Saturday, February 28, 2009

The Sad State of US Politics

Here is a blog entry by Richard H. Serlin that points to the sad state of American politics:
If only we had kept the extremist right in power...

...we might eventually have achieved our goal of becoming a third world country.

From the New York Times today:
Frederick Hess, an education policy analyst at the American Enterprise Institute, criticized the bill as failing to include mechanisms to encourage districts to bring school budgets in line with property tax revenues, which have plunged with the bursting of the real estate bubble.

"It's like an alcoholic at the end of the night when the bars close, and the solution is to open the bar for another hour," Mr. Hess said.
Yes, spending on education is like spending on alcohol. If only we weren't so addicted to education we might be a dirt poor third world country today.

This is Funny

Here is a blog entry by Jonah B. Gelbach that caught me. I had a good laugh at myself...
White House Fact Sheet on Stimulus

The White House released a fact sheet explaining its support for fiscal stimulus plan. Here's an excerpt:

The President’s economic plan has three main goals:
  1. Encourage consumer spending that will continue to boost the economic recovery and create jobs.
  2. Promote investment by individuals and businesses that will lead to economic growth and job creation.
  3. Deliver critical help to unemployed citizens.
No surprise there, right? After all, President Obama has been quite clear about his support for a stimulus plan to achieve these goals, all of which are textbook Keynesian stuff.


The White House fact sheet in question was released in the name of former President George W. Bush, on January 7, 2003. You can read the whole thing here (lots of plugs for tax cuts, of course).

Here's an entertaining chunk of text from a page A1 story in the LA Times the next day:
With Democrats criticizing Bush’s plan for its effect on the deficit, Republicans – who for years pushed for a balanced budget – are in the unusual position of arguing that deficits do not matter.

“What we need to do for an economic stimulus package is not look at what the cost is but what the impact will be on the economy,” said Sen. Rick Santorum (R-Pa.).
How things change.
The above is funny, but it is sad. It is hard to be cynical enough about politics.

Paul Samuelson

Here are some bits from a very interesting interview in October 2008 of Paul Samuelson by a Japanese newspaper. Samuelson was the leading post-WWII economist and his textbook taught a generation of economists. He may be very aged now but this interview proves that his mind is still keen:
Question: The current global financial crisis is said to be the worst since the Great Depression. What is your view?

Answer: I think it is definitely the worst crisis since the 1929-1939 Great Depression, both in America and globally, and I think it was an unnecessary breakdown as there was no need for America to have a meltdown.

When George W. Bush became president in 2001, he inherited a country with quite sound (fundamentals) from President Bill Clinton with an overbalanced budget.

Now this does not mean that there were not problems ahead ... (there had been problems) ever since 1981 when President Ronald Reagan took office.

He was not a bad movie star but he brought into power a swing to the right. This is what we call "extreme right, supply side economics." And, from 1981 we trace the acceleration of the huge yearly balance-of-payments deficit of the United States, which is still going on.


Q: How much of an impact will the global financial crisis have on the Nov. 4 elections in the United States?

A: Now, Bush has done everything wrong in eight years. I'm not going to discuss Iraq or Iran or Afghanistan or North Korea. I'm an economist. I'm not an expert on geopolitics. But, he has lowered America's leadership role in the world greatly and maybe permanently.

Voters are going to repudiate him and in all likelihood both Houses of Congress will be strongly controlled by the Democratic Party. This already happened after his first term in office. But this is almost the first time the Democrats have come back since Ronald Reagan's time, since 1981 to 1988.

George Bush will go down in the history books as the worst president that America has had in more than 200 years. And, that couldn't have happened if the voters had not moved to the right.

Now, aside from economics, which is my speciality ... President (Lyndon Baines) Johnson introduced Civil Rights ... equality in the law for black Americans. Immediately, all of the Democrats in the solid South moved to the Republican Party and that's part of the reason that for most of the last 28 years, since Ronald Reagan came to power, the Democrats have been the minority party.

I think after November that will change and it will change for two quite different reasons, both very important.

One is the Iraq war, which is a disaster. It's as bad as the Vietnam War and the Vietnam War entangled four or five presidents and there was no victory, and there can't be in the end a victory in Iraq and in neighboring places. Well, people don't like to see every night on television, a list of names of the new dead soldiers. So that alone would hurt Bush's reputation and his power.

But the other reason is because people on Main Street in America are hurting. The reason they're hurting goes back to 1995 when Alan Greenspan, as the chairman of the Federal Reserve Board, made no efforts to curb the stock market bubble.

So the American electorate is very unhappy. Free trade and globalization add to world productivity. It also adds to the potential standard of living of many people, but unequally.

So, if Bush had been as wise as Clinton, you still would have from free trade a worsening of the situation of the lower middle-classes compared to the upper middle-classes and the very rich.

Adding to that, we had what Bush called "compassionate conservatism," which is generous to millionaires and helping to make them billionaires. The trouble is, it is ungenerous to people below the middle. So with this meltdown November's election should certainly go toward the Democrats.


Q: You have experienced and studied the Great Depression. What is the difference between the Great Depression and the current financial crisis?

A: Well, the present one in America is still primarily a Wall Street phenomenon. But right behind that is going to be a Main Street downturn, because all of the swollen population, aged 50 to 65, have lost from these subprime ridiculous mortgages.

They've lost much of what they're going to need to retire. And when I say "lost," it's not something that the government can stuff back in. It's gone. And, it all traces to bad deregulation, to incompetent appointments, to conflict-of-interests appointments.

Harvey Pitt, the first head of the SEC for George W. Bush was a lawyer to the four big accounting firms. The four big accounting firms do not deal from an honest deck of cards. They have tricks to keep things off the balance sheet and so forth. And, these are the new fiendish Frankenstein monsters (laughter).

Phoney Issues

I enjoy Dean Baker's blog because he points out all the curious cases of ideology painted as "news" by the American news media. Here is an especially egregious case:
Are There Any Economists Who Think the Economy Will Be Too Weak in 2011 to Absorb Tax Increases on the Wealthy, But Strong Enough to Absorb Budget Cuts?

In discussing President Obama's budget, the Washington Post (a.k.a. Fox on 15th Street) tells readers that: "some economists worry that even in 2011 the economy may be too fragile to absorb a tax increase." It then tells adds "some Democrats joined Republicans in complaining that the budget plan does not go far enough to narrow the yawning budget gap."

While no economists are identified with the view that President Obama's tax increases on the wealthy in 2011 will harm a fragile economy, the article does not discuss at all the economic impact of the cuts in spending that "some Democrats" and Republicans apparently favor. The multiplier for almost possible spending cuts would be considerably larger than the multiplier for the tax increases on the wealthy. Any economists who were concerned that tax increases in 2011 could harm a still weak economy would almost certainly be much more concerned about the prospect of spending cuts in that year.

GDP Breakdown

Here is a nice graphic that shows the components of GDP. As you can see, durable goods (think "cars") is collapsing. Spending on services is holding up. But consumers have cut spending by nearly 5% and the non-durables are down 10%:

This is a nosedive. The only thing that will bring the nose up and let the economy fly again is the consumer of last resort, the government. That is the role of Obama's stimulus bill. Given that the economy is $14.5 trillion, and things are collapsing by 6.2% in Q4 of 2008, an $800 billion stimulus won't fill the hole. If the economy stopped dropping, then an $800 billion stimulus would fill in the missing purchases, but everything is headed lower, so Obama's stimulus would have been excellent back last September. But Bush still held the wheel and Bush argued that "the economy is fundamentally sound" (just like John McCain, and just like Herbert Hoover). So the opportunity to pull up the nose with an $800 billion injection is past. It will take even more spending by government to pull the trajectory of the economy up out of its deepening slump.

Zombie Banks

Here is a Bill Moyer's interview with Robert Johnson about the lobbying power of the big banks. There is a growing wave of "revelations" about the improper political control of Congress by the big financial institutions in the United States. Notice how more and more voices are expressing grave worries about the direction of the Obama administration. There needs to be a clear plan that kills off the zombies and restarts the banking industry:

Part 1:

Part 2:

Manufacturing "the News"

Here is a very interesting accusation from an usual magazine for muckracking, Playboy. Here is an article by Mark Ames and Yasha Levine that accuses CNBC correspondent Rick Santelli of being part of a right-wing conspiracy to "manufacture" news:
What we discovered is that Santelli’s “rant” was not at all spontaneous as his alleged fans claim, but rather it was a carefully-planned trigger for the anti-Obama campaign. In PR terms, his February 19th call for a “Chicago Tea Party” was the launch event of a carefully organized and sophisticated PR campaign, one in which Santelli served as a frontman, using the CNBC airwaves for publicity, for the some of the craziest and sleaziest rightwing oligarch clans this country has ever produced. Namely, the Koch family, the multibilllionaire owners of the largest private corporation in America, and funders of scores of rightwing thinktanks and advocacy groups, from the Cato Institute and Reason Magazine to FreedomWorks. The scion of the Koch family, Fred Koch, was a co-founder of the notorious extremist-rightwing John Birch Society.


