Seeing Nuclear Power in Your Future

Robert X. Cringely has written an interesting blog entry on the Three Mile Island nuclear accident. I love his conclusion. I've bolded the key bits:

Just as we neglected the economy for the last decade or more, we have also neglected nuclear energy. We don’t have a national storage system for spent fuel. We don’t have a spent fuel recycling process. We don’t have a standard national reactor design. We add incredible costs to power plants for an amazing list of things, many of which contribute nothing.

Life doesn’t get simpler, it gets more complex. TMI led us to repudiate nuclear power as a nation – something in the long run we probably can’t afford to do. We just have to find ways to manage technology – all technologies – more responsibly. Sadly, we tend these days to put the wrong people in charge.

Within the article he notes facts and raises issues that most people just plain don't know and haven't addressed:

Some people argue that TMI was actually worse than Chernobyl in terms of the actual core damage. I don’t know. There’s no doubt that Chernobyl killed a lot of people and TMI didn’t. The difference was that TMI had a concrete containment vessel and Chernobyl had none. Building nuclear power plants without containment vessels was insane and Chernobyl proved that.

Looking back at the accident with the benefit of knowing what it took to clean it up and what the workers found when they were finally able to send robots inside the containment, the TMI accident was very bad indeed. There were pressure spikes during the accident that would have cracked an average containment vessel, releasing radioactive gases into the atmosphere. Fortunately the Unit 2 containment wasn’t average. TMI-2 was built on the final approach path to Harrisburg International Airport, a former U.S. Air Force base, and was therefore beefed-up specifically to withstand the impact of a B-52 hitting the structure at 200 knots. A normal containment would have been breached.

TMI wasn’t caused by a computer failure but the accident was made vastly worse by an error of computer design. Specifically, TMI-2 had a terrible user interface.

And this is just plain scary. How could the designers not realize they were building a monster that would simply overwhelm the operators when something other than the simplest fault occurred?

Here’s how it was supposed to work. Something went wrong. The computer noticed what went wrong, set off audible and visual alarms, then sent a description of the problem to a line printer in the control room. The operator would read the print-out, check the trouble code in one of many manuals, then make the adjustment specified in the manual. Simple, eh?

Too simple, it turned out.

What happened at Unit 2 was a little more complex. A cascading series of events caused the computer to notice SEVEN HUNDRED things wrong in the first few minutes of the accident. The ONE audible alarm started ringing and stayed ringing continuously until someone turned it off as useless. The ONE visual alarm was activated and blinked for days, indicating nothing useful at all. The line printer queue quickly contained 700 error reports followed by several thousand error report updates and corrections. The printer queue was almost instantly hours behind, so the operators knew they had a problem (700 problems actually, though they couldn’t know that) but had no idea what the problem was.

So they guessed.

Not good.

And here is the incomprehensible fact about the "design" of the Three Mile Island reactor:

The average chemical plant or oil refinery is vastly more complex than a nuclear power plant. The nuke plant heats water to run a steam turbine while a chemical plant can make thousands of complex products out of dozens of feedstocks. Their process control was totally automated 30 years ago and had an amazing level safety and interlock systems. A lot of effort was put into the management of chemical plant startup, shutdown, and maintenance. The chemical plant control system was designed to force the highest safety. So when manufacturing engineers from chemical plants looked at TMI, they were shocked to see the low-tech manner in which the reactors were controlled and monitored. To the chemical engineers it looked like an accident waiting to happen.

Here's Cringely's indictment of the US government:

Chemical plants were better designed than nuclear power plants in part because Congress did not legislate how the chemical industry designed their plants.

A Vote for the Geithner Bank Plan

Brad DeLong has published an article that supports the Obama administration's plan for the banks. But he isn't happy. Why? Because it is not enough.

Here is the key bit from the end of the article:

The problem is that the Geithner Plan appears to me to be too small - between one-eight and one-half of what it needs to be. Even though the US government is doing other things as well -fiscal stimulus, quantitative easing, and other uses of bailout funds - it is not doing everything it should.

My guess is that the reason that the US government is not doing all it should can be stated in three words: Senator George Voinovich, who is the 60th vote in the Senate - the vote needed to close off debate and enact a bill. To do anything that requires legislative action, the Obama administration needs Voinovich and the 59 other senators who are more inclined to support it. The administration's tacticians appear to think that they are not on board - especially after the recent AIG bonus scandal - whereas the Geithner Plan relies on authority that the administration already has. Doing more would require a legislative coalition that is not there yet.

It is interesting that an economist from Australia quoted on the Crooked Timber blog points out that DeLong's "support" is in fact tepid despite its presentation as "positive":

The views of ‘market economists’, representatives of financial businesses on whom the press commonly relies for instant reaction on such matters, were overwhelmingly favorable. By contrast, the responses from economists who actually undertake research into how the economy works ranged from outright rejection to the most tepid of endorsements.

In many ways, the endorsements are more damning than the criticism. Berkeley economist Brad DeLong, who has been among the most prominent supporters of the plan sees it as the best that can be done without new legislation, which would almost certainly fail in the wake of the outrage over massive bonuses paid to the executives of failed banks. And, he says, it might lay the groundwork to convincing doubters of the inevitability of bank nationalisation. Writing in the New York Times, he says ‘“We tried alternatives like the Geithner Plan and they did not work” might well be an effective argument several months down the road.’

Clawing back Wall Street Bonuses

Steve Waldman's Interfluidity blog looks at the issues surrounding clawing back the bonuses from the Wall Street crowd that caused so much damage to the US and the world. There are some interesting points made. I like this bit that argues this is a civil action and just like environmental laws dealing with toxic waste can apply ex post facto, so civil law should apply to "toxic assets":

Conor Clarke suggests that such a bill would be unconstitutional on its face. I think he's wrong about that. He cites the following line from the US Constitution:

No Bill of Attainder or ex post facto Law shall be passed.

I am not a lawyer, but I don't think this prohibition would much apply, as long as the tax is civil and remedial in nature, rather than criminal and punitive. Consider the so-called "Superfund" law, which made polluters liable for cleaning up environmental messes, even though that liability may not have been written into law at the time when the polluting was done. The current banking crisis strikes me as quite analogous to the Superfund situation: A large class of private actors have caused harms that must be remedied. While the state has no choice but to pick up some of the tab, it also identifies the responsible party and holds them partially liable for the mess they have made. We even use the same words: It's all about "toxic waste".

