The New York Times has the OpEd The Timidity Trap by Paul Krugman.

And I’d argue that an important source of failure was what I’ve taken to calling the timidity trap — the consistent tendency of policy makers who have the right ideas in principle to go for half-measures in practice, and the way this timidity ends up backfiring, politically and even economically.
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The classic example is the Obama stimulus, which was obviously underpowered given the economy’s dire straits. That’s not 20/20 hindsight. Some of us warned right from the beginning that the plan would be inadequate — and that because it was being oversold, the persistence of high unemployment would end up discrediting the whole idea of stimulus in the public mind. And so it proved.

What’s not as well known is that the Fed has, in its own way, done the same thing. From the start, monetary officials ruled out the kinds of monetary policies most likely to work — in particular, anything that might signal a willingness to tolerate somewhat higher inflation, at least temporarily. As a result, the policies they have followed have fallen short of hopes, and ended up leaving the impression that nothing much can be done.

This is another ironic Paul Krugman piece where he unknowingly identifies his own problem and blames it on others.

The irony is that a purported Keynesian economist is too timid to come right out and say what it is that Keynes taught us.  There is no monetary solution to this problem.  Anybody who pretends that the Fed has any effective tools to combat the type of Great Recession that we faced is setting us all up for a huge disappointment.

Krugman does identify the weakness in Obama’s stimulus.  He should never leave that topic.  To hint that there is another solution in the hands of the Fed is to promote Milton Friedman propaganda.  At various points, Krugman admits that he was mesmerized and bamboozled by Friedman, but he seems to forget these moments of clarity for the most part.

Truthout has the article Abby Huntsman Promotes the Wall Street Banksters’ Big Lie. The article has this piece of information that I am surprised that I did not know (because it is not true).

From when it was created in 1935 up until the 1980s, Social Security was paid for by taxes coming in from people who were currently working. In other words, people currently in the workforce paid for the Social Security benefits of people who had already retired and started collecting Social Security checks.

But in 1983, the Reagan administration changed things around. It raised Social Security taxes so that, in effect, working people from the Boomer generation would pay for both their own retirement and the retirement of people older than them.

The Reagan administration did this so that Social Security could afford the benefits surge that would come about once all the Boomers retired. The extra money it got from raising Social Security taxes was invested in government bonds. Today we call that extra money the Social Security trust fund.

And right now, that fund is working just swimmingly. In fact, it’s running at a $2.6 trillion surplus!

As a result, Social Security, will continue to pay out 100 percent of its scheduled benefits, until 2033, when the trust fund runs out of money.

Again, though, this isn’t a problem. It’s part of the plan.

The trust fund was created to pay for Boomers’ retirements, and since by 2033 most Boomers will be well into their eighties and nineties, it makes sense that the fund will run out by then.

Maybe, I need to do some more research on this.  It is odd that I have never seen this information about the trust fund until today.

The Social Security Administration web site has the article Debunking Some Internet Myths.

The Social Security Trust Fund was created in 1939 as part of the Amendments enacted in that year. From its inception, the Trust Fund has always worked the same way. The Social Security Trust Fund has never been “put into the general fund of the government.”

The statement at the end of the excerpt from the article about Abby Huntsman is very misleading.  The trust fund was not created to pay for Boomer’s retirements.

The Daily Kos has the article Craziest person in Illinois wins Republican primary.

I have been going back and forth as to whether or not to post this. The video is 7 minutes long, but I have never managed to get past the 56 second mark. When she starts talking about all the money in the vaults of the banks, it just becomes too much for me. Maybe, I just don’t need to hear any more to see the point of the headline. Maybe you either need more convincing or you have a stronger stomach than I do.

Enjoy, if that’s the proper word.

The Daily Kos has the article Bill Kristol confuses fiasco-fatigue with war-weariness.

The article juxtaposes this political cartoon

With the following quote from Bill Kristol:

Are Americans today war-weary? Sure. The Iraq and Afghanistan wars have been frustrating and tiring. Are Americans today unusually war-weary? No. They were wearier after the much larger and even more frustrating conflicts in Korea and Vietnam. And even though the two world wars of the last century had more satisfactory outcomes, their magnitude was such that they couldn’t help but induce a significant sense of war-weariness. And history shows that they did.

