20100405 PM, Economist Capture

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The term "regulatory capture" refers to industries that have gained control of their regulators. This is often seen with monopoly electric providers (rate increases are OK with provider because their customers are captive), and it has happened with US-based medical device makers (who had Congress put on laws to protect from competition - consumers can't import from cheaper countries).

It appears the Federal Reserve has effectively captured economists. The Fed has funded so many economic studies, that any economist who writes against the Fed is at risk of losing future funding. Therefore puff pieces like the following are produced.


America's central bank, The Federal Reserve, spends so much money on studies that they have effectively captured most economists. If an economist is critcal of The Fed, that economist's grants and junkets from The Fed will end. Economists understand what areas to avoid to stay in the good graces of The Fed's research and analysis money.

On January 4 2010, Barron's ran an article by a Japanese economist that misdiagnosed our economic problems. It is interesting to note how far and wide The Federal Reserve control's economists and encourages a "group think" mentality in which few economists can break out of the central banker's ideas.

Sections of the original articles are in italics. My comments are in regular type.

A Japanese Rx for the West: Keep Spending
By LESLIE P. NORTON

AN INTERVIEW WITH RICHARD KOO: America seems to be suffering from the same affliction that has hobbled Japan for so long -- a balance-sheet recession." And no matter how hard the Federal Reserve tries, it won't end until businesses shake their heavy loads.



Koo is well-equipped to answer questions about Japan and the West, having served as an economist for the Federal Reserve Bank of New York in the past and as chief economist of Nomura Research Institute now.

Koo formerly worked for The Federal Reserve, and Koo knows to stay on that gravy train.


But when the private sector is completely absent and paying down debt at zero interest rates, and the government doesn't borrow this money, what happens? Even a child would understand the whole thing could collapse.

Koo ignores the fact the private sector has reached it's maximum borrowing ability in 2007. Few in the private sector are able to borrow more even if they wanted to borrow more. The private sector has determined that paying down debt will provide better returns than by taking on more debt. And if you don't agree with Koo, he implies you are a child.


The only way the government can turn this economy around is to do the opposite of the private sector -- borrow the money the private sector saved and spend it, which means fiscal stimulus. That's what saved Japan from entering a Great Depression.

A large part of the problems that began in 2007 (the credit crunch) were due to excessive borrowing. More borrowing and additional debt will not cure a debt problem.
There are actually others ways toward a more sound economic, monetary, and banking system, Koo doesn't know of any and actually claims there are no other ways.


You end up losing demand. That's how the U.S. got into the Great Depression of 1929 to 1933 and lost half of its GDP in just four years.

The Great Depression was not caused by lack of demand. A large credit bubble had collapsed. The credit bubble was caused by polices of the (then newly created) Federal Reserve.


But we can't repair the government balance sheet until the private sector starts to borrow money again.

Koo's statement is complete nonsense. More borrowing will not cure too much debt.


That kind of explanation is essential to get Democrats and Republicans to understand why you need fiscal stimulus.

We have had several years of fiscal stimulus. Tax receipts, wages, housing prices, and jobs continue to decline.


I can assure you if [the government doesn't spend much more], your budget deficit will continue to increase.

The federal budget deficit is caused by spending more than is taken in. The federal government could fix the budget deficit by spending less. Spending more will make the federal deficit worse because it is SPENDING MORE.


American bankers are still tightening lending standards, which means the credit crunch is still with us.

Banks have no interest in lending to the private sector when The Federal Reserve is paying interest to get the banks to deposit money with The Fed. Since those deposits earn interest and are risk-free, bankers would be irresponsible to take greater risk in the private sector. The Fed could stop this behavior immediately by not paying interest on deposits to The Fed.


The TARP [Troubled Asset Relief Program] money was put in place to end the credit crunch, and failed miserably.

Based on huge banking bonuses on The NY Fed's (Geithner's) covering up of the AIG conduit to big banks, TARP appeared to simply be a transfer of funds from taxpayers to the banking elite. TARP was successful in fleecing the taxpayers.


Many banks are facing potential losses on commercial mortgages and real estate. They should come up with a 10-year plan to write off problems and inject capital to keep things going.

In a free market, those who take bad risks and lose should not be rewarded by a taxpayer-funded bailout. Apparently the banker's motto has become something like, "Winners win and losers are bailed out."


... to keep things going.

Whey would taxpayers want to continue to finance the huge bonuses of bailed out bankers? We don't need to "keep things going".


Unless the government issues a sufficient amount of debt and boosts fiscal expenditures, the economy will fall into a deflationary spiral.

Issuing more debt can not cure a debt problem.


It was the haphazard assignment of AAA ratings to subprime CDOs by these two organizations that enabled those instruments to be bought by investors around the world, ultimately triggering the global financial crisis.

Some would say it was the FRAUDULENT assignment of ratings that contributed to the problem. If the government would open competition beyond a handful of lying credit rating agencies, better competition could fix this problem.