I especially like this bit of honesty:

The law may be the law, but it is also a battlefield upon which people play to win and hypocrisy is everywhere. I'd like to be idealistic, but if that means a kind of "unilateral disarmament" under which the least idealistic run roughshod, we'd better try a different strategy.

He has more here as well. Where he presents reasons to be cautious:

In our better moments, we dislike "collective punishment" and try not to change the rules of the game out from under people midstream. On balance, I think the benefits of a well designed tax clawback could exceed its costs. But a poorly designed clawback would set a corrosive precedent for no other purpose than to salve and misdirect public rage.

And he comes out against HR1586 here.

Happy Thought of the Day

Here's the opening bit from an article by James Surowiecki in The New Yorker magazine that plants a happy thought in your head. Everybody needs a happy thought from time to time to make them feel better:

Not long ago, many of America’s biggest banks made terrible bets on overpriced real estate and suffered huge losses. While the banks insisted that they were fundamentally healthy, economists and politicians declared many of them to be insolvent. Government regulators, though, allowed the banks to stay in business. The banks hunkered down and cut back sharply on new lending, and the resulting credit crunch made an already weak economy worse.

That sounds like the story of what just happened to the U.S. economy, but actually it’s the story of what happened at the beginning of the nineteen-nineties, after banks found themselves sitting on billions in worthless loans to Sun Belt developers and other commercial builders. And, if you tweak the details a bit, it’s also the story of what happened in the early eighties; that time, it was loans to developing countries that got the banks in trouble. In other words, while the current banking crisis is exceptionally severe, it’s not exactly new. It’s the third major banking crisis in the past thirty years, which is at least a couple of crises too many. And that’s forcing the Obama Administration to confront two huge tasks at once: rescuing the economy from the current meltdown, and figuring out how to prevent the next one.

The rescue effort, surprisingly, may be the easier of those tasks; although recurrent financial turmoil is hardly a confidence-booster, the fact that the U.S. economy—unlike, say, Japan’s—has recovered well from previous banking disasters offers hope that the government’s strategy will work.

In the middle the article provides some analysis of the current situation and the interprets the Obama administration's actions. The article then ends on the following hopeful consideration:

In effect, the Administration is trying to do two things at once. In solving the current crisis, it’s partnering with Wall Street, using the existing system to try to stabilize the economy. But in thinking about the future it’s trying to use hostility to Wall Street to bring about serious changes in the system. This is quite a balancing act: let’s hope the Administration can pull it off.

Big Brother is Watching

Sadly, the world is a dangerous place. Most citizens don't know what their own government is up to. The big news this week was of a Chinese hacker spy ring that has infiltrated computers in over 100 countries.

Although it is reported as Chinese, and probably is, you don't necessarily know. Here is the key bit from a NY Times article by John Markoff:

Although the Canadian researchers said that most of the computers behind the spying were in China, they cautioned against concluding that China’s government was involved. The spying could be a nonstate, for-profit operation, for example, or one run by private citizens in China known as “patriotic hackers.”

“We’re a bit more careful about it, knowing the nuance of what happens in the subterranean realms,” said Ronald J. Deibert, a member of the research group and an associate professor of political science at Munk. “This could well be the C.I.A. or the Russians. It’s a murky realm that we’re lifting the lid on.”

I found this quote in the article side-splittingly funny:

“These are old stories and they are nonsense,” the spokesman, Wenqi Gao, said. “The Chinese government is opposed to and strictly forbids any cybercrime.”

All governments refuse to admit to their crimes. It is pro forma. Unfortunately, citizens without an alert and determined press are left in the dark. People mourn the "death of newspapers" but part of the reason why they are dying is that most people have figured out that the news was seens as "filler" because the real purpose of the newspaper was to carry advertising. The NY Times is not immune. I can pretty well guarantee you there will be no analysis of what this spy ring means and there will certainly be no follow-up to allow citizens to draw any lessons from this event. Newspapers have devolved to entertainment and fishwrap. That's why they are dying.

The NY Times article doesn't go into much depth. Here is a CBC podcast that interviews the University of Toronto researchers who reported this widespread infection of computers.

The scary bit of analysis in the CBC podcast is the researcher talking about the hidden "cyberwar" that is going on behind the scenes. The Canadian researcher asks the critical question: "What this incident represents for international politics. ... Do we want this environement militarized? ... I think there needs to be a peace movement inside cyberspace because this is a vital public domain."

Bad News for US Households

The NY Times has an article by Vikas Bajaj that quantifies the losses this financial collapse has had for US households:

The Federal Reserve reported Thursday that households lost $5.1 trillion, or 9 percent, of their wealth in the last three months of 2008, the most ever in a single quarter in the 57-year history of recordkeeping by the central bank.

For the full year, household wealth dropped $11.1 trillion, or about 18 percent. Though the numbers do not yet reflect it, the decline in the stock market so far this year has probably erased trillions more in the country’s collective net worth.

But this isn't just a US problem. Similary numbers can be cited for countries all around the world. This financial crisis has ruined the lives of many, many people.

Words of Caution

Here are bits from two articles by Harvard economist Dani Rodrik. They provide a good antidote to the current hue and cry that latches on to simple answers for the mess the economy is in.

First, he takes economists to task in this article:

As the world economy tumbles off the edge of a precipice, critics of the economics profession are raising questions about its complicity in the current crisis. Rightly so: economists have plenty to answer for.

It was economists who legitimized and popularized the view that unfettered finance was a boon to society. They spoke with near unanimity when it came to the "dangers of government over-regulation." Their technical expertise - or what seemed like it at the time gave them a privileged position as opinion makers, as well as access to the corridors of power.

Very few among them (notable exceptions including Nouriel Roubini and Robert Shiller) raised alarm bells about the crisis to come. Perhaps worse still, the profession has failed to provide helpful guidance in steering the world economy out of its current mess. On Keynesian fiscal stimulus, economists' views range from "absolutely essential" to "ineffective and harmful."

...