So American war-weariness isn’t new. Using it as an excuse to avoid maintaining our defenses or shouldering our responsibilities isn’t new, either. But that doesn’t make it admirable.

Just as people still read yearly predictions from the astrologers in the newspapers, people keep listening to the talking heads that have a proven record of being wrong on almost everything.

The Daily Kos has the article Three Democrats seek audience with Eric Holder over FBI’s making mortgage fraud a low priority. Who do you suppose is one of those three Democrats?

Sen. Elizabeth Warren of Massachusetts, Rep. Elijah Cummings of Maryland and Rep. Maxine Waters of California, all Democrats, sent a letter to Attorney General Eric Holder Monday expressing their “deep concern” about an investigative report released last week that concluded the FBI placed mortgage fraud as its lowest priority for criminal investigations.
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It’s not exactly the first time anyone has called into question the lack of criminal prosecutions of mortgage fraud, but this is the highest-placed source of such an accusation so far.

You can also Sign the petition to Eric Holder: Make prosecuting mortgage fraud a top priority.

The comment to Eric Holder that I added with my signature said that he should look at the record of prosecutions after the Savings and Loan crisis, and then try to explain his own record to me.

Don’t let Eric Holder get away with asking you to look at how much effort and money he is putting into this, nor his recent record compared to his earlier record.  Take a look at the prosecutions after the Savings and Loan Crisis and compare to current results.

As Yoda said, “Try not. Do. Or do not. There is no try.”

The Rachel Maddow Show web page has the article The education of Scott Brown.

Less than two years after losing his re-election bid in his home state, former Sen. Scott Brown (R-Mass.) is apparently trying again, this time running in New Hampshire – where’s he still learning quite a bit.

It’s not altogether clear why Brown is running in the Granite State, but his strategy has nevertheless taken shape: the Republican intends to hit the campaign trail complaining about the Affordable Care Act. It worked in one state in 2010, Brown figures, so maybe it’ll work in a different state in 2014.

With this in mind, Brown visited with state Rep. Herb Richardson (R-N.H.) and his wife over the weekend at the lawmaker’s home, where the Senate candidate called the ACA a “monstrosity.” Sam Stein flagged an account of the meeting from the local newspaper
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The state lawmaker added that the health care law, which Brown claims to abhor, has been a “financial lifesaver” for his family.

If I didn’t actually know some people in New Hampshire, I might comment that Scott Brown is Massachusett’s gift to New Hampshire.

When I said that, I would have a Snidely Whiplash sort of grin and be twirling my mustache.

Naked Capitalism has the article Joe Firestone: Progressives Re-Arrange the Deck Chairs for Obama’s Austerity Budget.

The Congressional Progressive Caucus (CPC) recently issued its “Better Off Budget” document as an alternative to the White House/OMB document, and the coming House budget document, a Republican/conservative alternative. The “Better Off Budget” has received enthusiastic evaluations from writers affiliated with the DC progressive community. Richard Eskow’s recent treatment is typical and provides other reviews that are laudatory. These “progressives” clearly see the CPC budget as anything but an austerity budget. But is it, or is it not?
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In short, the CPC budget isn’t an anti-austerity budget as claimed. It is another exercise by budgeteers in near macroeconomic austerity that is likely to result in microeconomic austerity for the many, and continued prosperity for the few. And the pity of it is that budget plans like this are so unnecessary.

None of the deficit and debt terrorism and miserly fiscal policy reflected in these budgets are necessary, because there is no shortage of Federal fiscal capacity in the United States, and no justification for the fiscal policies the US Government has followed since the Recovery Act was passed in 2009. To end austerity, the Federal Government needs to budget to create full employment and benefits for most Americans, including solutions for the major problems facing the US, while letting the trade and budget deficits float.

First create full employment through various programs, including a Federal Job Guarantee to get and keep the employment level there. And then, let the twin deficits float until we’re at that point. A policy like this one adjusts to the savings and trade balance desires of Americans, while creating full employment, with whatever government deficit spending is necessary to accommodate those needs.

