Our Peril at the Zero Bound

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If you’ve been reading Paul Krugman regularly for the past 18 months, you know what he says about interest rates, and the way traditional monetary measures are unavailable to us during this recession. This is Krugman back in January 2009:

But looking forward, the Taylor rule says that the Fed should cut rates a lot from here — in fact, to negative 6%. That’s not surprising: we’re clearly opening up a huge output gap, inflation is turning into deflation.

The problem, of course, is that you can’t cut interest rates below zero (if you try, lenders will just hoard cash.) So the Fed simply can’t do what the rule says it should.

He’s been beating this drum pretty regularly since that time, writing many posts on the liquidity trap and zero interest rate policy. This one is long (and, as he says, wonkish) while this one gets to the nitty gritty. What it comes down to is this:

The whole subject of the liquidity trap has a sort of Alice-through-the-looking-glass quality. Virtues like saving, or a central bank known to be strongly committed to price stability, become vices; to get out of the trap a country must loosen its belt, persuade its citizens to forget about the future, and convince the private sector that the government and central bank aren’t as serious and austere as they seem.

Of course, that’s the opposite of what we’ve been doing lately, but that’s beyond the scope of this post. What made me want to write about this today was a graph and two paragraphs in Calculated Risk. First, the graph:

Housing Starts vs. Unemployment (Inverted)

And now, the real meat of this post—thanks for sticking around—the two paragraphs that sum up our situation so well:

Usually near the end of a recession, residential investment (RI) picks up as the Fed lowers interest rates. This leads to job creation and also additional household formation – and that leads to even more demand for housing units – and more jobs, and more households – a virtuous cycle that usually helps the economy recover.

However this time, with the huge overhang of existing housing units, this key sector hasn’t been participating. This is what I expected when I first posted the above graph two years ago!

The housing bubble really pooched us, as I’m sure you’re aware by now. But we can’t rely on the housing sector to help bring us out of the unemployment slump this time around either, because we can’t lower interests rates like we normally would.

Week End Thoughts

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I’ve been thinking a lot about the auto bailout lately (read my post on the House passage over at PR Watch), and the GOP in particular has me confused. Senate Republicans have made incredible tactical and strategic errors in killing the proposed auto bailout. This is why:

The proposal called for the government to provide $14 billion in emergency “bridge” loans, meant to carry them (notably GM and Chrysler, though Ford was lobbying for the money in the hopes of preventing cascading industry failures) through the winter and alleviate a cash shortage. The money for the loans, as proposed, would have come from a $25 billion fund approved by Congress and and President Bush earlier this year. That fund was already set to be loaned to the domestic carmakers, to help them retool and produce more fuel-effecient vehicles.

Senate Republicans did what they know best: try to screw folk over. They called for autoworkers at the Big Three (mostly union members) to take a huge pay and benefit cut. They called on the carmakers to restructure their operations as a condition of the loans. They called on the firms to also reduce their debt burden by allowing bond holders to take equity in the companies receiving the loans.

And everybody said, “great, fine, just give us the money.” The United Auto Workers wanted to phase the paycuts in over 18-months, rather than the six months required by GOP senators, but otherwise, the Republicans managed to squeeze a huge number of concessions from the autoworkers and the domestic carmakers.

But, because the union guys weren’t ready to throw away their wages and benefits right when the recession is getting really bad, GOP senators balked at the bailout. They killed it, killed it dead. And that’s what I don’t understand.

The carmakers are going to get their money one way or another – either President Bush (struggling to do something, anything, to savlage his reputation) will tap the $700 billion TARP, or a President Obama and a Democratic Congress with larger majorities in the House and Senate will approve a deal. And you know what? The UAW and the carmakers won’t have to make anything near the same kind of concessions.