The fault lies not with economics, but with economists. The problem is that economists (and those who listen to them) became over-confident in their preferred models of the moment: markets are efficient, financial innovation transfers risk to those best able to bear it, self-regulation works best, and government intervention is ineffective and harmful.

They forgot that there were many other models that led in radically different directions. Hubris creates blind spots. If anything needs fixing, it is the sociology of the profession. The textbooks at least those used in advanced courses - are fine.

And here he takes to task Simon Johnson for his overly simple analysis of the crisis. I've put in bold a key point:

Simon Johnson tells a simple and compelling story: the U.S. has been afflicted by a version of the crony capitalism that has been the scourge of so many emerging markets, except that Wall Street has bought its influence and power not by bribery but by shaping the ideology of our times...

As with any story built around clear villains easy solutions, there is something in this account that is quite unsatisfying. For one thing, I think it puts the blame too narrowly on the bankers. Yes, there can be little doubt that banks badly misjudged the risks they were taking on. But they were aided in all this by the broader economics and policymaking community--not because the latter thought the policies in question were good for bankers, but because they thought these would be good for the economy. Simon himself says as much. So why pick on the bankers? Surely the blame must be spread much more widely.

And I find it astonishing that Simon would present the IMF as the voice of wisdom on these matters--the same IMF which until recently advocated capital-account liberalization for some of the poorest countries in the world and which was totally tone deaf when it came to the cost of fiscal stringency in countries going through similar upheavals (as during the Asian financial crisis).

Simon's account is based on a very simple, and I believe misguided, theory of politics and economics. It is an odd marriage of populist and technocratic visions. Countries fail because political elites always end up in bed with economic elites. The solution, apparently, is to let the technocrats (read the IMF) run your affairs.

Among the many lessons from the crisis we should have learned is that economists and policy advisors need greater humility. Too many of us thought we had the right model when it turned out that we didn't. We pushed certain policies with much greater confidence than we should have. Over-confidence bred hubris (and the other way around).

Do we really want to exhibit the same self-confidence and assurance now, as we struggle to devise solutions to the crisis caused by our own hubris?

I confess, I too easily fall under the sway of persuasive analysis. But luckily I keep my eyes open and take in new evidence and adjust my viewpoint as I learn other facts or see things from another perspective. Too much of our world today is run by fundamentalists and fanatics who latch onto one idea and refuse to ever revisit or re-evaluate their ideas.

I'm glad that Dani Rodrik has helped me learn something new. I hope I never lose the joy in learning. I hope I never lose the humility of realizing that I must be open and still learn new things.

The Ethics of Torture

Here is an intersting opinion piece in the Washington Post by Dan Froomkin looking at Bush's policy on torture. Here are some key bits:

Abu Zubaida was the alpha and omega of the Bush administration's argument for torture.

That's why Sunday's front-page Washington Post story by Peter Finn and Joby Warrick is such a blow to the last remaining torture apologists.

Finn and Warrick reported that "not a single significant plot was foiled" as a result of Zubaida's brutal treatment -- and that, quite to the contrary, his false confessions "triggered a series of alerts and sent hundreds of CIA and FBI investigators scurrying in pursuit of phantoms."

Zubaida was the first detainee to be tortured at the direct instruction of the White House. Then he was President George W. Bush's Exhibit A in defense of the "enhanced interrogation" procedures that constituted torture. And he continues to be held up as a justification for torture by its most ardent defenders.

But as author Ron Suskind reported almost three years ago -- and as The Post now confirms -- almost all the key assertions the Bush administration made about Zubaida were wrong.

Zubaida wasn't a major al Qaeda figure. He wasn't holding back critical information. His torture didn't produce valuable intelligence -- and it certainly didn't save lives.

All the calculations the Bush White House claims to have made in its decision to abandon long-held moral and legal strictures against abusive interrogation turn out to have been profoundly flawed, not just on a moral basis but on a coldly practical one as well.

Indeed, the Post article raises the even further disquieting possibility that intentional cruelty was part of the White House's motive.

Go read the whole article. It is well worth your time.

An Insider's Story

Here is an article by Michael Osinski, a software developer, which he presents as a "tell all" confessional entitled "My Manhattan Project:
How I helped build the bomb that blew up Wall Street". It doesn't quite live up to its pretensions, but it does provide some details about making software that allowed Wall Street to blow up the economy. I find him less than morally honest about his actions. He is proud of his software, but metaphorically just shrugs his shoulders at the devastation it has left behind. He expresses "concern" for the devastated lives he sees around him, but there is no "dark night of the soul" in his account. Sadly, I'm left with the impression that he would do it all over again if given the chance.

Here's a tidbit:

I never would have thought, in my most extreme paranoid fantasies, that my software, and the others like it, would have enabled Wall Street to decimate the investments of everyone in my family. Not even the most jaded observer saw that coming. I can’t deny that it allowed a privileged few to exploit the unsuspecting many. But catastrophe, depression, busted banks, forced auctions of entire tracts of houses? The fact that my software, over which I would labor for a decade, facilitated these events is numbing. Is capitalism inherently corrupt? I don’t think the free flow of goods in and of itself is the culprit. No, it’s the complexity masked by thousands of unseen whirring widgets that beguiles people into a sense of power, a feeling of dominion over the future.

He blames capitalism. He blames complexity. He apparantly is unaware that we have to take moral responsibility for our actions. We don't pull a trigger on a shotgun then ask "but who could have known it was loaded, and how could I possibly have known what devastation a shotgun blast would do before pulling the trigger?" Well, most teachers of ethics would say that this dodge of "who could have known" isn't good enough. You have to worry about consequences if you want to claim to be a moral being.

Anyway, read the whole article. It gives a different perspective than most of what is currently being written about this disaster.

Digging Your Own Grave

Kevin Carey has written a very interesting article in the Washington Monthly on US colleges and universities. Specifically he asks: Technology is driving down the cost of teaching undergraduates. So why are tuition bills going up?

Read the whole article to get all the details, but here is a few key tidbits:

...the cost of providing math instruction at Virginia Tech has declined dramatically—as much as 75 percent for some courses. But the university’s tuition increased nearly 11 percent this year alone, and Virginia Tech math students are paying twice what they did eleven years ago, when the first Emporium course was offered. If Michael Williams is saving Virginia Tech hundreds of thousands of dollars a year and other colleges are realizing similar savings, why aren’t their students seeing a dime of that money?