Within hours of Santelli's rant, a website called sprang to life. Essentially inactive until that day, it now featured a YouTube video of Santelli’s “tea party” rant and billed itself as the official home of the Chicago Tea Party. The domain was registered in August, 2008 by Zack Christenson, a dweeby Twitter Republican and producer for a popular Chicago rightwing radio host Milt Rosenberg—a familiar name to Obama campaign people. Last August, Rosenberg, who looks like Martin Short's Irving Cohen character, caused an outcry when he interviewed Stanley Kurtz, the conservative writer who first "exposed" a personal link between Obama and former Weather Undergound leader Bill Ayers. As a result of Rosenberg’s radio interview, the Ayers story was given a major push through the Republican media echo chamber, culminating in Sarah Palin’s accusation that Obama was “palling around with terrorists.” That Rosenberg’s producer owns the “” site is already weird—but what’s even stranger is that he first bought the domain last August, right around the time of Rosenburg’s launch of the “Obama is a terrorist” campaign. It’s as if they held this “Chicago tea party” campaign in reserve, like a sleeper-site. Which is exactly what it was. was just one part of a larger network of Republican sleeper-cell-blogs set up over the course of the past few months, all of them tied to a shady rightwing advocacy group coincidentally named the “Sam Adams Alliance,” whose backers have until now been kept hidden from public. Cached google records that we discovered show that the Sam Adams Alliance took pains to scrub its deep links to the Koch family money as well as the fake-grassroots “tea party” protests going on today. All of these roads ultimately lead back to a more notorious rightwing advocacy group, FreedomWorks, a powerful PR organization headed by former Republican House Majority leader Dick Armey and funded by Koch money.


So today’s protests show that the corporate war is on, and this is how they’ll fight it: hiding behind “objective” journalists and “grassroots” new media movements. Because in these times, if you want to push for policies that help the super-wealthy, you better do everything you can to make it seem like it’s “the people” who are “spontaneously” fighting your fight. As a 19th century slave management manual wrote, “The master should make it his business to show his slaves, that the advancement of his individual interest, is at the same time an advancement of theirs. Once they feel this, it will require little compulsion to make them act as becomes them.” (Southern Agriculturalist IX, 1836.) The question now is, will they get away with it, and will the rest of America advance the interests of Koch, Santelli, and the rest of the masters?
Very interesting... go read the whole article.


Here is an interesting talk. Fourteen minutes into this video focuses on Toxoplasma, a protozoan parasite. This parasite controls behaviour. Normally it causes rodents to lose their fear of cats so they more easily become prey to complete the lifecycle of Toxoplasma. When humans are infected, there are some interesting effects connected with schizophrenia and behaviours reflecting an inhibition of fear. Talk of Invastion of the Body Snatchers, this microbe runs your brain...

Cyclists vs. Structuralists

Here is an interesting viewpoint on the economy from Robert Reich. I've added bold and italics to help readers:
Those who support the stimulus as a desperate measure to arrest the downward plunge in the business cycle might be called cyclists. Others, including me, see the stimulus as the first step toward addressing deep structural flaws in the economy. We are the structuralists. These two camps are united behind the current stimulus, but may not be for long. Cyclists blame the current crisis on a speculative bubble that threw the economy's self-regulating mechanisms out of whack. They say that we can avoid future downturns if the Fed pops bubbles earlier by raising interest rates when speculation heats up.

But structuralists see it very differently. The bursting of the housing bubble caused the current crisis, but the underlying problem began much earlier -- in the late 1970s, when median U.S. incomes began to stall. Because wages got hit then by the double-whammy of global competition and new technologies, the typical American family was able to maintain its living standard only if women went into the workforce in larger numbers, and later, only if everyone worked longer hours.

When even these coping mechanisms were exhausted, families went into debt -- a strategy that was viable as long as home values continued to rise. But when the housing bubble burst, families were no longer able to easily refinance and take out home-equity loans. The result: Americans no longer have the money to keep consuming. When you consider that consumers make up 70 percent of the economy, the magnitude of the problem becomes apparent.

What happened to the money? According to researchers Thomas Piketty and Emmanuel Saez, since the late 1970s, a greater and greater share of national income has gone to people at the top of the earnings ladder. As late as 1976, the richest 1 percent of the country took home about 9 percent of the total national income. By 2006, they were pocketing more than 20 percent. But the rich don't spend as much of their income as the middle class and the poor do -- after all, being rich means that you already have most of what you need. That's why the concentration of income at the top can lead to a big shortfall in overall demand and send the economy into a tailspin. (It's not coincidental that 1928 was the last time that the top 1 percent took home more than 20 percent of the nation's income.)

Other structural problems are growing as well. One is climate change and our dependence on oil. Another is the United States' growing reliance on foreign capital, mostly from China, Japan and the Middle East. Neither is sustainable.

Meanwhile, our broken health-care system drains more of our dollars yet delivers less care.
Read the whole post. Reich has lots of interesting factual data and ideas. In fact, read his blog. It is excellent.

I would put myself in the structuralist camp.

Playing Political Games

Robert Reich thinks he knows why the Republicans pretended to play footsie with Obama then nixed him in the end:
Why are Senate Republicans (all, that is, except the lonely moderates Collins, Snowe, and Specter) nixing the stimulus package, as House Republicans did? Not because Obama failed to compromise -- he gave them the tax breaks they wanted, included a whopper for business. Not because Senate Democrats failed to bend -- they agreed to trim more than $100 billion out of a previous version of the bill. Not because Senate Republicans are doctrinally opposed to deficit spending -- many of them happily voted for Bush spending and tax cuts that doubled the federal debt.

The reason has to do with the timing of the economic recovery. If everything goes as well as possible and the stimulus and next round of bank bailouts work perfectly, a turnaround could begin as early as mid-2010. But even under this rosy scenario, employers wouldn't start rehiring until late 2010 because they'll want to be sure the upturn is for real (employment typically lags in a recovery). This means that under the best of circumstances -- assuming the stimulus is big enough to jump-start the economy and the next bank bailout big enough to get credit moving -- most Americans won't feel much better than they do now by November, 2010.


Yesterday, while sitting across from Newt Gingrich on George Stephanopoulos's Sunday morning television show, 1994 came roaring back into my head. Gingrich, you remember, turned that midterm election into a national referendum about Bill Clinton's leadership. (No one today remembers what was in Gingrich's "Contract with America," but almost no one did then, either.) Because Clinton's presidency had had a rough start and because House and Senate Republicans had kept remarkable unity in opposing him at almost every turn, Gingrich in the election of 1994 could claim that and the Republican Party offered a clear alternative, and had earned the chance to control Congress.

Fast forward to today and listen to Senate Republicans referring to the stimulus: "This is neither bipartisan nor is it a compromise," said Sen. John McCain this morning. "It is ... generational theft" that will increase the role of government and provide no mechanism for paying back the money.


Obama believes Republicans will eventually embrace bipartisanship. I hope he's right but I fear he's wrong. They want to take back Congress the way Newt Gingrich retook the House (and helped Republicans retake the Senate) in 1994 -- with hellfire and brimstone. Once in control of Congress, they'll be able to block Obama's big inititiaves on health care and the environment, stop any Supreme Court nominees, and set up their own candidate for the White House in 2012.
Yes... that is a cynical enough reason to try to sabotage Obama. Yes, the first goal of Republicans is to get re-elected, not to save the Republic.

Impaled on the Horns of a Dilemma

Here is an excellent interview with Michael Hudson, an economist who is bitterly opposed to the Wall Street interests.

Hudson presents the problem as a dilemma: the government can "save the economy" or they can they can "save the creditors who made the bad loans".

Gee... that doesn't sound like a dilemma to me. It's pretty obvious that you want to "save the economy". But wait... he explains why governments find themselves in a dilemma: The largest contributor to the politicall parties is the financial sector.

