Special Guest: Marshall Auerback, Director of Institutional Partnerships,
Institute for New Economic Thinking. Auerback has over 20 years of experience
in the investment management business. He served as a director and global portfolio
strategist for the Canada-based fund management group Pinetree Capital. He
also was head of economic research for Madison Street Partners, a Denver-based
investment management group, and he worked as an economic consultant to PIMCO,
the world's largest bond fund management group. In addition, Auerback is a
Research Associate at the Levy Economics Institute of Bard College and a Research
Fellow for the Economists for Peace and Security. (http://www.epsusa.org)
Previously, Auerback managed the Prudent Global Fixed Income Fund for David
W. Tice & Associates and assisted with the management of the Prudent Bear
Fund. He also worked as an international economics strategist for Veneroso
Associates, which provided macroeconomic strategy to a number of leading institutional
investors. Prior to that, Auerback ran an emerging markets fund for Tiedemann
Investment Group in New York. He began his finance career as an investment
manager at GT Management, focusing on the markets of Japan, Australia, and
the Pacific Rim, while based in Hong Kong and then Tokyo.
Auerback graduated magna cum laude from Queen's University in Canada and received
a post-graduate masters degree from Oxford University.
Financial Repression
"Financial Repression can be a fairly loaded word. I think you can say
that anytime you have a central bank which is a monopoly of anything, which
can establish a price, you can have repression. I am less concerned with
the labels and more concerned with the fact that we have been in response
to this unprecedented crisis, been increasingly undertaking exotic experiments
on behalf of the central banks. Most notably Quantitative Easing. It has
had the effect of repressing interest rates or keeping them low. This of
course is great for borrowers, but has the unintended by-product of depriving
people of income."
A Flawed System
Financial Repression is an experiment that " is flawed in terms of the economics
behind it. I don't think it does much to help elevate aggregate demand (spending
power) and it turns out to be a large implicit subsidy for the financial sector."
"As far as I am concerned we are already over-financed as an economy
and do too much for the banks anyway. It is really a fundamentally mistaken
policy approach!"
Trends Since The Financial Crisis
"We have had three rounds of Quantitative Easing by the Fed, we have undertaken
similar policies in Japan and more recently in Europe. If you look at the impact
it has been rather minimal! The Japanese economy is still pretty stagnant.
The US is growing but I believe that has less to do with QE and more to do
with the fact that we had a fairly robust fiscal policy response after the
crisis in 2009. Likewise in Europe we have been mired in depression like numbers
which is worse than anything we had in the 1930s. It hasn't worked but we keep
trying it."
"The economics behind it are flawed. it is based on the notion that if a bank
buys a bond and puts reserves into the banking system that somehow it can encourage
the banker to lend. We actually don't lend out reserves and are only used for
interbank lending amongst banks. Also lending is a two way process. You have
to have a credit worthy borrower and a credit worthy lender. If you have individuals
or business that are piled down with debt they may not be very credit worthy
or they may be less inclined to take on more debt"
"You want to engender rising employment, rising income so people aren't
as reliant on credit. I think that is the problem our system has had over
the last 30 years. We have become Credit centric versus Income centric!"
"We have been conducting this 'pulmonary resuscitation' to a fundamentally
dead financial system rather than use the money to revive the economy and
transition it into more productive economic activity."
Control Fraud
"When you have an economy that is over financialized and banks account
for a disproportionate amounts of activity, and you have a compensation incentive
system that is highly dependent on share price appreciation, then you provide
a very perverse incentive for business not to invest in productive business
affairs but to use excessive cash to buyback shares."
"What is worse is you begin to use all sorts of accounting tricks. This is
what Professor Bill Black calls 'Control Fraud'. You get a form of casino capitalism.
Actually, the casinos in Las Vegas are regulated more favorably than the banks
are."