That’s how you end austerity for most people without causing demand pull inflation, or cost-push inflation. The second of these may occur because of developments in commodity markets that have nothing to do with Government employment or safety net programs. But that is a story for another day, unrelated to austerity and its remedy.

This analysis is more severe than what I stated in my previous post Congressional Progressive Caucus Budget Strikes Back Against Austerity.  I must be getting an understanding of Modern Money Theory when i can produce a critique that is in the same direction this one by Joe Firestone.  I just didn’t have the courage of my convictions.  I still worry about the overhang of liquidity when the economy starts to pick up.  I don’t have the faith that the Congress will be able to raise taxes when it becomes necessary.

POLLIN: I think it’s a very credible budget that the Congressional Progressive Caucus has put out, the “Better Off Budget”. Let’s start with the things that we know are very straightforward. The projections on job creation are somewhat speculative. But here’s some of the basic things.

The budget that they’ve laid out directly attacks austerity. So that’s number one. That’s really outstanding. So, for example, the cuts to food stamps, I mean, some really basic stuff: 47 million people are facing cuts in food stamps. That’s 15 percent of the population. Twenty-two million children are facing cuts in their access to food. So we are directly attacking food insecurity through the basic budget. So if it didn’t do anything else, just starting there is a really good place to start.
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Spending on infrastructure, spending on schools, spending on health care, spending on the green economy, all of those things are expanding, not contracting, under the congressional budget’s —Better Off Budget.

So all of those things are really critical. They’re all moving in the right direction.

Now, if you spend more money in these areas, obviously, you have to pay for them somehow. So what do they do in terms of taxes?

Fairly good analysis until he gets to the part of you have to pay for it. I wish Polin had taken a fire-extinguisher to that part. Why play into the hands of the people who are making such big deal out of deficits during a weak recovery when in fact the deficits help us recover faster? I guess the ideas of Modern Monetary Theory have not reached the PERI at UMass Amherst. Are they too far west in Massachusetts? I am pretty sure they must be connected to the state’s high bandwidth internet backbone, so that can’t be the reason they haven’t gotten the news yet.

I think the best thing that Robert Pollin could have said instead is the following:

At this point in the economic cycle, deficits aren’t harmful if they are spent for the right things. Too much of the money pumped into the economy by deficits and the Fed’s QE policy are going primarily to the wealthy. They use the money for speculative investments. Not only are these investments harmful to the economy for the instability they produce, but they also don’t involve creating many jobs, and certainly not useful jobs.

So, in this case, it actually helps the economy to tax this money away from the people who are misusing it. Rather than encouraging people to create these harmful investment products, we should be doing everything we can to discourage them.

This kind of tax increase is not a job killer, but in fact is a job creator. This is especially true when the money collected is put to a use of creating jobs and producing things the economy desperately needs, anyway.

In fact I emailed the above suggestion to PERI.

Naked Capitalism has the article New Study Shows Dangers of Trade Agreements that Help Corporations Sue Governments.

The study’s authors contend that for those concerned with democracy and basic rights, this El Salvador case stands as a potent reminder of how important it is that we fight such unjust corporate lawsuits. It is vital not only to support the people in El Salvador and other countries under assault, but to rally the groups and governments trying to halt new trade and investment agreements built from this same cookie-cutter mold. The governments of Chile and other countries are already raising critical questions about these pro-corporate rules in the proposed Trans-Pacific Partnership (TPP). Social movements in several European nations are making common cause with their governments in raising similar concerns in the trans-Atlantic talks. The Pacific Rim/OceanaGold case is an advertisement of the dangers of such rules

The author of this article is one of the authors of the study that is mentioned in the article.

Download the full report [PDF]

The 17 page report focuses on this one case.  You have to judge for yourself whether or not you think this is typical of what happens, or if trade agreements like the ones being pushed by President Obama cause more harm than good.  I am using these weasel words to guard against being accused of letting one bad apple ruin my opinion of the subject matter at hand.  I am only saying that this is one report to include with all the other things you learn about these trade agreements.  Do your own due diligence.

Naked Capitalism has the article Philip Pilkington: Thinking Makes It So – The IMF Bailout of the UK in 1976 and the Rise of Monetarism.