Watch this, something I never thought I would see... a modern economist calling for a return of the ancient "Jubilee" where debts were cancelled:

His conclusion: Until the government saves the economy and writes down the debts to the ability to pay there is not going to be a recovery from this recession. Amazing. Here is an economist telling us that the economists surrounding Obama are captives of Wall Street and are more interested in creating a keptocracy than in working for a democracy.

Personally, I think this guy is over the top. But I think he is useful. His arguments should put some fear into the Wall Street lobby and hopefully will get Obama to take a long look at the economists he has surrounded himself with. It is becoming more and more obvious that these economists are captives of Wall Street.

Hudson is useful because he separates the (1) social change Obama stands for from the (2) regressive pro-Wall Street tendencies of the Obama camp. It is helpful to recognize that in the real world people do not wear white hats vs. black hats. In fact, instruments of change such as Obama may in fact harbour regressive tendencies. Knowing this innoculates you from adulatory worship and keeps you critical of those in power.

A New New Deal?

Here is an interesting paper I found on Barry Ritholz's The Big Picture website. It is by Marshall Auerback is a Denver, Colorado-based global portfolio strategist for RAB Capital plc. Here's the abstract:
Historical revisionists have done much to dismiss the economic achievements of the New Deal, some even going so far as to suggest that FDR’s fiscal policies worsened the crisis. Such arguments have been made popular during the past 25 years by economists and historians keen to debunk the effectiveness of Keynesian economics in favor of the neo-liberal Washington Consensus. We suggest, on the contrary, that mainstream economics and policy have been unable to come to grips with our current socio-economic problems because of a lack of historical memory.

In particular, the key to evaluating Roosevelt's performance in combating the Depression is the statistical treatment of many millions of unemployed engaged in his massive workfare programs. Including such ‘workfare’ recipients as employed presents a radically different picture for the New Deal, showing unemployment dropping by almost two-thirds from a high of 25%. Treating these men and women as unemployed while soldiers in Germany and France were treated as having jobs has made the Roosevelt administration's economic performance appear uncompetitive, but it is fairer to argue that the people employed in government public works and conservation programs were just as authentically (and much more usefully) employed as draftees in what became garrison states. Meanwhile Roosevelt was rebuilding America at a historic bargain cost.

As President Barack Obama confronts the most serious economic crisis since the Great Depression, it behooves him to embrace the legacy of Franklin Delano Roosevelt and introduce a new “New Deal” as soon as possible.
Here is a key claim by this paper...
One advantage we have over policy makers of the 1930s: the historic experience of the Great Depression itself. The gross policy errors made during that period — such as raising taxes, tightening monetary policy and trade barriers — are less likely today. And the landslide victory of Barack Obama and the corresponding gains of the Democrats in Congress ensure less visceral opposition to a major role for government going forward. Fiscal policy has been virtually absent from the US government’s policy arsenal for almost a generation, in part inhibited by a perception that the state’s major role should be to protect property rights and ensure a very modest supply of public goods. More specifically, according to this view of economics widely known as the “Washington Consensus”, the state should create and sustain (a) efficient, rent-free markets, (b) an efficient, corruption-free public sector able to supervise the delivery of a narrow set of inherently public services, and (c) decentralized arrangements of participatory democracy. It should not, in this view, attempt to influence the rate of unemployment.

The reputation of fiscal activism has also been harmed by a historical revisionism aimed at the heart of FDR's original New Deal, the essence of which is that he achieved little of lasting economic benefit and that it was only World War II that finally took America out of the Great Depression. This is factually incorrect. There is much evidence to support the contrary position, that the effects of the New Deal were in fact greater than even mainstream historians have been willing to allow. This paper presents some of the relevant evidence.
And here is how history can be re-written to meet a political agenda:
Even pro-Roosevelt historians such as William Leuchtenburg and Doris Kearns Goodwin have meekly accepted that the millions of people in the New Deal workfare programs were unemployed, while comparable millions of Germans and Japanese, and eventually French and British, who were dragooned into the armed forces and defense production industries in the mid-and late 1930s, were considered to be employed.

This made the Roosevelt administration's economic performance appear uncompetitive, but it is fairer to argue that the people employed in government public works and conservation programs were just as authentically (and much more usefully) employed as draftees in what became garrison states, while Roosevelt was rebuilding America at a historic bargain cost.
Here is the contemporary illness that Auerback diagnoses:
There had NEVER before been anything even close to the severe downturns that occurred just prior to the administration of FDR. Not until now. And today’s crisis, unsurprisingly, has come at a time when much of the legislative framework put in place by Roosevelt has been largely eviscerated. FDR's long-term stabilizers in fact worked very well, but were gutted during an unprecedented period of corporate predation, which found its apotheosis in the recent credit boom and growth of the so-called “shadow banking system.” Before this market fundamentalist philosophy took root during the Reagan era, the financial sector accounted for only 2 per cent of U.S. corporate profits. In recent years, the figure has approached 40 per cent.

It is true that under FDR, we ended up with a national debt exceeded the national income by the end of the war -- as the government spent over $200 billion more than it took in taxes during the war years. But of course, the American people "saved" more than 200 billion" during the same period – the national debt was private financial wealth. And the end result was full employment prosperity. A final point, which today’s deficit hawks should bear in mind: if deficits are so economically ruinous, then why run them during wartime, when in theory the optimal functioning of the economy is most crucial?

So what form should a new ‘New Deal’ take today? As any university economics student promptly learns, a dollar's worth of expenditures on goods and services yields a larger multiplier than tax cuts. This suggests that supporting already planned investment in infrastructure -- by states and municipalities that are currently liquidity constrained, and squeezed by declining tax revenues -- would be a more effective way of supporting aggregate demand than “trickle down” economics.

Let's All Sing Along...

Here's a music video that nicely sums up the year 2008...

The previous year this author, L. McDuff, treated us to his 2007 version of crash & gloom...

Gee... when I was a kid we sat around a campfire and sang campfire songs that were wholesome and fun. Today everyone sits alone at a computer screen to sing along to frightening music videos with apocalyptic visions of financial meltdown. ...I want to go back to campfire songs!

I don't think I can take more deregulation, globalization, financial toxification, or videos with a mindless driving beat. Let me go back to simpler times where you worked to earn your living and you didn't suck blood out of others through "financial engineering".

A "Mountain" of Debt

The bleating of right wing ideologues is now in full fury. Debt! Mountains of debt! Save us from that spendthrift Obama...

Funny... when Reagan ran up huge deficits that built a mountain of debt, these same people were mum. But when Clinton took office, there was suddenly lots of talk about "lock boxes" and the need to bring the deficit down and remove those nasty "entitlements" that the little people held so dear. So Clinton bent to their will. But... then Bush 43 took a budget surplus and ran it into deficit and started a new run-up of debt. Funny how that works. Spending by Republicans is OK  because it is "essential" but spending by Democrats is bad because it is "wasteful".

So... once again America has a Democrat in power. His mandate is to pull the country out of the ditch that Bush 43 ran it into. But what have the right wing ideologues contributing to this debate? The cry of "Debt!" They are yelling once again that debt is a monster that will swallow everything.

Here is a graph from a report by Auerbach and Gale published by the non-partisan Tax Policy Center that puts the lie to all this hullabaloo. See Figure 4:

Two things are obvious from this graph:
  1. The US has sustained far worse debt in the past, see WWII.
  2. The Reagan run-up of debt was far worse than anything Obama is planning to do to save the economy.

The Reagan run-up was of no concern to those now crying that the sky is falling. Reagan justified his deficits as necessary to "win the Cold War". OK, I'll buy that. But then who doesn't believe that a run-up of debt today isn't necessary to "win the war" against the oncoming Depression?

Oh wait... only the cozy rich who will pull their sacks of moolah over them and snuggle down living off dividends and rents until the ill winds of the economic recession/depression they created has passed. They are worried that taxes will be needed to pay off the debt. They don't want to spend their dollar to help out those thrown out of a job. Nope! No way! Where is good old American self-reliance?

Oh wait another sec... those Wall Street bankers just turned from anti-debt howlers to "please spend trillions on me" lemon socialists. They turned on a dime when their banks collapsed due to their own reckless disregard of financial risks. They suddenly went from "conservative" principles to "I need another hundred billion".

So... all this anti-debt wailing is simply a "not me" response to trouble. These fat cats (and fat cat wannabes) don't want government to waste money on the unemployed or those who have lost homes or suddenly run up big medical bills. No! But, wait another sec, if you've lost a half trillion here or a hundred billion there because of bad business practices... well... that's a different story. Now it is essential to the "stability of the system" that the government shower you with dollars and debts be damned!


