I’ve been assuming all year that Mitt Romney would pivot to Obama’s left on economic issues (say, on regulating banks, a higher minimum wage or payroll tax cuts). So I was pretty astonished that he’s somehow managed to move right of Reason Magazine, the National Review and Grover Norquist’s Americans for Tax Reform. Who knew this was even possible?
“While conservative activists are circling their wagons around Mitt Romney and encouraging to stand by his claim that the 47 percent of Americans who don’t pay federal income taxes are essentially mooching off the government, prominent policy voices on the right are dismayed by his comments — both because they’re inaccurate, and because they cut against fundamental conservative cause.”
On a related topic, I’ve been reading lately about the IMF proposal for a Financial Activities Tax (or “FAT”), basically a variation of the VAT tax that would apply to the financial industry (which is otherwise exempt in existing VAT regimes).
Since unlike the Europeans, we don’t already have a VAT, the easiest way to move to one would be by levying a FAT on th3e entire economy and not just the financial sector (using the revenue to cut other taxes). Essentially it would be a tax on payroll plus a tax on excess profits. In fact, since we already have a payroll tax, it’d make sense to build up from there, converting the Federal Insurance Contributions Act tax (FICA) into the Federal Insurance Activities Tax (FIAT).
I just wanted to be the first to go on the record endorsing a Fiat tax on our Fiat money. 
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This is the Beowulf I know and love. Good, out-of-the-box thinking!
I’m really stunned by the strategy to move further right. I would have thought they’d stay centered. But they don’t seem to read the polling data too much. Instead, they made the same mistake McCain made and moved further right. Except Romney has moved right of Palin in recent weeks!
It’s gonna be hard to overcome that. And the scary thing is that Congress is not going to let Obama have anything he wants over the next 4 years. Fun times ahead boys and girls!
Likewise…Obama isn’t going to give the congress everyhting THEY want…like repealing the Affordable Care Act.
As far as taxing and spending goes, I expect more of the same….Obama caving in to the Republicans
Once he’d locked down the nomination in the spring, Romney was free to stiff his conservative base without consequence (what’s the saying… “we will astonish the world with our ingratitude”).
It didn’t matter how far he moved to the center, the anti-Obama vote would still come out in any event to vote for the Republican ticket. Adding Paul Ryan (and his already notorious budget) ditdn’t add a single new conservative vote but lost a ton of swing voters.
If Romney were running as a moderate Republican, the radio talk sow hosts would be tearing their hair out…. and he’d be up by 10 points.
Detroit Dan, thanks for the kind words.
I don’t have time to write more now but remember that excess profits taxes were enacted in both World Wars and acted as a pretty effective anti-inflation tool (in fact, Vickrey’s gross markups market is simply a cap and trade version of an excess profits tax).
Why are comments to the TARGET2 post closed? Please reopen!
Am I allowed to continue the TARGET2 post here? Thanks!
Go ahead… you can say whatever you like (unless its critical of JKH, then there will be blood).
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From: http://monetaryrealism.com/target2-window-on-eurozone-risk/
“JKH September 18, 2012 at 7:31 pm
Krugman writes for a popular audience that has little interest in reserve technicalities.
Of course, he is technically wrong in one area here. Banks don’t “lend reserves” as a general matter. Reserves are used for interbank settlement of principal and customer payments of all types – not for lending to non-banks. The Fed normally provides any reserves that are required by statute – after the deposits that generate the requirement are created. From a banking system perspective, the deposits that are created are the consequence of new lending – not the prerequisite for it. As far as excess reserves are concerned, the Fed normally (pre-2008) provides them independently of any current lending/deposit trend. This is a fact of monetary operations. And the additional evidence is that that the excess reserve series was low and stable for decades, prior to 2008.
The core purpose of reserve balances is to serve as liquidity in the settlement of payments between banks – not to facilitate lending. Such liquidity needs mostly result from deposit transfers that have nothing to do with new loan creation – this should be a tip off to the spurious idea that lending requires reserves, from a banking system perspective. 2008 and thereafter is a completely different game that can’t be used as the standard to describe the loan/deposit/reserve mechanism as it normally works.
In your example, he might try to argue that excess reserves allowed new lending that resulted in increased deposits, which then resulted in additional required reserves which the Fed then supplied subsequently. But I doubt it. Or, he might fudge it in another way. In any event, he hasn’t spent much time updating himself on the technical facts, if he cares. That seemed to be the case in his debate with Steve Keen early this year. And it’s a bit surprising, because it’s not just Steve Keen or the MMTers who tell the correct story (which PK labelled “mysticism”) about reserves. The BIS has had some fairly good papers out for several years, with a similarly accurate description of bank reserve dynamics.
