WONKESS

Inequality...

Wow, these Mother Jones charts are spectacular.

I like this next one.  Especially the difference between the actual and perceived distribution.  There is definitely a strong frontier mentality in the US.  We are loathe to believe that (1) there is no manifest destiny, (2) hard work may not be enough and (3) that the odds are deliberately stacked against us.  I wonder how large the gap between reality and perception will grow before we'll (as a nation) actually get something real done.

And last but not least, why tax cuts are idiotic.  And the worst is, this chart merely reflects a "millionaire's" tax rate, which is significantly bumpbed up by the large crop of the top 1% who are earning in the low 7 figures and whose taxes are still largely income based.  For those in the truly upper tier, the .05, .01ers, their effective tax rate is probably much closer to 20%, as much of their annual wealth are profit-based.  Also, the corporate tax relative to income tax *wow*. 

All You Need is the Fed...

There is an excellent post up at Econbrowser about the Fed balance sheet, something I've been wondering about since the TAF was first opened and have been increasingly fretting over since it went from $120 to $600 to $900 billion.  And voila!

Balance sheet of the Federal Reserve.
  (Based on end-of-week values, in millions of dollars).  Data source: Federal Reserve Release H.4.1.

	Aug 8, 2007	Sep 3, 2008	Oct 1, 2008
Securities	790,820	479,726	491,121
Repos	18,750	109,000	83,000
Loans	255	198,376	587,969
Discount window	255	19,089	49,566
TAF		150,000	149,000
PDCF			146,565
AMLF			152,108
Other credit			61,283
Maiden Lane		29,287	29,447
Other F.R. assets	41,957	100,524	320,499
Miscellaneous	51,210	51,681	50,539
Factors supplying reserve funds	902,992	939,307	1,533,128
Currency in circulation	814,626	836,836	841,003
Reverse repos	30,131	41,756	93,063
Treasury supplement			388,850
Other	51,440	56,884	38,717
Reserve balances	6,794	3,831	171,495
Factors absorbing reserve funds	902,992	939,307	1,533,128

Some interesting points from the author (James Hamilton, professor at UCSD):

(1) Up to September, the Fed had been changing the composition of the asset side of its balance sheet through the beginning of September 2008, while keeping the total assets essentially constant.  The Fed did this by replacing more than $300 billion of its holdings of Treasury securities with assorted riskier loans.

Now, that has all changed in the past month.

(2) Over the past month, the Fed expanded its total asset holdings by $600 billion, with less than a third of this going directly into reserve balances.

My favorite line:

Anyone who suggests that last week's ballooning reserve deposits represent inflationary pressure or the Fed monetizing the deficit simply doesn't know what they're talking about. Banks are sitting on the reserves, not withdrawing them as cash. When markets settle down, the Fed can and will absorb those reserves back in with sterilizing sales of Treasury securities, just as it did in 2001 or after the more modest spike in August 2007. Providing new reserves aggressively is absolutely and unquestionably the way the Fed needs to respond to this kind of development.

Ok, that had been what I was suggesting.  I accept that I don't know what I'm talking about, and I have been deeply concerned about the deflation/inflation question.  I am desperate to know how the Fed can re-absorb this huge bonanza of reserves, but if they've managed to do it once before (after 9/11) that at least gives me a modicum of confidence that they might be able to do it again.

(3) Now interestingly, Hamilton is only speaking of the effects of the additional amounts in the reserve balance, and not the additional liquidity via the alphabet soup of new lending facilities.  Here's a superman graph:

   

Federal Reserve assets in billions of dollars.  Source: Macroblog.

Like, *doink*.  Apparently, this was done by:

the Fed offset [a] supplemental Treasury auction with a matching purchase of private assets, thereby temporarily delivering reserves to banks which the banks in turn could hand over to the Treasury supplementary account. The net result of such dual Treasury/Fed operations is that the newly created "reserves" would just sit there in the Treasury supplementary account doing nothing other than standing as an accounting entry. In other words, the device allowed for a huge expansion of the Fed's balance sheet without causing any change in currency in circulation or reserve deposits.

That's astonishing.  I assume the idea is that as long as the assets don't diminish in price too much (which is a big if), once the credit crunch is dealt with, the assets can be re-sold into the market by the Fed/Treasury, which can then reduce this supplemental account, and then reduce the Fed's balance sheet?  Of course (of course), my question will be... well, what if the private assets turn out to be worth pennies on the dollar?  Anyone have an answer for that?

Please let me know.  I feel so outclassed here.