For the most part, colleges would just rather spend it elsewhere. ...

...colleges also tend to be inefficient while spending a lot of money on nonacademic activities and general self-aggrandizement. The NCAA recently revealed that among 119 Division I-A universities, the typical athletic department lost $9.3 million in 2006. That’s up from $6.1 million in 2004, a 50 percent jump in just two years. The growing deficits have to be made up from other sources, like tuition. And construction spending is always popular; new libraries, buildings, and student centers with climbing walls are good for marketing purposes—and they create plenty of blank space on which to engrave the names of generous alumni.

...

Colleges have increased real-dollar spending on student financial aid by more than 50 percent since 2000. But those dollars are increasingly going to the wealthiest students. Sometimes colleges buy students with high SAT scores, a factor in the U.S. News & World Report college rankings. Colleges also use sophisticated pricing and behavioral models to attract undergrads who’ll net them the most money. A $2,000 scholarship can be enough to woo the academically marginal child of wealthy parents, who then proceed to pay full tuition and donate generously to the endowment.

Scorecard

From a CNN blog entry, here is the current commitments of the US government to "fix" the US economy's problems. This is pretty breathtaking. I sure hope it works:

US Bailout Totals
Date	Bailout	Allocated	Spent
Dec 2007	Term Auction Facility	$600 billion	$468.6 billion
Feb 2008	Economic Stimulus Act of 2008	$168 billion	$168 billion
Mar 2008	Bear Stearns bailout	$29 billion	$26.2 billion
Mar 2008	Term Securities Lending Facility	$200 billion	$88.6 billion
Mar 2008	Primary Dealer Credit Facility	n/a	$61.3 billion
May 2008	Student loan guarantees	$130 billion	$9 billion
Sept 2008	Fannie Mae and Freddie Mac bailout	$400 billion	$59.8 billion
Sept 2008	Foreign exchange dollar swaps	Unlimited	$327.8 billion
Oct 2008	FHA housing rescue	$320 billion	$20 billion +
Oct 2008	Auto industry energy efficiency loans	$25 billion	$0
Oct 2008	Troubled Asset Relief Program	$700 billion	$323.4 billion
Oct 2008	Money market guarantees	$659 billion	$15 billion
Oct 2008	Commercial Paper Funding Facility	$1.4 trillion	$241.3 billion
Nov 2008	Unemployment benefit extensions	$8 billion	$8 billion
Nov 2008	Citigroup loan-loss backstop	$245 billion	$0
Nov 2008	Term Asset-Backed Securities Loan Facility	$1 trillion	$4.7 billion
Nov 2008	GSE mortgage-backed securities purchases	$1.25 trillion	$236.2 billion
Nov 2008	GSE debt purchases	$100 billion	$50.4 billion
Nov 2008	FDIC Temporary Liquidity Guarantee Program	$1.5 trillion	$297.1 billion
2008	FDIC bank takeovers	n/a	$18.5 billion
Jan 2009	Bank of America loan-loss backstop	$97 billion	$0
Jan 2009	Credit Union deposit insurance guarantees	$97 billion	$0
Jan 2009	U.S. Central Federal Credit Union capital injection	$80 billion	$0
Feb 2009	American Recovery and Reinvestment Act	$787.2 billion	n/a
Feb 2009	Foreclosure prevention	$25 billion	$0
Mar 2009	AIG	$182 billion	$129.3 billion
Mar 2009	U.S. government bond purchases	$300 billion	$15 billion
2009	FDIC bank takeovers	n/a	$2.3 billion
	Total:	$10.5 trillion	$2.6 trillion

Politicians Bought & Sold

Why would I find it strange to think that Obama decided it is a "good idea" to put $170 billion of US taxpayer's money into AIG, especially when it is obviously so lucrative for Obama:

Both Obama and Republican presidential candidate John McCain raked in much larger sums from AIG earlier in the year. Obama collected a total of $130,000 from AIG in 2008, while McCain accepted a total of $59,499.

The above is from that notorious liberal media: ABC News. So it is clearly slanted and hideously distorted. I'm sure that getting this money didn't "buy" Obama's support.

Obviously a company as bankrupt as AIG knew that it was losing money hand over fist. After you have lost $170 billion, what's a few hundred thousand. I guess that's why the decided to blow it on political contributions that couldn't possibly buy anything from the politicians.

Here's a puzzle from the same ABC news item:

AIG executives gave more than $630,000 during the 2008 political cycle even as the company was falling apart

Why would these guys, who knew their company was going bankrupt, want to take money that was a "sure thing" (their take home pay) and give it to politicians who constantly assure them (and us) that they can't be bought?

Why not just put the money in a little pile and set fire to it and toast marshmallows over the flaming bills? According to the politicians, giving to their campaigns has no influence over them. You are wasting your money.

At least the $630,000 would give you a nice little bonfire to which you could invite your buddies and everybody would enjoy plenty of toasted marshmallows. So I'm puzzled, why the political donations rather than toasted marshmallows?

The Sordid Truth about GM

The following is an interesting bit from a right wing blog called redstate. I don't generally spend any time on right wing blogs, but this blog entry has a lot of interesting facts/opinions about GM. I've put in bold the key bit:

GM needs a total restructuring of its operations. By rights, every stakeholder in the room should take a lot of pain, and then the company should figure out how to move forward in a world in which the competition is a lot hungrier, the markets are a lot smaller, and access to capital is far more constrained. But that’s a great challenge for American business people, who are still by far the best in the world.

But that’s not going to happen, because some stakeholders are more equal than others.

The common shareholders of GM are going to get wiped out. That’s good, they should. The bondholders are going to get converted to equity at 30 cents on the dollar. That’s good, they should.

Many of GM’s dealers will receive lavish buyouts as an inducement to close their doors, for a total cost in the billions of dollars. That’s disgusting, but it’s required both by GM’s contracts with them and by the welter of state laws that protect the dealers. (If you want to know who the political power brokers are in any given city or town, look for the car dealers.)

This is going to be kept scrupulously out of the news, because car dealers contribute huge sums to every last man and woman in Congress and the Senate. The public was ready to torch the private residences of AIG executives, but they won’t make a peep about paying billions of their own hard-earned dollars to provide a cushy retirement for thousands of already-rich auto dealers.

