist/Coalition) lost his own seat of Flinders to Labor's Jack Holloway. [2]

The Coalition had to call elections after the controversial Maritime Industries Bill, designed to transfer industrial relations arbitration powers from the Commonwealth Court of Conciliation and Arbitration to the Commonwealth was defeated in Parliament.

October 22, 1929.

James Scullin. [B]

James Henry Scullin (Catholic, Labor) took office as 9th Prime Minister of Australia.

October 24, 1929: Black Thursday.

The Dow Jones Industrial Average lost 11%: the Great Depression began.

1930.

Faced with collapsing commodity prices (Australia's main exports), high unemployment and with British banks calling its loans with Australia (largely contracted during Bruce's two terms in office), Labor was divided.

At one hand James Fenton and Joseph Lyons supported deflationary economic policies, with the advice of Sir Otto Ernst Niemeyer (director of the Bank of England).

At the other hand, NSW Premier Jack Lang, Ted Theodore, the caucus and the unions strongly opposed these policies and called for policies currently associated with Keynes.

Scullin (who accumulated the Treasury portfolio) left Australia for five months, to negotiate new low-interest loans, to assist to the Imperial Conference and to push to have Sir Isaac Isaacs appointed the first Australian-born Governor General.

Fenton (acting PM) and Lyons (acting Treasurer) were left in charge, applying budget cuts, with the approval of most state premiers.

1931.

Scullin returned to Australia and reinstated Theodore as Treasurer. Fenton and Lyons resigned and joined the Nationalists, in the rechristened United Australia Party.

Labor lost the December 19, 1931 federal elections [3]. Its House representation fell to 14 (from 46 in October 1929), its Senate representation fell to 3 (from 7 since November 1928).

Aftermath

Joseph Lyons was elected PM (06-01-1932 to 07-09-1939) and applied the policies Niemeyer recommended. Unemployment in Australia peaked at 29% in 1932. Australian recovery was slower than in the US, UK and New Zealand.

It took Labor nearly ten years to return to power.

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You can hear and read here what the likely next Treasurer said last night, and here what the current Treasurer has said.

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Update:
23-04-2012. Peter Hartcher's scenarios:

"LABOR would suffer its worst result in the Senate since 1944 if an election were held now, giving Tony Abbott control of the upper house as well as the lower, an analysis shows.
"This would allow him to wipe out many of the big achievements of the five years of Labor governments, as he has pledged to do, though some financial and legal complications would remain." (See here)

Notes:
[1] All election results data from Australian Politics and Elections Database. The University of Western Australia.
[2] Bruce kept the dubious honor of being the only Australian Prime Minister to lose his seat, until John Howard joined him in that exclusive club, in 2007. The 2007 federal election was dominated by the industrial relations issues originated by Howard's Work Choices industrial relations legislation.
[3] To date, the Scullin ministry is the only Australian government not to be re-elected at least once.

Image Credits:
[A] Stanley Bruce. Wikipedia.
[B] James Scullin. Wikipedia.

Good News... Bad News... (II)

The good news?

The IMF released overnight its World Economic Outlook: essentially, "some optimism has returned", according to the BBC News Service. (See here)

According to the IMF the global economy is expected to grow by 3.5% in 2012 (0.2% more than last January's update). For 2013, growth is expected to reach 4.1% (from 3.9%).

Growth will not be uniform, however:

" 'With the passing of the crisis, and some good news about the US economy, some optimism has returned,' the IMF said.
"But it added the 'risk of another crisis is still very much present'.
"As if to underline that point, Spain is the only Eurozone country whose growth has been revised even lower for 2012.
"The IMF expects Spain to contract by 1.8% in 2012, compared with its previous prediction of a contraction of 1.6%".

Overall, in Europe "the 17 countries of the eurozone are expected to shrink this year, but less than previously forecast, by 0.3% rather than 0.5%".

Australia's growth rate was revised down, too: a forecast of 3%, versus 3.3% last September.

Prompted for comments, Federal Treasurer Wayne Swan (Labor), ahead of his visit to the G20 Finance Meeting next weekend:

" 'The IMF forecasts show that the Australian economy will outperform every other major advanced economy this year and next,' he told [ABC Radio show] AM.
" 'I think a surplus in the conditions that Australia finds itself is the responsible thing to do,' he said.
" 'We have an economy which is growing around trend, we have unemployment at 5.2% and we have a huge investment pipeline'.
" 'This is the best defence for Australia at a time of global uncertainty, but it also provides the maximum opportunity for the Reserve Bank to reduce interest rates if they desire'." (See here)

Opposition leader Tony Abbott:

" 'It (the report) forecasts 3% for the current financial year and it looks like we are going to get 2 per cent,' Mr Abbott said.
" 'This is an underperforming economy and it's underperforming because of the poor economic management of the current government.'
"He says it is important to return the budget to surplus but does not agree with the government's methods.
" 'The way to get back to surplus is not to increase taxes, which is what this government is doing,' he said.
" 'The way to get back to surplus is to eliminate wasteful and unnecessary government spending'."

So, there you have it, according to Abbott: the Labor fiscal SORE+ dependent on the mining and carbon taxes revenue and social spending freeze is bad; a Coalition SORE+ (say, SORE+ v2) based on massive federal public servants sackings and social spending freeze is good.