Friday, February 27, 2009

The View from the Top

Here is a very readable statement from Christina Romer, the Chair of the CEA (Council of Economic Advisors), about the economic policies of the Obama administration. This looks good. Read the full statement here. Here is a key statement:
...there is strong reason to believe that a recovery in the real economy is salutary to the financial sector. When people are employed and buying things, loan defaults fall and asset prices are likely to rise. Both of these developments would surely be helpful to stressed financial institutions. This is, I believe, a key lesson of the Great Depression. In the Depression, the end of deflation, renewed optimism, and increased employment and output were as crucial to the recovery of the financial system as the more direct actions taken to stabilize banks. Thus, real and financial recovery reinforced each other. So, fiscal policy to raise employment may help to restart lending and in that way generate a more durable recovery.
This has the right tenor and the right focus. This sends the message that the government "gets it" and is working hard to stop the slide and lead a recovery.

DeLong Assesses Obama

Here is an assessment of the Obama administration's handling of the crisis by Brad DeLong:
Back last November, I said that the Obama administration needed to do five things:
  1. Expansionary monetary policy at an appropriate scale.
  2. Expansionary fiscal policy at an appropriate scale.
  3. Massive bank recapitalization--or nationalization--so that banks believe that they can be banks that start lending again rather than being zombies that think they have to hunker down and minimize risk in order to keep the next negative shock from destroying the institution.
  4. Massive buy-ups of mortgages by Fannie and Freddie so that (a) mortgage deals could be reworked, and (b) the supply of risky assets on financial markets that the private sector could be reduced in consonance with the banking system's reduced risk tolerance.
  5. Design the regulatory system for financial markets going forward.
Bernanke has done (1). Summers and company have done (2) at perhaps half-scale--but thanks to the Republicans and Senator Nelson that was the biggest fiscal boost progrtam that could get through congress. Geithner and his skeleton staff are doing about half of (3)--or perhaps less. And I see no signs of (4) or (5).

This is much, much better than the Bush administration. But it is not reassuring. We might still get out of this "OK," where "OK" means a headline unemployment rate that stays below 10%. But we might not...
This isn't good enough. The US economy continues to plunge into an abyss while government diddles. Not good.

Intellectual Ancestors

According to this Bloomberg news piece, James Tobin is the father of Obama's stimulus plan:
So long, Milton Friedman. Hello, James Tobin.

After a three-decade run, the free-market philosophies of Friedman that shaped U.S. policy are being eclipsed by the pro- government ideas of Tobin, the late Yale economist and Nobel laureate who brought John Maynard Keynes into the modern era.

Tobin’s stamp is on the $787 billion stimulus signed by President Barack Obama, former students and colleagues say. His philosophies are influencing Austan Goolsbee, a former Tobin student advising Obama, and Ben S. Bernanke, head of the Federal Reserve. Unlike Friedman, Tobin provides guidance for today’s problems, said Paul Krugman, a Princeton University economist.

“Hard-line doctrines don’t seem very appropriate at this troubled moment,” said Krugman, a New York Times columnist who also worked with Tobin at Yale from 1977 to 1979. “Tobin was never a guru in the way Milton Friedman was; he never had legions of Samurai ready to spring to the defense of his theories, but that’s part of why he is so relevant right now.”

The decision by Bernanke last September to invoke the Fed’s emergency powers and put mortgages and other assets on the central bank’s balance sheet “is pure Tobin,” Krugman said. Bernanke cited Tobin’s 1969 essay on monetary theory in a 2004 paper discussing options available to the Federal Reserve for stimulating the economy when interest rates approach zero.

Tobin’s experience of the depression as a teenager in the 1930s gave him a lifelong loathing of unemployment.

“As a young professor I did a paper where I analyzed the optimal unemployment rate,” said Joseph Stiglitz, a professor at Columbia University in New York, who knew Tobin at Yale. “Tobin went livid over the idea. To him the optimal unemployment rate was zero.”

Read the whole article. It is well worth the time (except for the idiotic comments of John Cochrane, but even that is educational in showing you how out of touch with reality the right wing still is in America).

Update: If you read this you can see Brad DeLong's assessment of just how idiotic the comments of John Cochrane truly are.

Obama's Budget Gets a Thumbs Up

Here's bits from a blog entry by Robert Reich (Clinton's Secretary of the Treasury) about Obama's budget:
President Obama’s new budget is, well, audacious -- not just because it includes several big, audacious initiatives (universally affordable health care, and a cap-and-trade system for coping with global warming, for starters) but also because it represents the biggest redistribution of income from the wealthy to the middle class and poor this nation has seen in more than forty years.


Although we don't have details as yet, the President's health-care proposal is likely to include substantial subsidies for lower-income families. In addition, let's hope the expanded Earned Income Tax Credit now in the stimulus bill will continue beyond 2010, as well as the refundable Child Tax Credit, enlarged Food Stamp program, larger Title I for poor school districts, and expansion of Pell Grants. (So are, no clear signal on this.)


It's about time a presidential budget uneqivocally redistributed income from the very rich to the middle class and poor. The incomes of the top 1 percent have soared for thirty years while median wages have slowed or declined in real terms. As economists Thomas Piketty and Emanuel Saez have shown, in the 1970s the top-earning 1 percent of Americans took home 8 percent of total income; as recently as 1980 they took home 9 percent. After that, total income became more and more concentrated at the top. By 2007, the top 1 percent took home over 22 percent. Meanwhile, even as their incomes dramatically increased, the total federal tax rates paid by the top 1 percent dropped. According to the Congressional Budget Office, the top 1 percent paid a total federal tax rate of 37 percent three decades ago; now it's paying 31 percent.

Fairness is at stake but so is the economy as a whole. This Mini Depression is partly the result of a widening gap between what Americans can afford to buy and what Americans when fully employed can produce. And that gap is in no small measure due to the widening gap in incomes, since the rich don't devote nearly as large a portion of their incomes to buying things than middle and lower-income people. The rich, after all, already have most of what they want.

Thursday, February 26, 2009

Debating the Stimulus

Here is an interesting debate between the liberal Dean Baker and the libertarian Megan McArdle:

The segment of this debate (minutes 62-69) where McArdle makes the typical libertarian wing-nut claim that FDR's stimulus didn't work is sad because it shows how an ideologue can deny facts and redefine things like "employment" to achieve their ideological goals. McArdle claims that the FDR stimulus didn't work. Here is the US Great Depression era GDP from Wikipedia's article on the depression. Seems to me that FDR did a pretty good job (FDR's part starts in March 1933 and he did a pretty good job for somebody working pre-Keynes, but he stumbled in 1937-38 when right-wingers like McArdle worried him into prematurely "balancing" the budget"):

Another part of the "debate" that bothers me occurs at the end where McArdle "worries" that the stimulus will cause "too much" debt. This is exactly the kind of thinking that caused FDR to waiver in 1937-38 and which brought the dip in GDP you see in the above graph. McArdle couches her worry in fancy words of "soverign debt", but this is nutty. The current US debt was moderate. It exploded during WWII. But guess what? After WWII you had 25 years of extraordinary solid growth. That puts the lie to McArdles worry about "debt".

The debt isn't a problem if you have a sound government run by reasonable, pragmatic people. The danger to a republic is from ideologues like McArdle who invent "facts" and redefine categories (employment) to push their argument to the detriment of society.

The problem is that for 30 years you have had ideologues selling lies and distortions like "trickle down" economics, or that "tax cuts" are the fix for everything. Guess what? That wonderful growth from after WWII until the late 1960s occurred in an era where the top marginal tax rate was 92%. But the rich didn't "down tools" and go on strike and refuse to work. The worked and paid their taxes. But what they did do was fund a lot of right wing "movement" activity to elect Republicans to write laws that gave them this extraordinary 30 year era of tax breaks and "trickle down" economics culminating in two spectacular stock market bubbles, huge government deficits, and a collapsing economy. So what do you like? FDR's pragmatism with 30 years of solid growth (post WWII to the late 1960s) or the crash-and-burn economics of the ideological right (1980-2008)?

The truth is that the ideological left pushed too hard with Johnson's "Great Society". The enemy isn't right or left. It is ideologues. What you want is a centrist government with pragmatists in charge! But you don't want a straddle-the-line centrist government that gets bogged down. You want a centrist government which will bob and weave left of right depending on circumstances and which approach best fits the fact and the needs of the moment.

Vocker's Assessment

Here is the one competent economic adviser that Obama has. Here is his assessment of the financial mess. I agree with this.