Class Warfare?

Here is a gimlet-eyed recruit ready to go "over the top" and fight as a foot soldier in this new "class warfare" that the right wing nuts in the US are yammering about. And where is the hideout of this fanatic? Oh... it is Bloomberg News. Yeah, that left wing loony bin that pretend to be a business news reporting organization. Who could have known?

Here is John M. Berry, a Bloomberg News columnist with his views:

If letting top income-tax rates go back to where they were in 2000 is class warfare against the rich, I’m ready to snap to attention with my old M1 rifle on my shoulder.

What a ridiculous label, class warfare. It’s hardly aggression against any class to have a progressive income-tax system in which fairness and ability to pay are important considerations in setting rates for different income groups.

As far as the top tax rates are concerned, what President Barack Obama has proposed in his comprehensive, tightly crafted budget is to leave current law unchanged. That’s right: The law already calls for today’s 33 percent rate to go to 36 percent and the 35 percent rate to rise to 39.6 percent, in 2011.

Why did a Republican Congress and President George W. Bush countenance the 2011 expiration dates in the 2001 tax-cut bill? It was one of several deceitful provisions that made rate reductions temporary to hold down estimates of revenue loss. Of course, the GOP intended all along to make the rate cuts permanent.

Obama would let the Bush rate cuts expire only for couples with incomes above $250,000 (above $200,000 for single individuals) and raise the rates for them on capital gains and dividends to 20 percent from 15 percent.

Unfair? I don’t think so, given these earners’ relatively greater ability to bear the added burden. There’s no doubt that a larger share of the nation’s income has become concentrated at the very top of the distribution.

...

When Clinton proposed raising the top rates to 36 percent and 39.6 percent in 1993, there were plenty of predictions that the higher marginal rates would hurt Americans’ willingness to work and invest. Some economists argued that so many people would opt for leisure instead of work that the higher rates would raise no additional revenue.

Instead, a boom ensued in the latter 1990s, and the Congressional Budget Office credited the higher rates with generating a great deal of revenue.

What did Bush’s lower rates produce? Mediocre growth, very large deficits and financial-market manipulation.

The reality is that tax rates aren’t nearly as powerful a force as some people think they are.

Nor is the degree of progressivity a moral issue, as some conservatives seem to think. Going back to the rates in effect just several years ago is hardly an act of immorality, or a declaration of war.

Geithner Plan: The Movie

Here's a video that illustrates how the Geithner bank plan works.

First it shows the official version of how private investors and the government join hands to profit while cleaning up the mess.

Then he shows the dark side. He shows how "financial engineering" can be used by the banks to buy their own toxic assets using government money to magically heal their balance sheet. It shows how the government will take the hit on the toxic assets:

The Long Arm of the Law

I know police work is difficult and dangerous, but I can't help chuckling when the police trip over their own feet. Here is a blog entry from the Freakonomics site:

For 16 years, police in Germany hunted a female serial killer whose DNA was identified at 40 crime scenes, including six murders. Exasperated, investigators dubbed her “the phantom of Heilbronn,” after the town in which she allegedly killed a policewoman. A state prosecutor on her trail said he “just couldn’t believe that the same woman could be capable” of all the crimes to which she’d been linked. Well, it turns out she wasn’t. Police officials this week revealed the source of the DNA they’ve been chasing all over Europe. It came from the cotton swabs used to collect DNA evidence at each of the phantom-killer crime scenes. The swabs had probably been contaminated by a woman who works in the factory where the swabs were produced.

My solution? Better training, higher standards, better pay, and smarter police techniques. Unfortunately, calls for this really ends up just feeding the beast with more money, bigger bureaucracy, and more incompetence. So my "solution" is a non-solution until somebody finds a way to put somebody in charge of reform who is really committed to changing an institution in desperate need of improvement and modernization.

The Verdict on Free Market Capitalism

Here is Dean Baker's verdict on "free market" capitalism:

The media are busy perpetuating a myth that the United States has been a beacon of "free market" capitalism. This is a lie. The United States never had free market capitalism and certainly the system in place over the last three decades hardly qualifies.

The U.S. put in place policies designed to transfer income from the poor and middle class to the wealthy. This is most evident now with the hundreds of billions of dollars being spent bailing out the banks. For the last three decades, the banks and their top executives, made vast fortunes using a free government insurance policy called "too big to fail," under which bond holders and other creditors could lend money to the banks knowing that the government would honor their debts if they ever got into trouble.

It is an outright lie to call this a "free market." This is a huge government handout. This insurance policy is enormously valuable and the banks did not have to pay a penny for it. The banks are ardent opponents of free market capitalism. None of them have advocated that they be allowed to collapse.

Of course he is right. But there is an eerie silence in the media in the US. You don't see this discussed. Instead you find rantings about "nationalizing" the banks and how that is so un-American. You find the Republican party demanding that the "socialist" Obama back off and stop taxing the rich because it is the rich who will "save" the country. This is pathetic. Sadly, I don't see any groundswell against this idiocy preached by the media in the US. I guess the right wing propaganda has been drilled in so deep that nobody notices anymore.

What happened to the populism of the early 20th century that put a leash on the big trusts via anti-monopoly laws? Where did the popular agitation under Roosevelt for more government solutions to the complete collapse of the "free market" capitalism of Hoover?

Sadly, the American people are like members of Jim Jones' Peoples Temple. These members had listened to Jones' ranting for so long that they were willing to quietly drink the Kool-Aid and die. Similarly, Americans have listened to the propaganda of the Cold War about the wonders of "free market" American capitalism versus the evils of "socialism" that it has left the American people blind to their propaganda. It is funny, Canada is just across the border and it has a major social democratic (read "socialist") party. Europe has major social democratic parties that occasionaly gain power. These societies seem to work perfectly well. But Americans believe that harnessing the government to social movements is dangerous, "undemocratic", and ungodly. Just like those Peoples Temple members were convinced that the only option left was to drink the Kool-Aid.

Crony Capitalism

Here is the latest NY Times op-ed by Paul Krugman. The key bit is:

... these days America is looking like the Bernie Madoff of economies: for many years it was held in respect, even awe, but it turns out to have been a fraud all along.