The bad news?

Forecasting is a risky business. Even the best, most objective and competent forecasters often end up looking like fools.

But the IMF is not the best forecaster. In fact, it has been shown the IMF is a particularly incompetent forecaster, and one whose objectivity might be doubtful, to put it mildly.

David Rosnick and Mark Weisbrot, in a 2007 report analysing the forecasting performance of the IMF in the cases of Argentina and Venezuela, concluded:

"The IMF's large and repeated errors in projecting GDP growth in Argentina since 1999 strongly suggest that these errors were politically driven. The large overestimates occurred during the country's 1998-2002 depression, when the IMF was lending billions of dollars to support policies that ultimately ended in an economic collapse. Similarly, the underestimates took place at a time when the IMF had an increasingly antagonistic relationship with the Argentine government, and opposed a number of its economic policies. It is worth noting that despite the IMF's pessimism about Argentina's recovery from the beginning, Argentina has now completed a five year economic expansion with the fastest growth in the Western Hemisphere, with real GDP (adjusted for inflation) growth of 47 percent.
"As this paper shows, the IMF's public documents and statements regarding Argentina lend support to the idea that its errors were related to political considerations. The repeated underestimates of Venezuela's GDP growth raise further questions in this regard.
"The IMF's economic projections, including those in its Spring and Fall World Economic Outlook, are widely disseminated and used throughout the world. There are generally taken to be based on sound methodology and economic analysis, and free from political influence. The forecast errors described in this paper raise serious questions as to whether this is always the case." (Download the report from here)

Update:
18-04-2012: That came in quick! Is this the first crack in the IMF forecast?

"Italian PM Mario Monti to cut economic growth forecasts for 2012". The Telegraph (UK). 17-04-2012 (UK time).

The IMF forecasts appear to be based on the GDP estimates for 2011. For 2011, the World Economic Outlook seemed to have considered that Italy's GDP would shrink by 0.4% (see here, chapter 2).

However, now, according to The Telegraph, PM Mario Monti could be talking of a 1.2% contraction for 2011.

Italy is the third economy in the Eurozone and the fourth in Europe.

21-04-2012: Bill Mitchell on the December 13, 2011 IMF forecast release:

"The latest IMF medium-term forecasts for Greece reveal a staggering failure by that institution to understand causality and the impacts that their austerity programs have on real economies. Without a blush, the IMF presented the world yesterday with revised forecasts for Greece which reveal their previous forecasts will be around 100 per cent wrong over just over a 6-month horizon."

I have nothing to add.

Dear Markets,

You'll forgive me, but I am confused and rather annoyed. 

The Rajoy Government did what you told them to do. To wit:

1. 27bn euros (AU$ 35bn) budget cuts: 2.3% to 2.5% of estimated 2011 GDP.
2. Average ministerial budget cuts: 16.9%. But public works cuts to reach 34%.
3. Public sector wages and salaries frozen.
4. Electricity and gas, increase by 7% and 5%.
5. Housing subsidies and employment policy cuts: 2bn euros (AU$ 2.6bn).
6. 12.3bn euros (AU$15.9bn) tax increases, supposedly from big corporations but including fiscal fraud amnesty fees (10% of the fiscal debt!); personal income tax (1.9% increase)

VAT remains unchanged, unemployment benefits frozen, age pensions indexed by CPI. (See here)

Two weeks down the road, this is what you give them in exchange:

1. As we speak, the risk premium demanded to acquire Spanish bonds reached 445 basic points.
2. Interest rate paid by Spanish bonds reached 6.122%.
3. Luis de Guindos goes around the place to explain to you, The Markets, why things in Spain are going just fine. (See here and here)

Meantime, after the governments of Greece, Italy and Ireland did what you told them, their people are killing themselves, out of despair. (See here or here)

If I were De Guindos, following Rage Against the Machine, this is what I'd tell you (yes, The Markets), the troika, Frau Merkel, Monsieur Sarkosy, Signore Draghi and the whole bunch:

Fuck you

I won't do what you tell me

Love,

the Magpie

Bailey's Home Loans (II)

Henry Travers as Clarence Odbody
after 'saving' George. [A]

Last time we left George Bailey, from Redford Falls, NY, (a State of the American Union, which is in the jurisdiction of the Federal Reserve System) after he gave a home loan to young Bo Anderson.

Next day and with the $900 required in his account, Bo went to see Old Sven, first thing in the morning, intending to pay for the house with a cheque.

 "Nah!" roared Old Sven, cantankerously. "I don't want no stinkin' piece'o paper. I want the money in my account at Buffalo City Bank!"

Taken by surprise, Bo tried to explain that from the point of view of who-gets-how much, to pay in cheque, with cash withdrawn directly from his account, or direct transfers is immaterial.

Seeing however that Sven would not back down, and feeling disappointed and irritated, Bo went back to Bailey's headquarters and only branch at Main Street muttering to himself all the way.


A Nightmare on Main Street

Upon hearing from Bo, George Bailey, looking up from his coffee cup, said reassuringly: "Don't you worry, son!"

"That's what we'll do: We'll advance $900 from your account to Buffalo [City Bank], instructing them to credit Old Sven's account".