I think what he’s done in part is construct a story about regular environment reserves (pre 2008) that is consistent in its overall framework with a story about QE environment reserves. It’s consistent all right, but unfortunately, both parts are technically wrong. Again, he’s writing for a popular audience, so convenient simplification is an excuse I suppose. (He justifies his use of the ISLM model in a similar way.) Still, in the case of reserves, it’s hard to know just how much amounts to simplification, and how much is misunderstanding. I strongly suspect the latter is at least part of it.”
“Krugman writes for a popular audience that has little interest in reserve technicalities.”
I see that as a problem. [Central bank] reserve technicalities are one thing to know to understand how banks create new medium of exchange.
“The Fed normally provides any reserves that are required by statute – after the deposits that generate the requirement are created.”
Timing question. Can the fed provide [central bank] reserves that are required by statute – BEFORE the deposits that generate the requirement are created? Assume 10% reserve requirement. That means $10 of excess [central bank] reserves means the fed wants $100 of demand deposits (liability) to be created along with $100 of loans (asset).
Also, instead of providing any [central bank] reserves that are required by statute or allowing the fed funds rate to rise to try to get currency deposited at the commercial bank, can’t the fed just lower the reserve requirement?
“Reserves are used for interbank settlement of principal and customer payments of all types – not for lending to non-banks.”
And, “The core purpose of reserve balances is to serve as liquidity in the settlement of payments between banks – not to facilitate lending. Such liquidity needs mostly result from deposit transfers that have nothing to do with new loan creation – this should be a tip off to the spurious idea that lending requires reserves, from a banking system perspective.”
For example and a simple version, I have two checking accounts. One is at bank a and the other is at bank b. The reserve requirement is 10%, the banking system is in balance, and there are 10X as many demand deposits as reserves. I write a check to bank b from bank a. $1,000 of demand deposits is transferred (or marked up and marked down) and $1,000 of [central bank] reserves is transferred (or marked up and marked down).
Is that correct, and is it always 1 to 1 (demand deposits to [central bank] reserves) transferred?
Bank a now needs to borrow [central bank] reserves ($900 of them?), preferably from bank b or attract demand deposits ($1,000 of them?), preferably from bank b. No currency is involved in this example.
Is that right too? Thanks as always!
“I see that as a problem.”
You’re probably right. I shouldn’t be making excuses for him.
Timing – yes, the Fed can provide reserves now that may be required in the future, according to statute, before the deposits that generate the requirement are created. But it must pay interest on excess reserves in support of the target funds level, for as long as the pre-supplied amount remains meaningfully in excess of the current required amount. It is doing this now as a result of QE.
The connection between QE and “pre-supplied” reserves is complicated, because the interpretation of reserves is still disputed by different schools of economic thought (or perhaps by those with different levels of knowledge about banking system operations). In fact (as far as I’m concerned), banks don’t need and won’t necessarily be encouraged to lend as a result of pre-supplied reserves. And the effect of QE (whatever that effect is) comes about mostly from the direct effects of Fed asset expansion on interest rates (although that alone is debatable) and perhaps from related commercial bank deposit liability expansion, rather than central bank reserve liability creation. Reserve creation is merely a convenient liability instrument for the expansion of the Fed’s financial intermediation role – a natural by-product of balance sheet expansion, rather than the primary focus and purpose of it. So, in that sense, the dynamic of pre-supplying reserves as a consequence of QE is only incidental to the expectation that required reserves will tend to grow in aggregate over time (based on current rules), simply as a function of the natural expansion of the banking system. But those who still believe in the “money multiplier” story (monetarists primarily, explicitly or implicitly) may dispute this, and may say it’s not so incidental.
Also, the $ 1.7 trillion of excess reserves that now exist would probably “pre-fund” required reserve expansion until quite late in this century, based on current reserve formulae and trends. So that particular rationale is a little overcooked.
Yes, the central bank can play around with the reserve requirement, for whatever reason. Canada has entirely eliminated its requirement (which should be proof enough that the old money multiplier story is bogus). China changes reserve requirements frequently.
“Is that correct, and is it always 1 to 1 (demand deposits to [central bank] reserves) transferred?”
Yes (including your example).
P.S.
Regarding your question earlier on about the length of the post – this was a piece I wanted to be able to refer to later on as a broadly consistent approach to Eurozone and monetary operations in general. It needed to be comprehensive and thorough for that reason.