It’s painful now to read a lecture that Mr. Summers gave in early 2000, as the economic crisis of the 1990s was winding down. Discussing the causes of that crisis, Mr. Summers pointed to things that the crisis countries lacked — and that, by implication, the United States had. These things included “well-capitalized and supervised banks” and reliable, transparent corporate accounting. Oh well.

One of the analysts Mr. Summers cited in that lecture, by the way, was the economist Simon Johnson. In an article in the current issue of The Atlantic, Mr. Johnson, who served as the chief economist at the I.M.F. and is now a professor at M.I.T., declares that America’s current difficulties are “shockingly reminiscent” of crises in places like Russia and Argentina — including the key role played by crony capitalists.

In America as in the third world, he writes, “elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.”

Here is an earlier blog entry on Simon Johnson.

A New Stonehenge?

I'm always amazed at how much a lone obsessed individual can create. Here's a guy who has figured out how a no-tech society could build Stonehenge. Even more, he is showing how it can be done single-handedly. This is amazing.

The guy is Wally Wallington. Here's a video about his work:

Do What I Say, Not What I Do

I've never had much time for ranters who want to tell me what I "should" do. I'm not big on finger wagging.

I am big on education. I think if you show people the various sides to an issue, they can figure it out for themselves.

The problem with moral preachers is that they are often busy in the back room sinning.

So I now introduce you to Al "don't turn off my lights" Gore, the preacher of gloom-and-doom, of the impending heat death of the planet. I found this bit of tattle tale from Nashville in a blog at the Nashville Post site:

I pulled up to Al’s house, located in the posh Belle Meade section of Nashville, at 8:48pm – right in the middle of Earth Hour. I found that the main spotlights that usually illuminate his 9,000 square foot mansion were dark, but several of the lights inside the house were on.

In fact, most of the windows were lit by the familiar blue-ish hue indicating that floor lamps and ceiling fixtures were off, but TV screens and computer monitors were hard at work. (In other words, his house looked the way most houses look about 1:45am when their inhabitants are distractedly watching “Cheaters” or “Chelsea Lately” reruns.)

The kicker, though, were the dozen or so floodlights grandly highlighting several trees and illuminating the driveway entrance of Gore’s mansion.

I [kid] you not, my friends, the savior of the environment couldn’t be bothered to turn off the gaudy lights that show off his goofy trees.

I have no idea of the literal truth of the above. It has the ring of truth. But I could be wrong and if so, I will delete this blog entry. But my experience in life with finger waggers tells me this is all too likely to be a true story.

Simon Johnson Speaks Out

I've run across this former IMF chief economist, Simon Johnson, before. I think he has a point to which we need to pay attention.

Here is a previous post presenting his theory of Wall Street capturing political power.

Here is the intro to an article in the Atlantic magazine for May 2009:

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

Read the whole article. For those who refuse to click and read the whole thing, here's the concluding paragraph:

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

And here is a key bit of the indictment:

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations.

...

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). ... But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

And this:

Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As well as this indictment of Washington:

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

And he documents the greed and insularity of Wall Street. I've put in bold the key bit:

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

And here is the key indictment of the government bailout "plan". Again I bold the key bits:

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

And here's the medicine to fix the problem which both the Bush and Obama administrations have refused to countenance:

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5trillion (or 10percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

...

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

AIG Bonus Money

What does a business school professor think of the AIG bonus payments? Here's Sudhakar V. Balachandran who teaches at Columbia University:

Understanding Geithner's "Financial Engineering"

I'm not a fan of Geithner's plan to use "financial engineering" to get the US out of the economic catastrophe that Wall Street's "financial engineering" created.

Here's a Wall Street type explaining in plain English how the Geithner system works. This is the first few paragraphs from David R. Kotok's explanation. If you read the whole thing, you will arrive at Kotok's assessment of Geither's plan: "As a private citizen concerned about my country and its policy direction, I think this reeks and stinks."

Dear Reader: Please give me 8 minutes to explain the $1.1 trillion federal government Public-Private Investment Program (PPIP).

Start here with this simple example. It’s a coin toss. Heads you win $100; tails you get nothing. How much would you pay to play? You can play as many times as you wish. Answer: not more that $50. For less than $50, you would play as often as you can. $50 is your breakeven; only a fool would pay more.

Now add Tim Geithner as your partner. He matches what you invest but you, and only you, get to set the price to play. Answer: you put up no more than $25 as the investor and that means he matches your number. At under $25 you play as much as you can. $25 is your breakeven as the investor; $50 is still the breakeven for the coin flip.

Now let’s add some of the leverage from the FDIC. ...

Read the whole thing.

How to Fix a Problem

Here is a very simple, effective, and cheap solution to the problem of food safety. It is probably too simple, too effective, and too cheap to be adopted by any government, but I like it and think it will work. Here is the key bit from the Ian Ayres blog entry on Freakonomics:

By now, virtually everyone in the country has heard that the Peanut Corporation of America knowingly shipped peanut products contaminated with salmonella bacteria, leading to the deaths of at least nine people and sickening 22,500 others. Last year, the Westland/Hallmark slaughterhouse processed meat from “downer” cattle that were too sick to stand, forcing a recall of 143 million tons of beef. President Obama has spoken of a food-safety “crisis” confronting the country, and that over-used term does not seem to be an exaggeration in this case.

So what should we do? Government inspectors are too few in number to visit all of the thousands of food preparation facilities, let alone conduct thorough inspections. Some large-scale purchasers conduct their own inspections of their suppliers, or the suppliers themselves pay for inspections, as was apparently the case in the peanut incident. But private audits have not proven to be much more effective than, say, the private credit-rating agencies that gave AAA ratings to all those mortgage-backed securities.

Maybe we should take a lesson from the 1980’s commercials for the Hair Club for Men. You may remember those cheesy ads, which concluded with the pitchman declaring that “I’m not only the Hair Club president, I’m also a client.” The right way to align the incentives of management with those of the customers, in other words, may be to make sure that the managers are customers. One way we could implement this would be to require inspectors to certify that they saw the president of the company (or perhaps the plant manager) eating a substantial helping of the product being sold. (Maybe the inspectors should be required to eat some as well!) Someone who knows that his downer-burger was made from a cow that was too sick to stand, or his salmonella-butter-and-jelly sandwich contained infested nuts, might not be so happy about his working lunch.