Because the $900 balance in Bo's account is a liability for Bailey's, Buffalo won't accept it, if no offsetting asset is transferred.

He must decide what assets to transfer. Not the loan itself, clearly: it involves a stream of interest payments. Besides, Buffalo could not want it: it could be a dud loan.

No. George must transfer $900 in liquid assets, so that Buffalo is sure Old Sven can withdraw the money and hide it under his mattress, if he so wishes.

Again, George must check Bailey B&LA's books. This is how Bailey's records looked like the previous day:

Assets          | Liabilities          | Net equity
----------------+----------------------+-----------
+$900           | +$900                |          
+$100           | +$100                |          
----------------+----------------------+-----------

Presumably, Bailey B&LA has performed other transactions before; it should have other assets and liabilities; there should be some net equities. But... that's not shown above! That's because those records show only yesterday's transactions. Technically, that's not a balance sheet.

In fact, Bailey's has an account with the Fed. Banks use these accounts to settle transactions involving other banks. In the US it's a licensing requirement.

If Bailey's own account with the Fed has a balance of at least $900, he can simply transfer the $900 to Buffalo, as a positive balance with the Fed is an asset for Bailey's: the asset needed for the transfer.

These transactions add this entry to Bailey L&BA's records:

Assets          | Liabilities          | Net equity
----------------+----------------------+-----------
+$900           | +$900                |          
+$100           | +$100                |          
----------------+----------------------+-----------
-$900           | -$900                |          

Let's think about what's represented above. In nominal dollar values (and that's what's shown in the table) $900 is $900.

But those entries, even if showing equal amounts, refer to different things: $900 in the top-most asset line is Bo's loan; the $900 in the lowest asset line is the Bailey B&LA's Fed balance transferred to Buffalo.

Bailey's assets diminished, but its loan portfolio remains unchanged (Bo's loan is filed under A, inside the old wooden filing cabinet, just behind George).

What are the two $900 entries under liabilities? If it were vitally important, one could say the top-most is the "deposit that came into existence simultaneously with the loan (liability and asset)".

But George is a simple man; for him, it's unimportant what label to use, as long as the bookkeeping entries are right and they sure seem right to him. Besides, to say it was a deposit created "out of thin air", although technically incorrect, has two advantages: it's shorter and quite metaphorically descriptive.

So, unless a much better reason is advanced to be technically precise if idiomatically awkward, George (who can be pigheaded) will keep describing this as "out of thin air".

Anyway, the bottom-most $900 is Bo's balance, transferred to Old Sven's Buffalo account.

Let's note three things here:

1. Bailey's liabilities diminished by the same amount as its assets ($900), therefore, Bailey B&LA's net equity did not change;
2. Bailey B&LA's $900 balance with the Fed was there before George gave Bo the loan; it would still be there, had Sven not stubbornly insisted on having the $900 transferred to his account. It only became relevant due to the need to transfer funds from Bailey's to Buffalo. And its relevance is limited, as we'll soon see.
3. Further, the third line only reflects transactions due to the transfer of funds from Bailey's to Buffalo. Keep this in mind, as it will be recalled later.

As Bailey B&LA's deposits decreased and its loan base remains unchanged, George will need to check whether Bailey's still complies with legal reserve requirements.

(Incidentally, in Australia as reserve requirements are calculated differently, it's possible that a bank would not need to do anything. See footnote 1.)

Additionally, the skeptical reader might ask what if Bailey's balance with the Fed had been less than $900? Say, $750?

Ah ha! Two problems! Maybe the line "unconstrained lending creates deposits" was wrong after all! Should we start pulling our hairs, running around madly and wailing desperately?

Feel free, but George seems confident: should there be any reserve shortfall, he has time to get deposits from the public (i.e. borrowing from depositors), loans from other banks or the Fed, as he did yesterday, as a matter of fact.

What about the shortfall in Bailey's account with the Fed?

No worries, mate. In the US, the Fed has an overdraft facility and it's legally obliged to back interbank transfers, should balances prove insufficient: interbank payments don't "bounce". Naturally, should Bailey's go into overdraft, it owes the difference ($150=$900-$750) to the Fed and must repay it real quick, and with interests, too. (A brief exposition is presented in the Appendix).

So, how will George get these $150 to pay the Fed?

Again, pretty much as he did yesterday when he needed reserves: by asking loans.

So, can George solve all Bailey's problems by borrowing? Not all, but most of them.

Could Bailey's keep this situation forever? Probably not: at one hand, the Fed charges interests for their loans; at the other hand, banks not only charge interests; unlike the Fed, they could also refuse to lend to each other (as European banks allegedly did just last year).

But the relevant question here is not whether there are potential limitations. Clearly, there are. That's the nightmare scenario.

The relevant question here is: is there any reason to believe banks are normally affected by those limitations? To me, that doesn't seem to be the case: most of George's nights are nightmare-free.


Buffalo: Show me the Money!

These are Buffalo City Bank's records:

Assets          | Liabilities          | Net equity
----------------+----------------------+-----------
+$900           | +$900                |          

The +$900 asset is Bailey's balance with the Fed, transferred to Buffalo. To Buffalo it's irrelevant whether Bailey's had the $900, used an overdraft or had to beg for money: from Buffalo's perspective, they received a single amount and this amount is an asset for them.