This was a classic example of a rather unimportant variable becoming important merely because people began to think it important. In 1977 Treasury Minister Denzil Davies summed the situation up perfectly when he said,

[W]e should do all we can do to keep M3 within the announced target during this financial year. It matters not, it seems to me, that the definition of M3 is arbitrary; that the commitment to the IMF is in terms of Domestic Credit Expansion (although everyone knows that DCE is irrelevant when a country is in a balance of payments surplus); and that an increase in the money supply caused by “printing money” may be of a different nature to an increase caused by inflows. All this, no doubt, is good stuff for a seminar. Unfortunately, those people who have the power to move large sums of money across the international exchanges believe, on the whole, that “money counts”. The fact that it may not count as much as they think it does, seems to me to be somewhat irrelevant. (p25)

I wonder about the implication of this on proponents of Modern Monetary Theory.  I presume that Philip Pilkington is one.  Rather than proving that MMT is correct  and the monetarism discussed in this article is incorrect, perhaps it proves that whatever the people with the money believe in most strongly is what is correct.  At least it, not surprisingly, shows that what people believe in most strongly is what dictates their behavior.

I’ll have to read the stories at the links in the article to see the more detailed description.

I think I have figured out what the lesson is here.

There is a natural tendency to look at how people use the rules to take advantage of others. From this analysis people propose new rules to stop this bad behavior under the old rules.  What they fail to account for is that the behavior of the people taking advantage is not a constant.  The behavior is a function of the rules that are there to be used to one’s advantage.

The one behavior that is constant in some people is to think, “Well, if your going to be so stupid as to make an easily subverted  rule like this, then I might as well use it to my advantage.”  I have that philosophy myself when considering how to survive in the current economic system while at the same time decrying some of its rules.  This is how Enron took advantage of the energy market rules in California that were lobbied for by Enron.

The lesson is that when you set up new rules, you must be aware of and constantly guarding against this human behavior.  Just because something will work if people continue to behave the way they do now, there is no reason to believe they won’t change their behavior when the rules change.  In fact, what I am saying is that when you change the rules, you can almost be guaranteed that people will change their behavior accordingly.

This was beautifully demonstrated in the recent financial collapse due to the mortgage bubble debacle.  People were creating and were investing in financial derivatives based on mortgages.  The inventors of these derivatives made calculations on their safety based on historical records of the levels of mortgage default.  What they failed to take into account is that the historical behavior was based on a real estate market that did not have the derivatives they were inventing. The historical market had incentives that forced the purveyors of these mortgages to strictly enforce rules about the creditworthiness of the people getting the mortgages.   The incentive was that the issuers of these mortgages could go bankrupt if there were too many bad loans given out.

The ability to sell mortgages in packages of financial derivatives did away with the incentive to try to make only good loans.  In the new system, the banks could easily get rid of any risk from making bad loans.  In fact, the best way to make money in the derivatives market was to make as many bad loans as possible and sell them off before they went bad.

The buyers of these derivatives felt comfortable because they figured that if people defaulted, the banks would take possession of the valuable real estate and sell it at a profit.  The trouble is that this tactic only worked in the real estate market that existed before the creation of derivatives.  With a real estate market collapse which could be best brought on by massive investments in the same type of poorly thought out financial “asset”, the saving strategy would be made inoperative by the very tool that depended on the tactic to assure that it was a safe investment.

As with most sure-fire investment systems that are validated by back testing against  the historical record, they work until everyone tries it.  Then they don’t work.  They only work when not everyone is trying to do it.  It’s the same paradox that Keynes’ explained about the economy.  Some people can put more money into savings if they just resolve to do it, unless of course everybody makes the same resolution at about the same time.  Keynes pointed out that when everybody tries to do it, the economy collapses and there is not enough income for people to increase their savings when savings are totaled up over the entire economy.  When everyone tries to save, the total net savings actually declines.

This also touches on what George Soros explains is the difference between social systems and systems based solely on physics.  For the most part, you can study physical systems, derive laws of behavior, and then predict future behavior from those laws.  Social systems don’t behave this way because the subjects being studied can learn about the conclusions of the  study,  and change their behavior based on what they read.  Soros called this property of social systems “reflexivity”.