  1. My first point... The present crisis grew out a serious and unsustainable imbalance in the United States and world economies. Specifically, over recent years, until the outset of the recession, Americans spent more than our country produced or was capable of producing at full employment. That spending, reflected in exceptionally high levels of consumption generally and in housing in particular, was made possible by a high level of imports, a collapse in personal savings, and large trade and current account deficits. The consequence was the nation became dependent on borrowing abroad hundreds of billions ofdollars a year. ... The trouble was it could not last. The process came to be dependent upon an enormous build-up of domestic as well as international debt, facilitated by the low interest rates and sense of “easy money”. The bulk of that debt came to be mortgage-related. It was supported by the strong increase in housing prices, giving the illusion of wealth creation. When housing prices leveled off and then declined, the weakest mortgages – so-called subprime – came under pressure, and the highly engineered over-extended financial structure began to unravel. As the financial crisis broadened, the recession was triggered. ...
  2. Secondly, I turn to the problem in financial markets. The rising debt, particularly mortgage credit, was facilitated and extended by the modern alchemy of financial engineering. Mathematic techniques that have developed in an effort to diffuse and limit risk turned out in practice to magnify and obscure risks, partly because, in all their complexity and opacity, transparency was lost. Risk management failed. At the same time, highly aggressive compensation practices encouraged risk taking in the face of misunderstood and sometimes almost incomprehensible debt instruments. As we look ahead, the obvious lesson is the need formore disciplined financial management generally and better risk management in particular. ...
  3. As the financial crisis evolved, weaknesses in accounting, credit rating agencies and other market practices were exposed. “Fair value” accounting rules were inconsistently applied and have contributed to downward spiraling valuations in illiquid markets. Credit rating agencies failed to analyze collective debt obligations with sufficient vigor. Clearance, settlement and collateral arrangements for obscure derivative contracts created uncertainty and need clarification. ...
  4. More directly of governmental concern are thelapses in financial regulation and supervision thatpermitted institutional weaknesses to fester, failed to identify exceptional risks and deal adequately with conflicts of interest, and did not expose large personal scandals after warnings. ...
Taken together, the need for change is both obvious
and wide ranging. ...

To help assure their stability and continuity and limit potential conflicts of interest, strong restrictions on risk-prone capital market activities – e.g. hedge funds, equity funds, and proprietary trading – would be enforced. ...

Implicit in this approach is the need for strong cooperation and coordination among national authorities and regulators. Some approaches - accounting standards, capital and liquidity requirements, and registration and reporting procedures - should be internationally agreed and consistent in application to minimize regulatory arbitrage and any tendency by particular countries or financial centers to seek competitive advantage by tolerating laxity
in oversight. ...

Dan Ariely's "Predictably Irrational"

This is a very readable account of some results in behavioural economics. The writing style is both entertaining and informative. The discussion of experiements and their analysis is very accessible. Lots of fun!

I like the fact that this research punches a hole in traditional economics. For example:
So where does this leave us? If we can't rely on the market forces of supply and demand to set optimal market prices, and we can't count on free-market mechanisms to help us maximize our utility, then we may need to look elsewhere. This is especially the case with society's essentials, such as health care, medicine, water, electricity, education, and other critical resources. If you accept the premise that market forces and free markets will not always regulate the market for the best, then you may find yourself among those who believe that the government (we hope a reasonable and thoughtful government) must play a larger role in regulating some market activities, even if this limits free enterprise. Yes, a free market based on supply, demand, and no friction would be ideal if we were truly rational. Yet when we are not rational but irrational, policies should take this important factor into account.
Update 2009mar03: Here's a positive comment about the book by Eric Drexler:
The author of Predictably Irrational, Dan Ariely, is a professor of behavioral economics at Duke University, and he’s written a book about pain, placebos, payment, procrastination, and prices (that’s just the Ps), as well as the necessarily priceless value (and fragility) of key social norms, the special moral psychology of money (but not tokens redeemable for money at the back of the room), and the strange allure of anything FREE! (but not of things that are merely very, very inexpensive). When Ariely speaks of the cost of holding options, he isn’t talking about financial instruments, but about the cost to us all of systematically over-valuing the range of our personal choices — and in his world, this means overvaluing in terms of our own considered values.

Like Nudge, the powerful reality that drives Predictably Irrational is the gap between the behavior of hypothetical highly-informed, fast-calculating rational agents (species homo economicus) and the predictably different behavior of real human beings. And as in Nudge, the focus of the book is on the growing science of human non-rationality, what it can teach us, and how we can use this knowledge to make life better by improving both public policies and the quality of our personal insight.
Update 01apr2009: Here is a video of Dan Ariely giving a talk at the TED conference. This will give you a quick and easy overview of his book.

Update 11feb2010: There is a nice summary of the book in Wikipedia.

Update 1mar2010: Here is a nice review of the book by Cory Doctorow:
Over the weekend, I finally picked up and read Dan Ariely's Predictably Irrational: The Hidden Forces That Shape Our Decisions, an accessible intro to the subject of behavioral economics -- that is, the study of how people behave in the real world and why that varies from the predictions made by classical economic theory (which predicts that people behave rationally and in their own interests). This is a subject I've been very interested in for some years and I'd read and blogged a lot of material about Ariely's work, but somehow never got 'round to reading it for myself.

I'm very glad I did! Ariely's a very engaging writer and a smart social scientist with a knack for illustrating his hypotheses about human behavior through elegant and simple experiments. There's no better time than now to read Predictably Irrational, as Ariely's theories about cheating, incentives, self-fulfilling prophecy, self control, and how we value the things we own versus the things we desire go a long way to explaining the econopocalypse, and also provide an excellent framework for analyzing proposals to get the economy moving again.
Doctorow has more to say, go read his whole posting.

"Entrepreneurship" is Alive in America!

Here is something very unusual. A "gourmet" magazine writing an article about slavery in contemporary America. Yep... poor migrants grabbed and forced to work, deprived of wages, deprived of their freedom. Sure sounds like the latest in "innovative" financial thinking from Wall Street. And, sadly, this is a fact. Read and weep. From the magazine Gourmet:
The beige stucco house at 209 South Seventh Street is remarkable only because it is in better repair than most Immokalee dwellings. For two and a half years, beginning in April 2005, Mariano Lucas Domingo, along with several other men, was held as a slave at that address. At first, the deal must have seemed reasonable. Lucas, a Guatemalan in his thirties, had slipped across the border to make money to send home for the care of an ailing parent. He expected to earn about $200 a week in the fields. Cesar Navarrete, then a 23-year-old illegal immigrant from Mexico, agreed to provide room and board at his family’s home on South Seventh Street and extend credit to cover the periods when there were no tomatoes to pick.

Lucas’s “room” turned out to be the back of a box truck in the junk-strewn yard, shared with two or three other workers. It lacked running water and a toilet, so occupants urinated and defecated in a corner. For that, Navarrete docked Lucas’s pay by $20 a week. According to court papers, he also charged Lucas for two meager meals a day: eggs, beans, rice, tortillas, and, occasionally, some sort of meat. Cold showers from a garden hose in the backyard were $5 each. Everything had a price. Lucas was soon $300 in debt. After a month of ten-hour workdays, he figured he should have paid that debt off.

But when Lucas—slightly built and standing less than five and a half feet tall—inquired about the balance, Navarrete threatened to beat him should he ever try to leave. Instead of providing an accounting, Navarrete took Lucas’s paychecks, cashed them, and randomly doled out pocket money, $20 some weeks, other weeks $50. Over the years, Navarrete and members of his extended family deprived Lucas of $55,000.

Taking a day off was not an option. If Lucas became ill or was too exhausted to work, he was kicked in the head, beaten, and locked in the back of the truck. Other members of Navarrete’s dozen-man crew were slashed with knives, tied to posts, and shackled in chains. ...

What happened at Navarrete’s home would have been horrific enough if it were an isolated case. Unfortunately, involuntary servitude—slavery—is alive and well in Florida. Since 1997, law-enforcement officials have freed more than 1,000 men and women in seven different cases. And those are only the instances that resulted in convictions. Frightened, undocumented, mistrustful of the police, and speaking little or no English, most slaves refuse to testify, which means their captors cannot be tried. “Unlike victims of other crimes, slaves don’t report themselves,” said Molloy, who was one of the prosecutors on the Navarrete case. “They hide from us in plain sight.”

I watched with dismay as Obama finished his speech to Congress on Tuesday Feb 24 with the now mandatory "... and God bless America" closing.