The $900 liability is the deposit Buffalo was instructed to make in Old Sven's account. That money comes from Bo's account, but now belongs to Old Sven; therefore, it is Buffalo's liability.

Let's observe something: this line in Buffalo's records corresponds to the last line in Bailey's.

Bailey's and Buffalo's combined records:

Assets          | Liabilities          | Net equity
----------------+----------------------+-----------
+$900           | +$900                |          
+$100           | +$100                |          
----------------+----------------------+-----------
-$900           | -$900                |          
+$900           | +$900                |          

The two last lines cancel each other out, because what's a credit for bank one, is a debit for bank two.

Therefore aggregate balances with the Fed did not change. So, Bailey's lost its $900 Fed balance? Meh. Buffalo gained $900. In this sense, as mentioned above, the Fed balances are of limited relevance. [2]

Furthermore, these two banks' combined assets and liabilities did not change, neither did their combined net equity. In fact, their combined loan portfolios did not change, either; nor did their combined deposits.

To all purposes, we could just delete the last two lines in the table above and the end result would be exactly the same as the one shown in a previous post.

In other words, it doesn't make any real difference to consider two banks (and, no, I won't show this for more than two banks).

Considering two banks introduces a real-life complication, that's true; but it's a complication unnecessary to the understanding of the basic situation: i.e. when there are no liquidity problems in the banking sector.

Or to put this in a more graphical way: when considering more than one bank, "Bailey B&LA" can be interpreted as the whole banking sector.


Buffalo Sven's Wild East

Old Sven is not a particularly rational person and, against better advice, withdraws the $900, presumably to hide them under his mattress (as he is reputed to be stingy, too).

Buffalo had no problem to give him the $900 in cash, because the transfer was in liquid assets; this reduced both Old Sven's account balance and Buffalo's liquid assets balance (both by -$900).

These are Buffalo City Bank's records:

Assets          | Liabilities          | Net equity
----------------+----------------------+-----------
+$900           | +$900                |          
-$900           | -$900                |          

Buffalo did do not need pre-existing reserves, neither did it need loans from other banks or the Fed.

Buffalo's net equity change: $0.


Epilogue

Before jumping to his death, Clarence Odbody, George's guardian angel, talked George into how life is wonderful. Clarence gained his angel wings.


Appendix

This is how Bailey L&BA's records look like if the overdraft facility (not the reserves) is needed:

Assets          | Liabilities          | Net equity
----------------+----------------------+-----------
+$900           | +$900                |          
+$100           | +$100                |          
----------------+----------------------+-----------
-$750           | -$750                |          
+$150           | +$150                |          
-$150           | -$150                |          

Third line: -$750 is interpreted as in the previous case (Bailey's reserves transferred to Buffalo).
Fourth line: +$150 is the overdraft for the difference between the $900 transferred and the $750 available in Bailey's balance (i.e. a loan from the Fed to Bailey's).
Last line: -$150 the balance of the transfer to Buffalo.

I know, this all can be a bit tiresome, but it's for a good cause!

Notes:
[1] Being in the US, Bailey's needs to comply with the fractional banking reserve regulations enforced by the Fed, most familiar to US economists (explaining why they explicitly mention them in their posts).
These regulations, in the US, require that reserves must amount to 10% of deposits kept "in the freezer" (i.e. liquid assets).
An eventual Bailey B&LA (Australia) would need to comply with the Australian Prudential Regulation Authority's regulations, contained in APS 201, establishing that ADIs (authorized deposit taking institutions) must keep reserves to "meet commitments and obligations under normal operations conditions" for up to 1 month, and are "capable of operating for at least five business days" under adverse circumstances.
These regulations, in Oz, boil down to require that reserves must amount to a proportion of deposits kept "in the freezer"; this proportion, however, is not necessarily 10%, but contingent upon predicted level of activity.
Call it Aussie slang: pretty much the same, but not quite.
[2] Clearly, if Bailey's used the Fed's overdraft this is no longer true. But, in this case, the combined banking sector owes the Fed and the debt is offset by their surplus balance.

Image Credits:
[A] "Henry Travers as Clarence Odbody after 'saving' George". Wikipedia.

Moving to Oz? (II)

By one of those coincidences, today I learned of a current research project, commissioned by the Fair Work Ombudsman to the University of Adelaide, on the subject of unpaid work experiences or "internships", as they have become known recently.

Readers might remember that I wrote about them a few days ago, in the context of graduate skilled migrants looking for work in Australia. (See here) 

According to Prof. Andrew Stewart (who together with Prof. Rosemary Owens is conducting the study) unpaid internships are becoming widespread among young graduates and workers in general and that some of these "internships" might have run into years:

"Anecdotal evidence suggests that a growing number of workers are offering, or being asked, to do unpaid internships or work experience. We need to get some idea of how big this particular iceberg is". (See here)

This should make it harder for graduate/experienced skilled migrant workers to find not just a permanent job, but now even one of these unpaid internships.

----------

In a related matter, an interesting note was published a few weeks ago by Fairfax Media/SMH and describes the local version of the "precariat" (familiar to Spanish readers as "precariado"), about which I wrote here.

Those are not good developments.

Australian Exceptionalism: ATO Edition.

