New Economic Perspectives has a second installment, Real Fiscal Responsibility 2; Carter: Stagnation and Unemployment, in its series that I first mentioned in my previous post Real Fiscal Responsibility I: Preliminaries. I have excerpted part of the explanation for the second post as follows:

In this second post, I begin my evaluation of the extent of fiscal responsibility or irresponsibility of the Federal Government during the Carter Administration by covering two of the primary problems reflecting public purpose, and what the Federal Government did or did not do about them with its fiscal and monetary policies. The two are: ending economic stagnation, and creating full employment at a living wage.

I thought it would be really interesting that the author, Joe Firestone, had chosen to start his story in the Carter administration. This article disappoints me as I posted in my comment to the article as follows:

Your article fails to address a major issue that you seem to think you can hide under the phrase “demand pull inflation rather than cost push inflation”. Without addressing how Carter should have handled the “cost push inflation”, you leave a big hole in the article. As I remember it, inflation was a major concern for everybody in the years from the end of the Johnson administration to the beginning of the Reagan years. MMT claims that there are no limits to the US government spending as long as it does not bring on inflation. There is some talk under MMT of what to do if inflation should rise. If you ignore this issue when inflation was running rampant, then it feels like MMT is only paying lip service to the worries about inflation.

I am not saying MMT has no prescription for inflation, but I am saying that if an MMT proponent misses the opportunity to address the inflation issue during a historical period when inflation was rampant, then you give unnecessary ammunition to the people who do not want to believe in MMT and you cut the legs out from under the people who do want to believe in MMT.

MMT is the acronym for Modern Money (Monetary) Theory. It is a frequent subject of my blog. The New Economic Perspectives blog is a major source of my information and links to information about MMT.

I hope to get a lot of enlightenment from the response to my comment.

September 1, 2014

I did get a response to my critique.

Joe Firestone | September 1, 2014 at 5:02 pm | Reply

I didn’t miss the “opportunity.” I just decided that this post would cover two of my 15 or so aspects of public purpose 1) ending stagnation, and 2) creating full employment with a living wage. Creating and Maintaining price stability; i.e. the inflation issue, is another aspect of public purpose, and is covered in my next post.

Please keep in mind that this a blog series, and that blog posts are not supposed to be long pieces. I’m trying to keep each one to 1500 words or so. So, if you think I’ve missed something,perhaps wait a few posts and then point that out if it’s still an issue.

Thanks to Nancy Weinberg for posting this on her Facebook page and giving me the idea for the title above.

This is the kind of vision I would like to believe in. Yes, I know, the world isn’t this simple, but it doesn’t hurt to set your goals high.

The New Republic has the article Remember This Moment When the Next Financial Crisis Strikes: The SEC could have fixed our broken rating agencies. It whiffed.

Too much of the financial industry relies on duping investors about the quality of investments. The SEC is supposed to be the first line of defense against that, but has failed in that mission repeatedly in recent years. That feeds skepticism about its seriousness in combating fraud at the rating agencies, especially since it refused to alter the inherently flawed compensation model. As long as the rating agencies get paid by issuers, they’ll have incentives to please them with high ratings.

“There’s a fundamental business incentive for ratings inflation, and there’s got to be something on the other side,” said Marcus Stanley of Americans for Financial Reform. “This rule could do that, but it’s a very tough challenge.”

One commenter on the article had a really brilliant idea.

A small suggestion that would not be susceptible to any regulatory capture: set a formula for fines to be paid by the raters a[t] the payment rate of the securities they rate at any level falls below a certain level. Some explanation of payment rate, 100% would be a bond issue making all interest payments and returning the principal at the maturity date while 0% would be going bankrupt and an intermediate value would be a default and payment of part of the interest and/or principal. The aggregate payment ratio for a rater would be weighted by the value of outstanding securities under its rating.

Higher ratings would have higher requirements for payment ratios. If a rater’s payment ratio for a particular rating fell below the requirement, the fine would be proportional to the total value of securities rated and the size of the shortfall and possibly higher for higher ratings. It should be set just high enough to dwarf any goodwill that the rater could hope to gain with securities issuers through issuing higher than deserved ratings.

We know that the raters have an incentive to err, to the least, on the side of giving higher ratings. Instead of relying on inspectors, why not lay out exactly what the consequences are for erring high in their ratings, with no chance to argue for a reduced penalty, and that the consequences of such errors are greater than the benefits of such errors?

This is such a good set of controls that I think it would put an end to all ratings agencies.  I would change it so that this rule only applies to ratings agencies where they are paid by the people whose financial instruments they are rating.  The only way to get out from under these rules would be to have the ratings agency agree to do no business with any entity that it rates.

If a ratings agency has a legitimate need to do business with an entity that it might have to rate, it would just be forced to abstain from rating that entity and publicly say that it abstained.   You wouldn’t be able to find ratings for all entities in one place anymore.  You would have to go to a different agency for a rating of an entity that your favorite source decided to do business with.

Political Garbage Chute has the article Bummer, Elizabeth Warren, Bummer by James Schlarmann.  This is a diatribe against Warren’s recent comments about Israel.

I’ve never once defended Hamas for their part in this shit-show. I’ve never once said that Hamas has a right to fire rockets into Israel. But I will never tire of pointing out the fact that Israel has the people of Gaza pinned down and penned-up. Where are the people of Gaza supposed to go when they are warned that the building they live in, or worse the building their sick children are getting care in, is about to be blown to smithereens? Senator Warren’s comments on the violence are extremely disappointing in their black-and-white portrayal of the situation.

In the article is a link to a report on Huffington Post which seems to be nothing but assuming too much from a story in Cape Cod Times – Warren explains positions on Israel, Pilgrim.

From past comments on foreign policy by Elizabeth Warren, I had already developed a suspicion that she buys the standard narrative hook, line, and sinker.  She fails to apply the skepticism that has been so good on the oligarchy that is ruling the financial markets of the world.

One commenter on the Schlarmann artice had the following to say:

One thing not mentioned in the article is that it is political suicide in the USA to publicly criticize Israeli conduct. Elizabeth Warren is one senator. She’s no idiot and probably has a pretty good idea what is going on in Gaza. But she has her own fledgling political agenda which would go no further than the next election if she said even one phrase critical of Israel.

While I recognize the truth to this comment, I had been hoping against hope that Elizabeth Warren could find a way to be true to her principles and yet avoid political suicide.  I fear that not only has she not found this path, but she may actually believe what she said at the meeting on Cape Cod.