The founders of the U.S. were part of the rational Enlightenment movement of Europe. They saw the ravages of religious wars in Europe. They didn't want them in the U.S., so they wrote a Constitution that strictly separated Church and State. But religious groups have assiduously worked to break the separation. And Obama's words indicate that he too has fallen prey to this curious American disease. While Europe and other parts of the world are going post-religious, the US marches to a different drummer and allows religious ideologues to gather greater and greater political power.

When I was a kid I saw this first hand and rejected it then. I was in my senior year in high school in the U.S. when the group "Up With People" wrangled permission to hold an assembly. I was mortified that this obviously politico-religious group was given free reign to "evangelize" a public school under the guise of "strengthening our morals and politics". I created a furor when I refused to stand for the "Star Spangled Banner" as led by this group. Since my group had been called out of a 12th grade civics course the teacher led a discussion of the right to dissent in order to let the class vent about my actions. I was convinced that giving this group access to the school was wrong and believed it was funded by some Texas billionaire trying to shape young minds to his right wing political vision.

I have since learned that the group was funded by a Texas billionaire (at least not to my knowledge) but came out of a group called "Moral Rearmament" founded in the U.K. by Frank Buchman. A guy who made these quotes to the U.S. press in 1936:

  • "I thank heaven for a man like Adolf Hitler, who built a front line of defense against the anti-Christ of Communism"
  • "…Human problems aren't economic. They're moral and they can't be solved by immoral measures. They could be solved within a God-controlled democracy, or perhaps I should say a theocracy, and they could be solved through a God-controlled Fascist dictatorship."

I do know that in the early 1970s when I saw Liza Mineli in Cabaret that what I had experienced in 1965 was the equivalent of the brownshirts touring German villages to sing "patriotic" songs.

The Up With People group are a direct descendent of the Moral Rearmament group founded by Frank Buchman. A little bit of Googling has led me to this assessment of Up With People by President Dwight D. Eisenhauer:

  • A memo showing that in 1967, after seeing a performance by "Up With People", Eisenhower became concerned about their sponsor organization Moral Rearmament.

So... I feel justified in my gut level reaction to Up With People back in 1965/66.

To bring my story full circle... I had the same sinking feeling upon hearing Obama give his pat "God Bless America" closing on Feb 24, 2009 as I did to the slick Up With People performance in 1965/66. These is an ideological craziness creeping across America blighting it with views that ignore the Constitutional heritage of the country and the long struggle for religious liberty and for a civil society that is unblinkered by ideological blinders or political cant that papers over substantive issues. The Bush 43 "love of liberty" was political cant for "let my Wall Street Bankers free! Deregulate! Lower Taxes!". That was not the right to "life, liberty, and happiness" that the Founders of the U.S. had in mind. But sadly the same mindless cant of "God Bless America" is the cant of Bush 43 and the path to ideological destruction.

I'm a minority of one. I've always been on the losing side of political arguments. But over time I've been proved right. Sadly being right isn't good when harm has infested a society. Just as the current economic destruction has "proved" that opposition to the extreme "free market" ideology of Bush 43 was right. But it brings no joy. A nation, and a world, now must suffer what appears to be a decade of lost opportunity and unnecessary travail because of the greed of the elite and their embrace of a poisonous ideology of neo-liberalism with its mindless worship of "free" markets, deregulation, and "trickle-down" economics.

It is sad to see Obama, who early in his campaign did not wear the "mandatory" flag pin and who argued that wearing a symbol was not a substitute for patriotism, has now caved in and joined the herd in blind worship of mindless mantras such as "God Bless America". Sad. Truly sad.

Krugman in Despair over Obama

This is so sad... Paul Krugman is deeply unhappy about Obama's handling of the financial crisis:
Feelings of despair

There’s so much to like about where Obama is going — health care, transparency in government, ending the war in Iraq. And the stimulus bill is OK, though not big enough.

But on the question of fixing the banks, many of us are feeling a growing sense of despair.

Obama and Geithner say the right things. But Simon Johnson nails it:

How long can you say, “we are being bold” when in fact you are not?

Obama and Geithner say things like,

If you underestimate the problem; if you do too little, too late; if you don’t move aggressively enough; if you are not open and honest in trying to assess the true cost of this; then you will face a deeper, long lasting crisis.

But what they’re actually doing is underestimating the problem, doing too little too late, and not being open and honest in trying to assess the true cost. The actual plan seems to be to keep the banks semi-alive by implicitly guaranteeing their liabilities and dribbling in money as necessary, all the while proclaiming that they’re adequately capitalized — and hope that things turn up. It’s Japan all over again.

And the result will probably be a deeper, long-lasting crisis.

Wednesday, February 25, 2009

Krugman Lecture in Oregon

Here is an hour long lecture given on Jan 29, 2009 at the "World Affairs Council of Oregon" in which he talks about the current financial crisis:

Krugman begins his talk at 12:45 into the video.

Bjorn Lomborg's "Cool It"

This is an excellent review of the madness of the Kyoto crowd with its unbridaled enthusiasm for Global Warming.

Lomborg makes the very cogent point that instead of spending trillions to limit the growth of carbon dioxide, you could spend billions and ameliorate people's lives. In other word, accomodate to the growth of greenhouse gases.

This leaves the Global Warming crowd apoplectic. But that is because they draw ridiculously exaggerated pictures of a runaway heat death of Earth. As Lomborg points out. The grim picture is a distortion. Lomborg admits that there is a greenhouse gas effect but argues with facts that the deletrious effects are over-dramatized.

This book is an excellent guide to how to rationally treat the future. Consequently it is a flop. The Chicken Littles don't want to hear that there are economic tradeoffs and rational choices. They want "generational challenges" and a true believer's absolute dedication. They want radical changes not adjustments that calculate a path between alternatives.

My personal view is that Kyoto's "commitments" to cutting carbon dioxide at huge costs to GDP is wrong headed. I believe -- based on no special knowledge -- that alternative energy will grow more cost competitive and a very large chunk of the economy will move away from fossil fuels and greenhouse gases will quietly decrease. My prejudice is that lots of big crusades is an exercise in tilting at windmills. The demanded result occurs over time because "its time has come". The radicals never accept this. They think their all-or-none worldview is the only way to go. But in reality they have simply caught the winds of a change and prematurely tried to bring the change about in a dictatorial way. If they focused on education and encouragement instead of ultimatums and threats, they would in fact hasten the future they want. Right now the Global Warming crowd would be far better off demonstrating for billion dollar investments in research in alternative energy rather than in the political "solution" of Kyoto which mandates quotas.

Going Down the Dismal Path of Japan

Paul Krugman cites a report that lays out exactly how the US is following the same ineffective banking policies that led to the "lost decade" in Japan. Tragically, the US is heading for a similar decade of depression because first Bush, now Obama, are unwilling to deal effectively with the collapse of the banking system:
The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks’ top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.

These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble’s burst in 1992 through to 1998 …
I'm a victim of this downturn. My retirement savings were in the stock market and I foolishly believed that economists were smarter than in the 1930s and that government officials (despite the ineptitude of the top levels of the Bush admin) would not make the mistakes of the past. But sadly, I was wrong. I will be eating dog food and living in a one room apartment for the last two decades of my life because of the criminals on Wall Street and the incompetents in government and the fools who pass for economists. Life is cruel. My mistake was to believe that things couldn't be that bad. I was wrong. I have no golden parachute. I have meaningful pension (government or private). My old age pension is $6,000 a year. That's it. I saved about 40% of my income diligently for 30 years to feather my nest for retirement. I had "plenty" when I retired. Now 50% of that is gone and I keep watching it ebb away as a new Great Depression gathers. I foolishly didn't believe it was possible. I'm learning my lesson most painfully. Sadly I will take this lesson to my grave.

Heads Wall Street Wins, Tails the Taxpayer Loses

The following is a nicely put explanation of the idiocy of the (apparant) Obama strategy on banks. This is from Steve Randy Waldman's blog:
The New York Fed is telling us, in plain and simple legalese, that it is planning to make a very generous gift to investors that participate in this program (and indirectly to the banks that sell assets to them). A non-recourse loan bundles an ordinary loan with an option to "put" the collateral back to the lender instead of paying off the loan. Sometimes this is not much of a gift: When a pawnbroker lends you half of what your Fender Stratocaster is worth, and the fact that you can surrender the guitar rather than pay off the loan is cold comfort. But if someone fronts you substantially all of what an asset is worth, and the value of that asset is uncertain and volatile, then the put option bundled into the "loan" becomes extraordinarily valuable. If the asset appreciates, you take the profits and "ka-ching!". If the asset falls in value, the lender takes the trash and eats the loss.