George Osborne. [A}

Oh my! The Chancellor of the Exchequer, George Osborne, is "shocked".

According to The Guardian (UK):

" 'I was shocked to see that some of the very wealthiest people in the country have organised their tax affairs, and to be fair it's within the tax laws, so that they were regularly paying virtually no income tax. And I don't think that's right,' Osborne told the Daily Telegraph.
" 'I'm talking about people right at the top. I'm talking about people with incomes of many millions of pounds a year.
" 'The general principle is that people should pay income tax and that includes people with the highest incomes'." (See here)

And you can't blame Osborne for being shocked: wealthy individuals using legal and semi-legal subterfuges provided by legislators in order to avoid paying taxes? Unthinkable!

That's why, after reducing the top marginal personal income rate from 50% to 45%, in a move to reduce fiscal deficit (!?), Osborne also will be "going after the wealthy tax dodgers".

----------

Meanwhile, in Australia, the Australian Taxation Office had been auditing high income earners for a while, to the latter great displeasure:

"TRACY BOWDEN, PRESENTER: The Australian Tax Office has been accused of abusing its power and squandering taxpayers' money on futile court cases designed simply to chase revenue rather than enforce the law. The claims are made by a group of Tax Office staff who raise a raft of concerns about the tactics used by the ATO in its crackdown on so-called high wealth individuals. The whistleblowers say that instead of acting on their complaints, the Tax Office turned its sights on them. PETA CARLYON has this exclusive report.
"PETA CARLYON, REPORTER: As business and political leaders were meeting in Canberra for last year's tax forum, in Melbourne a senior auditor from the Australian Tax Office was contemplating some serious issues of her own. Serene Teffaha had been at the ATO for eight years when the Tax Office bolstered its crackdown on so-called high wealth individuals or businesses worth between $100 and $250 million a year. Her job was to assess taxpayer objections to the scheme. It wasn't long before alarm bells sounded". (See here. Emphasis added)

Exceptional, right? And the report closes with Teffaha's dramatic words:

"SERENE TEFFAHA: The unchecked and unfettered powers of the ATO I believe are unparalleled. They might not be physically hurting you directly, but they're most certainly psychologically and mentally waging a horrific war."

After this statement, readers would be forgiven to ask: Have HM's Antipodean subjects started an exceptional campaign of terror against high wealth individuals?

But don't worry dear readers. Teffaha, who alleged has been harassed by the ATO, was probably referring to this harassment suffered by her. Not that it is evident from the crafty way the report was edited.

Logically, the outcry will be to stop this inhuman harassment... against the high wealth individuals who avoid taxes.

That is, until someone at taxpayer-funded ABC News realizes, as Osborne did, that shocking possibility: maybe high wealth Aussies are not an exception, after all, and also enjoy their "tax avoidance".

Image Credit:
[A] George Osborne. HM Treasury. Open Government Licence v1.0. Wikipedia.

Update:
11-04-2012. I missed a very telling detail in that report (I've just highlighted it in Tracy Bowden's quote above): so, the accusation goes, ATO is "squandering taxpayers' money", because it is "chasing revenue". Now, that's great: ATO should save taxpayers' money by allowing tax cheats!

Man, I love this shit.

Varoufakis on Marx and Keynes.

Yanis Varoufakis, a Greek economist who's written on the European crisis, has recently written an interesting article on Marx and Keynes.

I'm not sure I agree with Varoufakis in many things, but his is an intriguing perspective, nevertheless.

You be the judge.

Dimitris Christoulas (RIP)

Let's quote the known facts:

1. Dimitris Christoulas (77), retired pharmacist, shot himself in the head in Syntagma Square, Athens last Wednesday (April 04, 2012).
2. Christoulas left a suicide note, whose text is reproduced below, explaining his reasons.

"The Tsolakoglou government has annihilated all traces for my survival, which was based on a very dignified pension that I alone paid for 35 years with no help from the state. And since my advanced age does not allow me a way of dynamically reacting (although if a fellow Greek were to grab a Kalashnikov, I would be right behind him), I see no other solution than this dignified end to my life, so I don't find myself fishing through garbage cans for my sustenance. I believe that young people with no future, will one day take up arms and hang the traitors of this country at Syntagma square, just like the Italians did to Mussolini in 1945" (See here)

(Giorgios Tsolakoglou was a fascist and collaborationist leader during the Nazi/Fascist occupation).

----------

It's hard to decide what's more shocking, Christoulas' death or the spin it generated.

Take this comment, from The Guardian (UK):

"The politicians, eyes on forthcoming elections, have struggled to find usable capital in the moment. Those in power have tried to drain it of political meaning, mumbling about solidarity in these difficult times, criticising the bad taste of those who would exploit a tragic death. Those seeking power have, of course, tried to exploit it while affecting not to. George Karatzaferis of the far-right Laos party (in the coalition government until its popularity plummeted) said that the bullet in Syntagma should strike the conscience of the whole political class. The Communist party blamed the capitalist system and its lackeys. The parties of the non-communist left, whose stars have risen as the crisis deepens, spoke of the misery to which the Greeks have been reduced by the politics of austerity. Christoulas will be, above all, their martyr, and the martyr of all those opposed to the savage cuts that have fallen on the most vulnerable." (See here)

According to this piece, each and every comment, be it from the parties in power (who applied the austerity measures blamed by Christoulas himself for his decision), the far-right Laos party (until recently a part of the ruling coalition), the Communist party or the non-Communist left is an attempt to capitalize on Christoulas' suicide.