Now, I don’t know whether the automakers deserve a bailout, nor do I know whether the UAW workers should have the pay and benefits they have now (I’d refer you to this chart though). I don’t understand what  the Republicans in the Senate hoped to accomplish by killing the deal. They have nothing to show for the obstructionism: no concessions from the car makers, no concessions from the UAW, and Democrats will either get a legislative win in 2009 or they’ll get what they wanted all along: President Bush using the Wall Street money to save the Big Three.

Even worse, Republicans have also written off the Rustbelt states for good – they’ll be persona non grata for years come election season. To top it all off, the $25 billion is still there, waiting to be spent on bringing the car makers into the 21st century.

More on the Chino Layoffs

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So, looks like the job-cuts aren’t limited to SW New Mexico: Freeport McMoRan is cutting 20% of its U.S. workforce as it moves to reduce production across the board. The Daily Press also has a bit more on the local cuts this afternoon. In addition, looks like the AP expanded its coverage as well, with a really solid article:

Silver City is a prime example of how the global economic troubles — such as China’s cut in steel production or the domestic auto and housing woes — have hurt small towns across America.

“Copper truly gives a picture of the economy,” Silver City Mayor James Marshall said. “When the price of copper is up, the economy is healthy. When the economy drops, copper follows.”

If there’s any more evidence that the U.S. needs a federally-backed stimulus plan, one centered around infrastructure, I don’t know where you’ll find it. James is right – when you’re building cars and homes and routing cable to new subdivisions or creating SUPERTRAINS, you’re using copper. When the average price drops (according to the Daily Press) by $2 a pound, those things aren’t happening.

In addition, you can imagine copper will figure into a stimulus package that creates green jobs. Sure is reassuring to know we have a president-elect who is committed to that sort of goal.

Regardless, it’s probably going to be rough in Grant County for the foreseeable future. Fortunately, New Mexico’s current (and incoming) congressional delegation is already on the case, seeking federal assistance for affected workers: ((Hat tip to Peter St. Cyr (via Twitter) for the link))

The news has prompted Senator Jeff Bingaman, Senator-elect Tom Udall and Representative-elect Harry Teague, all New Mexico Democrats, to send a letter today to Labor Secretary Elaine Chao.

They are asking that the U.S. Department of Labor act quickly to determine whether the workers will be eligible for federal assistance.

On a personal note, it appears as though several members of my family are going to be impacted by this decision. It really hits home, as they say, to realize what the past 8 years have meant for my loved ones.

Surprise Domenici vote on stimulus? Not so fast…

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While reading this The Hill article on the Senate’s efforts to pass a broader economic stimulus package, I was surprised to see Sen. Pete Domenici listed as one of the Republicans voting for cloture. Then, I remembered that energy efficiency tax credits were part of the package (more here at TAPPED) . Domenici, if you recall, led the charge against the same tax breaks last year, because they would have been offset by taking away similar credits from the oil and gas industry.

Surely there’s no connection.

State Investments

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It’s not really my game anymore, but is anybody checking to see if New Mexico has this problem:

School districts, towns and cities across Florida were cut off from their money after the State Board of Administration, manager of the Local Government Investment Pool, halted withdrawals Nov. 29 to stem a run on the fund. Participants pulled out almost half the pool’s $27 billion in assets after learning it held $1.5 billion of downgraded and defaulted debt tainted by the collapse of the subprime mortgage market.

Thousands of schools, towns and fire departments across the U.S. keep their cash in state- and county-run public accounts. Modeled after private money-market funds, the funds are supposed to invest in safe, liquid, short-term debt.

Via Atrios.

Actual gas price war in Detroit

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Via Jalopnik (via Consumerist):

The Marathon station on Fort near Springwells dropped its price to $2.93. That angered Jawad Bazzi, whose regular gas was priced at $2.96.

Bazzi walked across the street with a couple of employees to confront the Marathon owner and his posse.

The groups argued, then began throwing punches. One of Bazzi’s employees hit a Marathon employee with a baseball bat, injuring him.

That’s when the Marathon owner grabbed a handgun and fired three or four times. Bazzi, 45, of Dearborn Heights was shot in the head.

There’s an update to the story here.