We are all tired of the lies, Mr. Geithner. By all means, let nationalization be a last resort, and do all you can to offer liquidity to private parties willing to take both the upside and downside of speculating in questionable paper. But if you keep nationalizing the downside and privatizing the upside, it will not be very long at all before the public concludes that stress tests and market prices are just a sleight-of-hand for Davos man while he picks our pockets, again. Act fairly, and you may end up nationalizing the worst few of the larger banks. Keep up the games, and we will insist that you nationalize them all. It is getting hard to believe that there is a banker in the land who has not already robbed us. Eventually we will tire of drawing fine distinctions.

Krugman on the Banks, Zombies Everywhere!

Paul Krugman continues to get pessimistic. He is depressed over the Obama administration's inability to clean up the banks:
Ben Bernanke’s testimony over the past two days gives us our best clue yet about where the administration and the Fed are going with bank rescue. And the answer seems to be … nowhere. ...

As long as capital injections are seen as a way to bail out the people who got us into this mess (which they are as long as the banks haven’t been put into receivership), the political system won’t, repeat, won’t be willing to come up with enough money to make the system healthy again. At most we’ll get a slow intravenous drip that’s enough to keep the banks shambling along.

More and more, it looks as if we’re headed for the decade of the living dead.
This is seriously depressing. I think Krugman's nailed it. It means the US will be like Japan in the 1990s... underwater and furiously dog paddling to survive. It is stupid not to kill the bad banks and let the few good ones and all the possible new banks grow up to replace them. But I guess all that payola that Wall Street gave to Congress via "political donations" has bought this grim scenario. Bad news. Very bad news.

Tuesday, February 24, 2009

The World Economy Looks Bleak

Here's some data from Martin Wolf of the Financial Times:
We are in a dire state. In the fourth quarter of last year, gross domestic product shrank at an annualised rate of 20.8 per cent in South Korea, 12.7 per cent in Japan, 8.2 per cent in Germany, 5.9 per cent in the UK and 3.8 per cent in the US. Even China’s economy stagnated. Industry has been particularly hard hit: the latest year-on-year declines in industrial output were 21 per cent in Japan, 19 per cent in South Korea, 12 per cent in Germany, 10 per cent in the US and 9 per cent in the UK. In brief, the world is in deep recession.

Neaderthal Redux

Here is an interesting NY Times article on the state of research into the Neaderthal genome:
Scientists report that they have reconstructed the genome of Neanderthals, a human species that was driven to extinction some 30,000 years ago, probably by the first modern humans to enter Europe. ...

Possessing the Neanderthal genome raises the possibility of bringing Neanderthals back to life. Dr. George Church, a leading genome researcher at the Harvard Medical School, said Thursday that a Neanderthal could be brought to life with present technology for about $30 million. ...

He said at a news conference in Leipzig on Thursday that he now had retrieved usable DNA from six Neanderthals and analyzed 3.7 billion units of DNA. The Neanderthal genome, like that of modern humans, is 3.2 billion units in length. Because many units have been analyzed several times over, and many not at all, Dr. Pääbo can now see about 63 percent of the Neanderthal genome. He will continue to analyze it until he has accumulated the equivalent of 20 Neanderthal genomes, which will allow almost every unit to be accurately known. ...

Archaeologists have long debated whether Neanderthals could speak, and they have eagerly awaited Dr. Pääbo’s analysis of the Neanderthal FOXP2, a gene essential for language. Modern humans have two changes in FOXP2 that are not found in chimpanzees, and that presumably evolved to make speech possible. Dr. Pääbo said Neanderthals had the same two changes in their version of the FOXP2 gene. But many other genes are involved in language, so it is too early to say whether Neanderthals could speak. ...

When the full Neanderthal genome is in hand, could it be made to produce the living creature its information specifies? Ethical considerations aside, Dr. Pääbo said, Neanderthals could not be generated with existing technology. Dr. Church of Harvard disagreed. He said he would start with the human genome, which is highly similar to that of Neanderthals, and change the few DNA units required to convert it into the Neanderthal version.

This could be done, he said, by splitting the human genome into 30,000 chunks about 100,000 DNA units in length. Each chunk would be inserted into bacteria and converted to the Neanderthal equivalent by changing the few DNA units in which the two species differ. The changed lengths of DNA would then be reassembled into a full Neanderthal genome. To avoid ethical problems, this genome would be inserted not into a human cell but into a chimpanzee cell.

The chimp cell would be reprogrammed to embryonic state and used to generate, in a chimpanzee’s womb, a mutant chimp embryo that was a Neanderthal in many or most of its features.

Somebody Has Got to Stop This

Here's Maureen Dowd in a NY Times op-ed about bailout banks using taxpayer money to throw a bash. Read and weep:
The entertainment Web site TMZ broke the story Tuesday that Northern Trust of Chicago, which got $1.5 billion in bailout money and then laid off 450 workers, flew hundreds of clients and employees to Los Angeles last week and treated them to four days of posh hotel rooms, salmon and filet mignon dinners, music concerts, a PGA golf tournament at the Riviera Country Club with Mercedes shuttle rides and Tiffany swag bags.

“A rep from the PGA told us Northern Trust wrote one big, fat check in order to sponsor the event,” TMZ reported.

Northern No Trust had a lavish dinner at the Ritz Carlton on Wednesday with a concert by Chicago (at a $100,000 fee); rented a private hangar at the Santa Monica Airport on Thursday for another big dinner with a gig by Earth, Wind & Fire, and closed down the House of Blues on Sunset Strip on Saturday (at a cost of $50,000) for a dinner and serenade by Sheryl Crow.


I enjoy this bit of myth busting by Eric A. Morris on the Freakonomics website:
We’ve been running a quiz about stereotypical views of transportation and urbanization in Los Angeles. Consider a headline that ran in The New York Times in 2006: “In Land of Freeways, Mass Transit Makes Nary a Dent.” ...

It is also correct that Los Angeles boasts an extensive freeway system. Counting Interstates and other expressways, the area ranks second in the nation in lane mileage, after New York.

But taking into account the area’s vast size, the network is one of the most underdeveloped in the U.S. According to the Federal Highway Administration, of the 36 largest metro areas, Los Angeles ranks dead last in terms of freeway lane miles per resident. (Chicago is second to last, and New York is near the bottom as well. The most freeway-heavy big city by this measure is Kansas City.)

With rock-bottom road space per person, it’s difficult to claim that the system is overbuilt (at least by U.S. standards), or that it dominates the region’s transportation profile. ...

How did Los Angeles end up with such a skimpy system? Only about three-fifths of the lane mileage envisioned in Los Angeles’s 1959 master plan was ever completed.

Interestingly, the original plans included a freeway smack dab through Beverly Hills. Anybody want to hazard a guess as to why this project was canceled while plenty of freeways through poorer neighborhoods were not? I’ll give you a hint: it’s not because the department of transportation just forgot to get around to it. ...
Read the whole blog entry to enjoy it. And if you are like me, you can hardly wait from the bit that will explore this myth versus reality.

You Have to Read it to Believe It

Here's the headline of a blog entry that tells it all:
Tearful Atlanta Cops Express Remorse for Shooting 92-Year-Old Kathryn Johnston, Leaving Her To Bleed to Death in Her Own Home While They Planted Drugs in Her Basement, Then Threatening an Informant So He Would Lie To Cover It All
I wouldn't want to be a police man. They deal with rough characters. They don't get paid enough for putting their life on the line. But I get outraged by police who step over the line and become thugs and criminals. I especially get outraged when the police "close ranks" and protect each other when this happens or which the police use their knowledge of the system to work the system to their advantage so they can get away with their crimes. It really, really disturbs me. Sadly too many people simply don't believe there are any "bad apples" in the police force. I know otherwise. And it isn't just police that are bad apples, there are bad prosecutors and bad judges. Unfortunately the system refuses to acknowledge that it has serious problems.

Ugh... David Brooks has a Point

I am not a fan of David Brooks. He was an apologist for the Bush administration and a McCain supporter. But here is an op-ed piece in the NY Times that I queasily agree with:
When I was a freshman in college, I was assigned “Reflections on the Revolution in France” by Edmund Burke. I loathed the book. Burke argued that each individual’s private stock of reason is small and that political decisions should be guided by the accumulated wisdom of the ages. Change is necessary, Burke continued, but it should be gradual, not disruptive. For a young democratic socialist, hoping to help begin the world anew, this seemed like a reactionary retreat into passivity.