So, if every comment is worth exactly the same, then all sides in this dispute are equally guilty: there is no real responsibility. Never mind what Christoulas himself said and the author quoted.

The author's solution is let "US" dialogue. "We" are all responsible, so let's all fix IT: the people go into misery meekly to pay for IT, while "those in power" take the people's wealth overseas and bring the money back after IT was fixed. But, isn't that what's already happening?

It's not just "those in power" who are attempting to drain Christoulas' suicide of political meaning, it seems.

This view is as disingenuous and partial as this one, taken from the same piece:

"Meanwhile, in Syntagma, the usual depressing scenes are unfolding as I write: a peaceful demonstration disrupted by battles between stone-throwing youths and helmeted police; industrial quantities of teargas. A woman journalist appears to be savagely beaten by riot police." (My emphasis)

Below is the video referred and linked to by the author. I don't know what the readers see, but I saw two persons being apparently beaten and taken down by riot police. One of them was also removed from the place.

It seems to me the author has an agenda to sell. If reality is different from what her agenda implies, let's just pick those bits of reality that accord with our agenda.

And she does that using the last words of a dead man.

----------

But things get worse, as this passage illustrates:

"Nothing will change in Greece and the same day those who believe it would were putting up messages saying he was the victim of a government that cares only about bank accounts and money, politicians were putting out phony messages of condolences and going about the business of planning more of the austerity that killed Christoulas and countless others who offed themselves at home instead of in the square where two years of protests, riots and strikes have done nothing to stop pay cuts, tax hikes, slashed pensions and the coming firing of 150,000 public workers - who should have been let go two years ago so that none of this nonsense would have occurred because the bloated public sector and the politicians who created it are what's killing Greece and its people". (See here)

The 150,000 public workers who were not "let go" two years ago are as guilty as the crooks running and ruining the country. It's their fault they were not sacked, fired, given the flick, kicked in the ass. You see now the need for small government.

----------

But I kept the best for last:

"IMF spokesman Gerry Rice offered his condolences over the man's suicide.
" 'What I'd like to say is we're deeply saddened to learn of any death in these circumstances, and just to express our sympathies". (See here)

Too bad the IMF did not offer their condolences over the death in neighbouring Italy of five people who have killed themselves in the last two weeks. They should have killed themselves in public.

----------

Frankly, I find this disgusting.

Bailey's Home Loans.

George Bailey (James Stewart), Mary Bailey (Donna Reed)
and their youngest daughter Zuzu (Karolyn Grimes). [A]

The year is 1929; the place, Bedford Falls, NY.

It's 10:05 am and you, as owner/manager of Bailey Building and Loan Association, are sitting at your desk.

You are happy and relaxed: life's wonderful, just hunky dory. As a conscientious banker, you make sure Bailey B&LA complies with all legal requirements and standard accounting practices.

Suddenly, young Bo Anderson comes along, sweating and slightly short of breath. Without knocking at the door or even greeting, Anderson says:

"Mr. Bailey, sir, I need ya help. I wanta buy Old Sven's house and I need $900. I'm gunna get married to Mary Ellen Walton and we need a house".

After Anderson explained himself, you, as Bailey's main and only credit analyst, give Anderson the loan.

Anderson, more relaxed now, manages to smile and, before leaving, turns and says with manifest gratitude:

"Ma was right. She always tells me to go talk to George Bailey, that he's a good man".

After Anderson leaves, as Bailey's CFO, head accountant and only bookkeeper, you open the books and write down the transaction:

Assets          | Liabilities          | Net equity
----------------+----------------------+-----------
+$900           | +$900                |      

With this transaction, Bailey's assets (the Anderson loan, represented, say, by a mortgage) increased by $900. You opened an account at Bo's name, with $900 (the money he'll use to buy the house). That's a liability for Bailey's. As both assets and liabilities increased by the same amount, Bailey's net equity did not change.

What about Bo Anderson? For him Bailey's asset is a liability; and Bailey's liability is an asset. Bo's net equity hasn't changed, either.

Similar scenes are happening all across the State of New York, or even the US.

All the B&LAs giving loans to buy houses, and all the Bos, Joes and Jacks buying them with the money thus raised, saw their assets and liabilities go up. That's true.

But their net equity? It didn't change: not one B&LA saw their net equity increase, just like Bailey's net equity did not increase. And exactly the same happened to all the Bos, Joes and Jacks.

Before proceeding, notice what happened here exactly: a loan was given, a double-entry transaction was inscribed in a book. Nothing else. In particular, the loan was given, but no previous depositor was mentioned.

Now, let's consider two separate issues: (1) Bailey's need to comply with fractional reserve legal requirements and (2) Bo's use of the money he's just gotten.


George Bailey and Fractional Reserve

After writing down the transaction above, George Bailey (you) finds that both Bailey's loans (assets) and deposits (liabilities) went up by +$900.