Republicans are Allergic to Numbers

Here is Ezra Klein in his blog at The American Project having fun at the expense of the number-phobic Republicans. This is just the first couple of paragraphs and I've bolded the funny bits. You have to read the whole thing to get a really good chuckle:

If you're having a bad day, I highly encourage you to spend some quality time with the Republican budget proposal. It's reads like what would happen if The Onion put together a budget...

Bush, famously, described his first budget by saying, "It's clearly a budget. It's got a lot of numbers in it." Indeed it was, and did. This isn't. There are no numbers. Let me repeat that: The Republican budget proposal does not say how much money they would raise, or spend. The Oxford English Dictionary defines a "budget" as "an estimate of income and expenditure for a set period of time." This is not a budget. It talks about balancing the budget but doesn't explain how. It advocates tax cuts but doesn't estimate their costs. It promises to cut programs but doesn't name them...

The health care section, for instance, says that Democrats propose "nearly $1 trillion" in health care spending as a "downpayment" on reform. The actual number is $634 billion, which someone who's more familiar with, you know, numbers, might have characterized as "more than $600 billion," or, alternately, "$634 billion." The Republicans say that "the prime focus of [the Democrats] agenda is the establishment of a government-run health insurance plan," a policy idea that doesn't appear in the President's budget. They say that the Lewin Group has analyzed this policy that doesn't exist and found that it will force three out of four Americans onto government-run health care (the Lewin Group analyzed the Economic Policy Institute's proposal, which is not the President's budget). And so on, and so forth.

The Power of Advertising

Here's a commercial that makes you want to rush right out and sign up with this company that sounds so knowledgeable, so strong...



Oh... wait a second... this is AIG, the company that blew up, that chewed through $170 billion of taxpayer's money... maybe they aren't quite the "sure hands" and "sure thing" portrayed by this commercial. Wow! And the commercial is so believable.

No wonder Geithner & Paulson have thrown so much money at this company!

The Cure for Our Economic Ills

Here is a call by Matthew Iglesias for us to abandon economic orthodoxy. It is a wonderful essay. Below is the final paragraph that sums up his position. You need to read the whole article to get the full argument:

The Great Depression led to the implementation of a regulatory regime that, though crude, served to prevent panics from becoming contagious and banks from becoming “too big to fail”. This framework was eroded by the belief that a market populated by rational actors could police and correct itself. After all, why would nearly all investors simultaneously make the same mistake, year after year? The answer, of course, is speculative mania – a concept for which there’s ample empirical support but for which a rationalist model has no place. The cure is not to abandon capitalism, but to ditch excessive faith in the rationalist model and make sure that regulations keep us well-clear of the ledge, lest inevitable bouts of irrationality push us into an abyss.

Cliff Diving: The US Economy

image from BMO economics research
The above is the CBO (Congressional Budget Office) estimate for Obama's budget in the context of the recent past. There is no denying that it is a bloodbath of red ink. The tragedy is that the Bush administration didn't nip the problem in the bud back in 2007 when the cost would probably have been one-fifth the size (remember, Ben Bernanke assured everybodey that it was "contained" to the sub-prime market in early 2007 and that was only a few hundred billion dollars, not trillions).

If you look not at dollars, but at GDP percentage, it doesn't look as bad. It is a lot of money, but the other option -- falling into a Great Depression -- is so very, very bad that only ideologues like the Republicans are willing to argue that the costs should be foregone in favour of a complete crash in the economy. Reagan was a happy warrior who ran up a 5.6% deficit and Republicans cheered him on. He did that during a vanilla recession, not a recession threatening to become a depression.

DeLong Weighs & Measures the Bank Plan

Brad DeLong has an interesting piece in The Week in which he looks at the Geithner bank plan and does his assessment of it. The key bit for me is:

Q: How does having the U.S. government invest $500 billion in the world's largest hedge fund operations reduce unemployment?

A: The sudden appearance of an extra $500 billion in demand for risky assets will reduce the quantity of risky assets other private investors will have to hold. And the sudden appearance of between five and ten different government-sponsored funds making public bids for assets will convey information to the markets about what models investors are using to value assets in this environment. That sharing of information will reduce the perception of risk somewhat. When assets are seen as less risky, their prices rise. And when there are fewer assets on the market, their prices rise too: it’s simple supply and demand. With higher financial asset prices, those firms that ought to be expanding and hiring will be able to get money on more attractive terms that make expanding and hiring more profitable, etc.

A: And the recession will end, and unemployment will drop back to normal?

A: I doubt it. My guess is that we would need to take a total of $4 trillion in assets out of the market in order to move financial asset prices to a point at which it becomes profitable for businesses that should be hiring and expanding to actually hire and expand. “Toxic” assets account for only $2 trillion of this total; the government has to sponge up additional assets because the big problem now is not the inability of some people in the desert outside Los Angeles to pay their mortgages. The problem is that among financiers everywhere, the tolerance for holding risk has collapsed. The Geithner plan supplies $500 billion to acquire assets. The Federal Reserve's quantitative easing plan will add another $1 trillion. And I should hasten to say that the administration thinks that the information-sharing effects of the Geithner plan will do three times as much good as the simple supply-and-demand analysis suggests. (I discount that entirely.) So from their perspective, the glass is 3/4 full.

Note how DeLong, who is an optimist, is enough of a realist to admit that the Geithner plan falls short of solving the problem. If you read the whole article you can see that politics is what prevents Obama from solving the problem.

Treading on Dangerous Ground

I just finished reading "Bonk" by Mary Roach (here), so I feel I'm up on the latest in sex research. When I ran across an article reviewing research on women's sexual desire, I thought it would be fun to see all the themes run through again.

There was a fair overlap. But there was new material. So the article was a pleasant addition to what I had recently learned.

As for style, I prefer the Roach-style romp through the literature because it educates without taking itself too seriously. But for those who are more fastidious and want their science delivered without innuendo, the article entitled "What Do Women Want?" by Daniel Bergner in the NY Times Magazine covers interesting ground in sex research.