Oh, and Hamilton concludes by pointing out that the Fed is about to announce the creation of a new facility, the CPFF (Commercial Paper Funding Facility) to purchase commercial paper from US issuers through a SPV.  Expect another large expansion of the balance sheet.

All this boils down to My Big Friggin' Question: if we survive the credit crunch, and I know that's a big if, should we be expecting hyper-inflation?

Updated numbers for October end. 

How Credit Crunched the Middle Class...

If I were a tad better versed in economics, I'm sure I would be able to say this as well as Steve Waldman (pfft, as if!). But I'm doing tadpole economics in a sea of sharks (in power only, not in aggression), so I can't. But he so lyrically says exactly what I'm thinking, every single time:

Credit was the means by which we reconciled the social ideals of America with an economic reality that increasingly resembles a "banana republic". We are making a choice, in how we respond to this crisis, and so far I'd say we are making the wrong choice. We are bailing out creditors and going all personal-responsibility on debtors. We are coddling large institutions of prestige and power, despite their having made allocative errors that would put a Soviet 5-year plan to shame. We applaud the fact that "wage pressures are contained", protecting the macroeconomy of the wealthy from the microeconomy of the middle class. 

I hate the whole Republican attitude of "nation of whiners" and I'm not sure why there are so many who buy into the line. Given the real lack of income progress made by the majority of Americans over the last seven/eight years, it is shocking that there are so many out there who still swear by the whole "pull yourself up by your bootstrap" motto.

Chart lovingly borrowed from the NYTimes.

Here is the deal: look at the first graph.  What you see is that the highest fifth of American households consumes just 47% of their income compared to the middle fifth (who consume 77% of their income) and the lowest fifth (who consume an astounding 182% of their income). 

A couple of interesting asides.  First, this chart ends at 2005, before the most recent run-up of gas and food prices.  Given that the official inflation rate in the US is running in the 5-6% area (and some suggest that inflation is as high as 8%, once you toss out certain metric bending adjustments, such as hedonic pricing), you would have to bump up consumption slightly for each bracket.  These numbers also do not take into account (1) any increases in housing prices due to ARMs adjusting over the past year, which has substantially increased housing costs for many Americans and (2) it also does not take into account the escalating unemployment numbers, which will drive the average income down.  Second, I find that there is an interesting disparity between the supposed average American consumption, which would suggest a savings rate of at between 20-50% among 3/5 of Americans compared to the actual savings rate in the US, which is and has been hovering in negative territory (which is, apparently, also a contentious issue, since the savings rate may or may not include pensions and other retirement savings plans and doesn't include home equity -- except we know how that's going).

Anyways, Waldman believes (as do I) that these numbers are vitally important because they hint at what has prevented furor over the growing income disparity in America.  That even as wages have stagnated for everyone except those in the top 5-20%, absolute consumption has actually kept apace among the different income groups.  And the truth is, most Americans (this one included) often use consumption instead of wages as the gauge of their own economic well-being.  (If I can own that latest Coach bag then I must be doing ok financially.)

Of course, the kind of consumption that these numbers suggest has been supported by easy credit.  Apparently, credit was soooo easy, that creditors were under the false illusion that they never had to be repaid.  And it is this "irresponsibility" that the conservatives seem irasibly focused upon. 

Now don't get me wrong: I don't understand how Americans have sank so far so fast, how we have an entire generation of people who think nothing of being tens of thousands, if not hundreds of thousands of dollars in debt.  And I'm not counting the folks who simply found themselves in hard times because of illness or other bad luck, who had to rely on easy credit to get them out of a jam.  I'm mostly thinking about those who thought it was worth a debt burden to own the latest model Suburban, iPhone or whatever monster machine most in vogue.  On the other hand, we are too quick to forget that on the other side of the debt equation were financial companies that made fistfuls of cash (on paper) from one-off fees and usurious interest rates.  As any credit card company will tell you, they don't make money off the rich, who tend to make their payments on time, qualify for low interest rates and, worst of all, never incur the penalties and extra interest charges associated with carrying a balance on their credit cards.  You just know that the incentive system is all wrong when a company can make MORE money off poor people than off the rich.

Now that credit is no longer "easy" and lenders are being told tighten their standards (by their shareholders and by regulators), we are going to face an enormous challenge as a society: what to do with the millions who will shortly have to arrive at the conclusion that they are not in fact the middle class that they had perceived themselves to be?

As Waldman points out: "in a way, the credit crisis comes out of a tension between the broad-middle-class America of our collective imagination and the economically polarized nation we have in fact come to be. We borrowed to finance an illusory Mayberry. The crisis won't be over until this tension is resolved. Either we modify the facts of our economic relations, or we come to terms with a new America more comfortable with distinct and enduring social classes." (emphasis mine)

So what do you think?  How comfortable are you with an America where social classes are far more distinct and less fluid than that which we have all become accustomed to?