If depositors never withdrew money from their accounts and banks didn't exist to make profits, that would likely be the end of the story: Bailey's did create deposits "out of thin air", by a simple double-entry bookkeeping operation.

Alas, people don't keep money in a bank's account without a purpose: sooner or later, they'll want their money back. And banks lend money for a profit.

Over banking history, this has caused some difficulty: if a bank's depositors came all together to withdraw their money, the banker wouldn't be able to return it to them. To avoid it, and following the law, George Bailey need's a reserve in liquid assets (let's say, cash).

Strictly speaking, no bank (or B&LA) can ever reduce this risk to zero. To achieve this they could not lend anything: their deposits would need to be sitting there idly by. But, if they couldn't lend any money, how would banks make any profits?

As a rule of thumb and compromise, the amount loaned by a bank must be a fraction of the deposits it keeps. Let's say, 90%. 10%, therefore, needs to be kept as a reserve. Incidentally, notice that all these considerations are not originated in double-entry bookkeeping: it's a legal imposition.

So, if at a given moment your deposits add up to $10,000, then you can have at most $9,000 in loans. The remaining $1,000 deposited are kept as reserve. And this is all the law requires of a banker. In principle, how you achieve that is up to you (but central banks will give you a little hand, as we'll see soon).

Bailey's has a new deposit ($900) and a new loan ($900), but no additional reserves: Bailey's reserves and deposits might be $100 short. But there's no need to panic, yet. George Bailey needs to check the books.

Maybe he finds he's already got the $100: perhaps yesterday, just before locking the door for the day, Giuseppe Martini (George's good friend), came in and deposited $100. In that case, the money was just there waiting to be used as reserve (not waiting to be loaned!) and George can recline his chair, light up a Camel, cross his hands over his belly, put both feet on the desk, and say: "It's a wonderful life".

Before moving on, let's recap: the Anderson deposit was still created "out of thin air", this did not change. It was this eventual previous deposit (Martini's) that was actually backed up by some form of cash. The whole deposit was used as reserve.

What if Martini (or another customer) did not deposit any money previously? No biggie. Henry F. Potter (Bedford Falls' wealthy slumlord and general purpose nasty guy) or another customer could still come by and deposit the amount required.

For that matter, perhaps George, himself, could deposit some money in his own account. Or he could call another B&LA or bank and ask for a loan.

Ultimately, all else failing, he can ask for a Fed loan. That's one of the things a lender of last recourse does.

Whatever happens, this is what the book shows at the end of the day:

Assets          | Liabilities          | Net equity
----------------+----------------------+-----------
+$900           | +$900                |      
+$100           | +$100                |       

The $100 under assets is the addition to reserves, the $100 under liabilities is the new deposit, regardless of its origins (other depositors, other banks, George's own pocket, the Fed). Considering all the day's transactions, we have $900 in new loans and $100 in reserves (totaling new assets for $1,000), and $1,000 in deposits (i.e. liabilities): Bailey's complies with the law.

Bailey's did not need to have the deposits before making loans. It could have happened, but it wasn't necessary. [1]

More generally: not every single deposit needs to keep the 90%:10% ratio prescribed by fractional banking. Because of this, Bailey's created money "out of thin air" even in the presence of fractional reserve banking.

And this is a general principle: not a single bank needs to wait until they have a deposit to lend 90% of it. That's not what fractional reserve banking forces banks to do. So, no money multiplier, thank you very much.

When Old Sven deposits in his own account the $900 Bo paid him, neither Bailey's nor any other bank needs to put $90 in the freezer, leaving $810 for future loans. They can just lend the entire $900 or more, if they can, in the reasonable expectation that they could get the reserves required. [2]

But there's something more: aggregate assets and liabilities increase equally, alright. But we can't say that Anderson ultimately owes money to any individual. Because the $900 were created "out of thin air", out of the $900 Bo got, not a cent can be traced back to individuals. Bo owes money to Bailey's.

More generally, it's not true that a household's liability means another household's asset. If a macroeconomic model (whether one calls it NK, NC, KKK or KGB) is based on this assumption, then one can say "Houston, we've gotta problem".


Bo's House

Now, we leave good old George Bailey and drop by Bo Anderson's newly-bought house.

As we've just heard, Bo paid Old Sven for his house. His equity did not change by doing that: he still owes Bailey's $900 (that is a liability for Bo) and has an asset (the house) with a market value of $900. Net equity: $0.

But, let's remember that many Bos, Joes, and Jacks, all over the place, are buying houses. Perhaps housing prices start to go up! If that's the case, Bo could soon be getting capital gains. Bo's net equity could be increasing.

This is not a direct consequence of double-entry bookkeeping, and sometimes, rightly or wrongly, this is the impression one gets when this phenomenon is explained by Prof. Keen's followers.

It's just that the liability Bo acquired is used to finance the acquisition of a physical asset. In other words, in the case of housing, debt is used to fuel demand in the so-called "real" economy. If the supply is less than the demand, prices could go up.

The other side of the coin is that house prices (against what many Aussies believe) sometimes go down: in that case, Bo could end up underwater. D'oh!


Last Word

This is my account of what Steve Keen has been trying to explain in his recent debate with Paul Krugman.

I cannot guarantee the account is 100% faithful to Prof. Keen's teachings, as I've followed him only irregularly, but it's my honest understanding of what he says.