P.P.S.
Thanks, Beo
Romney is doubling down. He’s definitely pulling a McCain. I’m really shocked Obama hasn’t just put out the numbers on how obstinate Congress has been during his tenure. Maybe he’s saving for post-election.
JKH, I thought Bernanke openly implied that the purpose of QE is to force yield reach/risk taking. Pre-Glass-Steagal repeal, that theoretically would have necessitated more lending, but post-GS repeal, it has instead fueled trading activities and cost cutting at investment banks (gotta keep profits up, Blankfein needs to get PAID).
“So, in that sense, the dynamic of pre-supplying reserves as a consequence of QE is only incidental to the expectation that required reserves will tend to grow in aggregate over time (based on current rules), simply as a function of the natural expansion of the banking system.”
Natural expansion of the banking system, what does that mean? What if no entity goes into debt?
“Also, the $ 1.7 trillion of excess reserves that now exist would probably “pre-fund” required reserve expansion until quite late in this century, based on current reserve formulae and trends. So that particular rationale is a little overcooked.”
Notice the time element there.
It seems to me there is some sort of vault cash plus [central bank] reserve multiplier. It also seems to me there is a capital multiplier. The “old money multiplier” doesn’t seem right.
Length of post. Got it.
Thanks to both JKH & beowulf!
heh, i find it kind of funny that some people expected the Republican Party to field a moderate. Moderates are an endangered species in the party. What used to be the caboose of FOX News and talk radio is now in the conductor’s seat.
“Everything in Michael Kranish and Scott Helman’s biography “The Real Romney” (HarperCollins) confirms the view that until 2005 Mitt Romney was a liberal Republican cryogenically preserved from the pre-Reagan era. He was a liberal on social issues, such as abortion and gay rights; a champion of government programs, such as universal health care; an anti-protectionist, “open door” internationalist; a private-sector multimillionaire who was also a personal square, completely uninterested in life-style “experimentation”; a reflexively patriotic, flag-pin-in-the-lapel sort of fellow; a wealthy man possessed of the slightly daft notion that although he had been born to privilege, every American has the opportunity (and the wish) to live as he does; a patrician with a deep sense of noblesse oblige. Since 2005, Romney has made himself interesting by getting a lot of people, including those who might vote for him and those who definitely will not, obsessed with whether, and to what extent, and in spite of anything to the contrary he might be saying on the campaign trail, he is still that person.”
http://www.newyorker.com/arts/critics/atlarge/2012/03/19/120319crat_atlarge_menand#ixzz27PysfSnW
Jamie Galbraith has a good piece up about QE.
“Quantitative easing isn’t magic: It is unrealistic to expect central banks like the Fed and the ECB to solve our deep economic problems”
http://www.guardian.co.uk/commentisfree/2012/sep/20/quantitative-easing-not-magic-central-banks
Who could have predicted that Romney picking Paul Ryan for VP (and thus lashing his campaign to the mast of Ryan’s Medicare privatization plan) would turn out to be a bad idea?
“But it’s worth pointing out another dynamic that’s been overlooked here: The escalating disaster that is Paul Ryan. At the time of his selection, a number of pundits argued Ryan’s strategic benefits, suggesting he would boost Romney by energizing conservatives, or by allowing Romney to run as the candidate of big ideas, or that he would at least be the party’s best defender of the Medicare plan Romney was going to have to defend whether he wanted to or not. This seemed like a stretch at the time—after all, Ryan’s Medicare plan proved to be a massive liability the one time voters weighed in on it. But who could say for sure?
Well, fast forward a month-and-a-half and the numbers look pretty persuasive.
Back in late August, Obama led Romney on the question of who would handle Medicare better by 8 points in Florida and 10 points in Ohio; now he’s up 15 in Florida and 16 in Ohio. And the problems are especially acute among senior citizens, a group Obama has traditionally struggled with. A month ago, Obama was down 13 points in Florida among people 65 and older; today he’s up 4. On the specific question of Medicare, Obama was down 4 points among Florida seniors in August; today he’s up 5 points…”
http://www.tnr.com/blog/107829/47-was-bad-romney-ryan-has-been-deadly
The only Republican pundit who has called this right all down the line is David Frum (quoting his Twitter feed).
“How do you message: I’m doing away w Medicaid over the next 10 yrs, Medicare after that, to finance a cut in the top rate of tax to 28%?…
I don’t care if you hire the people who produce the ATT ads that make my wife cry, there’s no lipsticking that pig.”