If I Can Make It There, I'll Make It Anywhere...

This is a pretty great article comparing the cost of living in New York versus Houston. (H/T Escape Brooklyn)

I'm not a fan of urban sprawl, and I've always considered Houston (along with Dallas, Atlanta, and LA) some of the worst transgressors.  But a few articles of note recently has me questioning my once immutable position.  This article and the referenced research by the Brookings Institution found West Coast metropolitan areas as among the lowest per capita carbon emitters in the US.  Apparently, even as sprawly a city as LA has the oxymoronic quality of being high density.  A separate article I read on the same Brookings research (which, of course, I can no longer find) suggested that what LA lacks in height, it makes up for by lots and lots of short but still multi-family housing.  Compare that to the typical southern or even east-coast sprawl, where the landscape devolves very quickly from skyscraper to stand alone houses.

The first article mentioned above (about Houston) talks about the appeal of a city like Houston to the statistical average American household:

Between 2000 and 2007, the New York region grew by just 2.7%, while greater Houston — the country's sixth-largest metropolitan area — grew by 19.4%, expanding to 5.6 million people from 4.7 million.

Houston's great advantage, it turns out, is its ability to provide affordable living for middle-income Americans, something that is increasingly hard to achieve in the Big Apple. That Houston is a middle-class city is mirrored in the nature of its economy. Both greater Houston and Manhattan have about 2 million employees.

Housing prices are the most important part of Houston's recipe for middle-class affordability. In Gotham, the extraordinarily high housing costs aren't a problem for the hyper-rich. With enough money, you can live in a spacious aerie overlooking Central Park, shop at Barney's, eat at Le Bernardin, and send your children to Brearley or Dalton.

The abundance of poorer immigrant New Yorkers, in turn, tells us that for people simply seeking a lifestyle that beats rural Brazil, the city's many entry level service-sector jobs, wide array of social services, and extensive public transportation can offset high apartment prices.

But what if, like most Americans, you are neither a partner at Goldman Sachs nor a penniless immigrant? Consider an average American family with skills that put them in the middle of the U.S. income distribution — nurses, sales representatives, retail managers — and aspirations to a middle-class lifestyle. What kind of life will such people lead in Houston and New York City, respectively?

The article then goes on to disect the differences between life in Houston versus New York (including hard figures for income, housing, taxes, trasnsportation and general cost of goods - oh the wonky in me died and went to heaven).

In many ways, I think that the crowding out of middle-America happening in New York is a phenomenon being replicated in many other idea-intensive cities in the country like San Francisco, Chicago, Boston, and Seattle.  But what happens to a society when all of the bankers, lawyers, and tech entrepreneurs live in a couple of expensive, high-octane cities, leaving those with solidly middle-class occupation to flee to the less expensive, and more family friendly ones?  To some extent, the service hole left by their exodus from New York City has been filled by either the very young, whose unencumbered lives allow them to choose excitement over security, or new immigrants, who may seek the anonymity of a large city with lots of fluid jobs, and whose lives are still comparatively improved by being in the United States at all.  And then supplemented, to a probably lesser extent, by certain highly (or overly, depending on your POV) educated, lefty leaning, non-profiteer types, who choose to live in these cities for their cultural benefits, and some sense of living according to their conscience, with left-minded people (ummm... that would be... me?).

Except, after reading this article, and because of what I've been going through these last few months financially, I am really starting to understand the pull.  It is attractive to think that you can spend $2200 a month and get something more than a living room, two bed rooms, and an euphemistically named "eat-in kitchen" that seats 2 skinny people at best.  And it would be nice to think that we would be able to send our girls to a good school district without either (1) spending $30,000 per year in private school fees or (2) moving an hour out of the city, to districts where median home prices exceed the $1 million mark (don't get me started on the school district research that I've recently embarked on).  So then the pull gets you moving to Houston-ish, where job prospects are significantly better than those hippie-rich cities of Austin and Portland, where you tell yourself that you can still strive for smallness without compromising your children's health and happiness, but then you get sucked into McMansion-mania, because smaller bigger (as in bigger than what's in Boston) housing is only available in younger, hipper, un-family-friendly neighborhoods.

This kind of physical separation seems like a recipe for real disaster down the road, when people of (increasingly disparate) economic makeup are no longer separated not just by ideological differences but real geographic ones.  Where there can be no confluence of ideas, and both sides become entrenched in their "justness".

No wonder we are such a polarized nation.