And, at least to me, it doesn't sound nonsensical or "mystical", which is an adjective Prof. Krugman used to describe Prof. Keen.

But it is a simplification, as footnote 2 makes clear.

I also deliberately chose "George Bailey", an extremely likeable fictional banker, who follows the rules to the letter and is not desperate to make a quick buck.

And if even George Bailey can and would lend "out of thin air", it seems utterly naïve to assume real bankers can't.

Those are my two cents, anyway.


Image Credit
[A] George Bailey (James Stewart), Mary Bailey (Donna Reed) and their youngest daughter Zuzu (Karolyn Grimes), from the motion picture "It's a wonderful life". Wikipedia.

Notes:
[1] In fact, George would be negligent and Bailey's could go broke if that was the usual situation: Bailey's can't afford having too many unproductive interest-earning deposits.
[2] Strictly speaking, this is only true if there were no other constraints. But there are: often banks face constraints relating loans to capital, for instance. Or related to obtaining financing from other banks or large institutional investors. One such constraint could force a bank to deny or postpone loans. And, even though this needs to be taken into account, these additional constraints generally only qualify the general principle: banks can lend as much as they want.

Colebatch & West: Doom & Gloom.

Tim Colebatch is quickly becoming one of mainstream media's most reliable commentators on macroeconomic issues.

Last week, in his aptly titled [Labor Treasurer, Wayne] "Swan's Foolish Surplus Fetish", Colebatch compared Swan's still sketchy budget cuts to "hara-kiri". (See here)

According to Colebatch, Swan bases himself on the assumptions that (1) Australia is still "on the way back up", (2) budget cuts would allow the RBA to lower interest rates, and (3) they would restore investors' "confidence".

This is how Colebatch argued against point (1):

"No Australian government has ever proposed such a huge withdrawal of spending from the economy. (...)
"On Treasury's estimates, that would take at least 2.6% of GDP out of the economy in 2012-13. (...)
"Why on earth would you do this in an economy that has added just 10,000 jobs in the past year, where the growth rate is just 2.5%, and most of that is in mining and related industries, and with Victoria and south-eastern Australia on the verge of recession?
"What Swan is planning for 2012-13 goes far beyond any previous budget cuts. In 1986, the hairshirt Hawke-Keating budget cut away 1.1% of GDP. The first Howard-Costello budget in 1996 took out 1% of the economy."

Although all these figures are equally relevant to Colebatch's argument, for my purposes, I want to draw to the readers' attention the fact that in 2011 the Australian economy added only 10,000 new jobs, as, further down, I'll have more to say about this.

Swan's third assumption (the confidence bullshit) is as nonsensical as not to be worthy of comment; Colebatch, however, didn't elaborate on monetary policy, that is point (2).

And is mainly on the issue of monetary policy where Swan's hara-kirinomics finds some level of support. [1]

Take Stephen Koukoulas, for instance:

"This focus [on fiscal policy] is where the misunderstanding occurs. It is as if fiscal policy is the only policy lever in town. It isn't.
"Monetary policy is usually not discussed by those bagging the Government's economic objective in delivering a surplus next year.
"It must be considered.
"In the most basic of basic terms, the tighter fiscal policy is, the easier monetary policy can be." (See here)

Well, all the data cited by Colebatch are as relevant today as they were last week. And today that data showing that the Australian economy is already verging on a recession failed to convince the RBA, Koukoulas' other policy lever manager in town, to lower interest rates or, paraphrasing Koukoulas, "to ease monetary policy". (See here)

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Today Colebatch produced another piece, comparing the Australian Gillard/Swan Labor government's fiscal policy to its Canadian Harper/Flaherty Conservative counterpart's. This is how the piece was titled: "Budget Cuts will Bring on Recession". (See here)

In Canada, the economy perceived as more similar to Australia's, a Conservative government is not falling for the "expansionary contraction".

I recommend Colebatch's piece.

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But here is where I want to bring back the poor performance of the Australian economy creating jobs.

Is not only that the economy is not creating jobs, or that it may start shedding jobs again (as implied by Colebatch), or that there are pushes to lower wages (as documented by Matt Cowgill, here; or yours truly, here and here). Nope, that's not all, at all.

According to Michael West, it's also that there are pushes to eliminate paid public holidays! (See here)

Great news, hey!

This is gonna be a long year.

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But there are a few things I don't understand or that make me curious about.

For one, according to Colebatch, "Prime Minister Stephen Harper's government is the closest thing the world has to the Howard government".

If the Gillard/Swan government is to the right of the Harper/Flaherty government in fiscal matters and the Harper/Flaherty government is the closest thing to the Howard/Costello government, where the hell would that leave a future Abbott/Hockey government?

The answer makes me afraid, very afraid.

Secondly, how are the good folks of the Fraser Institute managing with a Conservative government embracing the nefarious "S" word? What do our local right-wing think-tankers have to say about it?

And lastly, whatever happened to comments like "Ignore doom and gloom, the economy is blooming" that one could see in the mainstream media just a few weeks ago?

Note:
[1] Personally, like post-Keynesians, I have serious doubts on the direct effectiveness of low interest rates manipulation to promote investment; but, unlike them, I do give it a more important role in promoting final consumption and demand.