Private Debt Buildup
Marshall Auerback believes we have had excessive build-up in Corporate and
Household debt. "When you have a demand shock, then servicing that debt becomes
a problem. You end up with a large build-up of public debt in response." Unfortunately
those who benefited now want cuts to things like Medicare that were not the
cause of the problem. "Its a pretty perverse example of the wrong headed people
running our system."
Employment - Job Guarantee Program
TIME FOR A NEW APPROACH ON UNEMPLOYMENT: GOVERNMENT AS EMPLOYER OF LAST
RESORT By Marshall Auerback
At 10.2%, official American unemployment is now at its highest level since
1983 (http://finance.yahoo.com/news/Jobless-rate-to...ml?x=0&.v=8).
Nearly 16 million people can't find jobs even though we are constantly being
told that the worst recession since the Great Depression has officially ended.
Yet instead of trying to revive the productive economy, most of the Obama
Administration's recover efforts still remain focused on cardio-shock treatment
for Wall Street. Additionally, the President still seems curiously hamstrung
by his Herbert Hoover-like devotion to fiscal rectitude: he wants to spend
without "adding one dime to the budget deficit", as he announced at his Congressional
address on health care in September, even though deficits are a natural consequence
of slowing economic growth, falling tax revenues and higher social welfare
payments.
To all of the chicken-littles (including the President) who fret about "excessive" government
spending, we would simply point out that it is far better to deploy government
spending in a way which REDUCES unemployment, rather than arises as a consequence
of it. We therefore suggest a new approach:
Government as Employer of Last Resort (ELR)
or a Job Guarantee program.
The U.S. Government can proceed directly to zero unemployment by hiring
all of the labor that cannot find private sector employment. Furthermore,
by fixing the wage paid under this JG program at a level that does not disrupt
existing labor markets, i.e., a wage level close to the existing minimum
wage, substantive price stability can be expected. Other benefits could be
provided, including vacation and sick leave, and contributions to Social
Security and, most importantly, health care benefits, providing scope for
a bottom up reform of the current patchwork health care system.
Government as employer of last resort would not be introducing another element
of intrusive bureaucracy into our economy, but simply better utilizing the
existing stock of unemployed, now dependent on the public purse - especially
the chronically long term unemployed. The current system we have relies on
unemployed labor and excess capacity to try to dampen wage and price increases;
however, it pays unemployed labor for not working and allows that labor to
depreciate and develop behaviors that act as a barrier to future private
sector employment. Social spending on the unemployed prevents aggregate demand
from collapsing into a depression-like state, but little is done to enhance
future growth and demand, which can be done via the JG by providing them
with employment, greater education and higher skill levels.
The JG program would allow for the elimination of many existing government
welfare payments for anyone not specifically targeted for exemption, and
would command greater political legitimacy, as society places a high value
on work as the means through which individuals earn a livelihood. Minimum
wage legislation would no longer be needed as it would be established via
the JG. Labor would welcome the safety net of a guaranteed job, and business
would recognize the benefit of a pool of available labor it could draw from
at some spread to the government wage paid to JG employees. Additionally,
the guaranteed public service job would be a counter- cyclical influence,
automatically increasing government employment and spending as jobs were
lost in the private sector, and decreasing government jobs and spending as
the private sector expanded. It would therefore remain a permanent feature
of our economy, in effect acting as a buffer stock to put a floor under unemployment,
whilst maintaining price stability whereby government offers a fixed wage
which does not "outbid" the private sector, but simply creates a stabilizing
floor and thereby prevents deflation.
ELR is desired because a more or less free market system does not (and,
perhaps, cannot) continuously generate true full employment. No civilized
nation should allow a large portion of its population to go without adequate
food, clothing and shelter. Best of all is that the program would be creating
a stock of EMPLOYED people, rather than a buffered stock of unemployed, where
social capital depletes rapidly, and several long-term social pathologies
develop. The current policies clearly are not working; it's time to try something
that can put as many Americans as possible into productive employment.