Over the years, I have come to see that Burke had a point. The political history of the 20th century is the history of social-engineering projects executed by well-intentioned people that began well and ended badly. There were big errors like communism, but also lesser ones, like a Vietnam War designed by the best and the brightest, urban renewal efforts that decimated neighborhoods, welfare policies that had the unintended effect of weakening families and development programs that left a string of white elephant projects across the world.

These experiences drove me toward the crooked timber school of public philosophy: Michael Oakeshott, Isaiah Berlin, Edward Banfield, Reinhold Niebuhr, Friedrich Hayek, Clinton Rossiter and George Orwell. These writers — some left, some right — had a sense of epistemological modesty. They knew how little we can know. They understood that we are strangers to ourselves and society is an immeasurably complex organism. They tended to be skeptical of technocratic, rationalist planning and suspicious of schemes to reorganize society from the top down.

Before long, I was no longer a liberal. Liberals are more optimistic about the capacity of individual reason and the government’s ability to execute transformational change. They have more faith in the power of social science, macroeconomic models and 10-point programs.

Readers of this column know that I am a great admirer of Barack Obama and those around him. And yet the gap between my epistemological modesty and their liberal worldviews has been evident over the past few weeks. The people in the administration are surrounded by a galaxy of unknowns, and yet they see this economic crisis as an opportunity to expand their reach, to take bigger risks and, as Obama said on Saturday, to tackle every major problem at once.

President Obama has concentrated enormous power on a few aides in the West Wing of the White House. These aides are unrolling a rapid string of plans: to create three million jobs, to redesign the health care system, to save the auto industry, to revive the housing industry, to reinvent the energy sector, to revitalize the banks, to reform the schools — and to do it all while cutting the deficit in half.
At the same time I disagree with Brooks. I'm impatient with Obama. He has done a poor job of laying out a vision and a plan to get out of the current mess. The steps taken (stimulus plan and housing plan) have failed to inspire. I want Obama to succeed, but I just don't see him moving toward the goal. Brooks hints that there is a powerful group surrounding Obama secretly planning big changes for America. I don't see it. But I accept Brooks' worry about an elitist "plan for America". But I don't see it. Obama talked about pragmatism. I'm big on pragmatism. But I don't see the plan and I don't see the pragmatism. It is early. I'm impatient. And I worry. Hopefully the future will appear link a landfall out of the mist and I will chuckle at myself and my fears.

Shiller Says Stock Market is (Probably Too) Expensive

Here is an interesting interview with Robert Shiller.

He thinks this is 1930, not 1932, so it is too early to invest.

He says for young people "go for it" and invest as if it were a lottery ticket with the hopes to "hit it big". But for those who are in retirement to be cautious because what looks like low prices can still fall by 50%.

Notice two things that show that a lot of this "performance" is smoke and mirrors:

  1. The interviewer is Henry Blodget, a former technology analyst guilty of breaking the law and prevented from working in the industry has now moved to "financial entertainment" and does this interview.
  2. Shiller confesses to doing what a lot of highly trained academic financial ecnomists do: he writes about markets using finance equations but when it comes to investing he admits he is "seat of the pants". This self-delusion about decision-making was discussed in the book "Gut Feelings" by Gert Gigerenzer. It is disconcerting to realize that leaders in the field of mathematizing finance ignore their own analysis when it comes to their personal finance!

Why I Distrust Models

People like simple answers. People like to feel that they understand complex reality. Science shows us that we can master some things. But while elegant physics formulas point at the heart of reality, people forget that physics formulas apply to very "pure" events. Muddled reality is poorly represented by the mathematical models of physics.

The complex global circulation models of the Global Warming crowd point to unambiguous futures, but are misleading.

The wonderfully complex financial engineering models from the Black-Scholes model for pricing options to the latest gee whiz model in the Gaussian copula function are all models that are more fragile than their proponents recognize. Here's an article by Felix Salmon in Wired Magazine that recounts the horrors:
A year ago, it was hardly unthinkable that a math wizard like David X. Li might someday earn a Nobel Prize. After all, financial economists—even Wall Street quants—have received the Nobel in economics before, and Li's work on measuring risk has had more impact, more quickly, than previous Nobel Prize-winning contributions to the field. Today, though, as dazed bankers, politicians, regulators, and investors survey the wreckage of the biggest financial meltdown since the Great Depression, Li is probably thankful he still has a job in finance at all. Not that his achievement should be dismissed. He took a notoriously tough nut—determining correlation, or how seemingly disparate events are related—and cracked it wide open with a simple and elegant mathematical formula, one that would become ubiquitous in finance worldwide.

For five years, Li's formula, known as a Gaussian copula function, looked like an unambiguously positive breakthrough, a piece of financial technology that allowed hugely complex risks to be modeled with more ease and accuracy than ever before. With his brilliant spark of mathematical legerdemain, Li made it possible for traders to sell vast quantities of new securities, expanding financial markets to unimaginable levels.

His method was adopted by everybody from bond investors and Wall Street banks to ratings agencies and regulators. And it became so deeply entrenched—and was making people so much money—that warnings about its limitations were largely ignored.

Then the model fell apart. Cracks started appearing early on, when financial markets began behaving in ways that users of Li's formula hadn't expected. The cracks became full-fledged canyons in 2008—when ruptures in the financial system's foundation swallowed up trillions of dollars and put the survival of the global banking system in serious peril.

David X. Li, it's safe to say, won't be getting that Nobel anytime soon. One result of the collapse has been the end of financial economics as something to be celebrated rather than feared. And Li's Gaussian copula formula will go down in history as instrumental in causing the unfathomable losses that brought the world financial system to its knees.
When someone claims to "know" how something works... be very fearful, demand extensive testing, require independent audit and verification, and above all: avoid joining in a bandwagon effect of mindless endorsement and blind adherence.

Lessons from the UK

Here is an entry from Martin Wolf's Financial Times blog that is relevant to the US (and all other countries):
The lesson of the past is that inflation targeting failed. This does not mean that it is impossible to target inflation successfully. The evidence is that it has worked, so far. But stabilising inflation has not, in practice, stabilised the economy. On the contrary, success with inflation helped destabilise inflation itself, as we now see, by boosting a credit explosion, foolish risk-taking and ultimately a financial meltdown.

Within its two-year policy horizon, the monetary policy committee had to ignore the risks of such long-term feedback effects, via credit, money and asset prices. They were unsustainable processes. But when they would break was unpredictable. Yet, in hindsight, policy should have taken them more into account. This could have been done by adjusting interest rates or by regulatory means.

This lesson of the past also relates to the challenges ahead. Again, will it be possible to manage the powerful destabilising processes we see? The economy, the public finances and indebted homebuyers have suffered large negative shocks. Deflation is the immediate fear. But one must also ask what role inflation might play in redistributing these losses in future.

A big part of the answer depends on whether the UK government remains a triple-A rated sovereign borrower.
In short, Milton Friedman's thesis that "monetarism" was the solution to financial control is wrong. Unfortunately we are all the sad guinea pigs who are struggling to survive this in vivo experiment. Please, please deliver us from the hands of ideologues and please, please let us be led by pragmatists!

The Science of Sex Ratios

Satoshi Kanazawa has written a series of blog entries on what determines the sex ratio in humans. It is fascinating stuff:

  • engineers and scientists are more likely to have sons
  • nurses and social workers are more likely to have daughters
  • big and tall parents are more likely to have sons
  • violent parents are more likely to have sons
  • beautiful parents are more likely to have daughters
  • sexually promiscuous parents have more sons

You can read the underlying articles here, here, here, and here.

Monday, February 23, 2009


Conservatives love to beat their chest about "fiscal conservatism" and taunt the Democrats with epithets of "tax & spend liberals".

Look at this and tell me that Republicans are not lying SOBs...

Figure from DeLong's website
What you can see is that the two prevous Republican administrations ran up the debt. The Democratic one worked hard to lower it.

But in January who were those in the US Congress yelling loudest about "pork" and "wasted spending"? Why, it was the Republicans, those paragons of virtue, those tight-fisted fiscal conservatives who would never think to waste a penny! What a joke!

I find that hypocrites are the ones who yell loudest and throw their weight around the most. Sadly, most people are intimidated by the pomposity and bludgeoning that these hypocrites deliver. Pathetic!

Bush 43 delivered not only more debt... he engaged the US in reckless wars killing over 4,000 citizens, he ran the economy into the ground, he larded the supposedly "too burdonsome entitlement programs" with his hole-in-the-middle Pharmacare, and he played Nero busy on his fiddle while New Orleans sank beneathe the waters and poor victims clung to rooftops or huddled in the Superdome & Civic Center pleading for help.