It looks the work of a number of researchers, but most deeply at three sex researchers: Meredith Chivers at Queen's University, Lisa Diamond at the University of Utah, and Marta Meana at the University of Nevada. Here are some interesting bits from the article.

The key result of Chivers' work:

Males who identified themselves as straight swelled while gazing at heterosexual or lesbian sex and while watching the masturbating and exercising women. They were mostly unmoved when the screen displayed only men. Gay males were aroused in the opposite categorical pattern. Any expectation that the animal sex would speak to something primitive within the men seemed to be mistaken; neither straights nor gays were stirred by the bonobos. And for the male participants, the subjective ratings on the keypad matched the readings of the plethysmograph. The men’s minds and genitals were in agreement.

All was different with the women. No matter what their self-proclaimed sexual orientation, they showed, on the whole, strong and swift genital arousal when the screen offered men with men, women with women and women with men. They responded objectively much more to the exercising woman than to the strolling man, and their blood flow rose quickly — and markedly, though to a lesser degree than during all the human scenes except the footage of the ambling, strapping man — as they watched the apes. And with the women, especially the straight women, mind and genitals seemed scarcely to belong to the same person. The readings from the plethysmograph and the keypad weren’t in much accord. During shots of lesbian coupling, heterosexual women reported less excitement than their vaginas indicated; watching gay men, they reported a great deal less; and viewing heterosexual intercourse, they reported much more. Among the lesbian volunteers, the two readings converged when women appeared on the screen. But when the films featured only men, the lesbians reported less engagement than the plethysmograph recorded. Whether straight or gay, the women claimed almost no arousal whatsoever while staring at the bonobos.

The key claim of Diamond is for a sexual "fluidity" of sexual desire in women that isn't found in males:

...Diamond argues that for her participants, and quite possibly for women on the whole, desire is malleable, that it cannot be captured by asking women to categorize their attractions at any single point, that to do so is to apply a male paradigm of more fixed sexual orientation. Among the women in her group who called themselves lesbian, to take one bit of the evidence she assembles to back her ideas, just one-third reported attraction solely to women as her research unfolded. And with the other two-thirds, the explanation for their periodic attraction to men was not a cultural pressure to conform but rather a genuine desire.

The key results of Meana:

Yet while Meana minimized the role of relationships in stoking desire, she didn’t dispense with the sexual relevance, for women, of being cared for and protected. “What women want is a real dilemma,” she said. Earlier, she showed me, as a joke, a photograph of two control panels, one representing the workings of male desire, the second, female, the first with only a simple on-off switch, the second with countless knobs. “Women want to be thrown up against a wall but not truly endangered. Women want a caveman and caring. If I had to pick an actor who embodies all the qualities, all the contradictions, it would be Denzel Washington. He communicates that kind of power and that he is a good man.”

Fascinating stuff. The bottom line: men are simple while women are quite complex (separate mind/genital systems, fluidity of desire, being desired is the orgasm).

Finding "the Evil Doers"

Paul Krugman questions whether there is something that is driving policy makers away from doing the right thing. He is looking for a kind of "gold standard" fetish similar to what operated in the 1930s which fettered the minds of policy makers.

DeLong surveys the field and comes up with a tripartite categorization:

My view is that we are not now bound by golden fetters--that by and large we know what to do and how to do it to keep the world economy out of a depression. But, I would say, there are three groups of people who are trying to handcuff us with today's equivalents of the golden fetters that constrained economic policy and made the Great Depression so great. Each group is doing so for its own reasons:

1. Out of ignorance: the modern-day Chicago School of economists, which is arguing against effective use of policies to manage aggregate demand because they have never read Metzler or Friedman (or Keynes), and never thought at all seriously about the transmission mechanisms by which changes in monetary policy (and fiscal policy) affect the price level in the long run and affect output, employment and demand in the short run.

2. Out of malevolence: the Republican members of congress and all their intelletual enablers who would have fallen in line behind what are now the policies of the Obama administration had McCain won the election and had they been the policies of the McCain administration instead--but who are right now opposed because they think making Obama's presidency a failure is the road to electoral success in 2010 and 2012.

3. Out of justice: avoiding depression requires supporting asset prices--which means that for many financiers the wages of overspeculation will be not bankruptcy but fortunes. People rebel against the fact that in a financial crisis the banking sector has got the rest of us by the plums, and that there is no effective way to make sure they get their justice without creating prolonged mass unemployment for the rest of us.

Taleb Plays Mr. Fixit

Here is an article by Marion Maneker that looks at Nicholas Taleb, one of the few people who predicted the economic catastrophe. I've pulled out the key bits where Taleb prescribes the necessary fix:

Now that the catastrophe is here, Taleb's anger at the economic establishment that drove us over this cliff—and populates the Journal's conference—makes him a representative figure of ordinary people. Like most Americans, Taleb is seething with rage about the financial establishment's role in bringing the about credit crash. "Nobody saw the crisis coming," he says. "Bernanke, all these guys, I want them out. They proved incompetent, they crashed the plane."

...

First, he says, we have to unmask the charlatans of risk like Myron Scholes. To Taleb, Scholes is the Great Oz in this Emerald City because his work on options and derivatives allowed the whole of the financial system to adopt poorly understood products-like the ones that brought AIG down-that hide risk. To Taleb, Scholes' academic work, which enabled the widespread use of complex derivatives, was like "giving children dynamite."

"This guy should be in a retirement home doing Sudoku," Taleb says. "His funds have blown up twice. He shouldn't be allowed in Washington to lecture anyone on risk."

With complex derivatives unmasked and, in Taleb's vision of the future, outlawed, the next step is to create a more robust version of capitalism. Taleb calls it Capitalism 2.0. Robustness begins with a dismantling of debt. Leverage was the gas that inflated the financial system until it was too big, too fragile, and too volatile.

Over the past 20 years, the financial system has grown ever more complex. Building on a greater computing capacity and communication speed—"Bank runs now take place at the speed of BlackBerry"—Taleb recognizes that the financial system now possesses an efficiency that creates volatility. That cannot and will not go away.

We cannot have both debt leverage and a hyper-efficient system—the volatility is just too great. What Taleb explains—which no one else does—is that efficiency is already a form of leverage. A highly efficient system removes slack and magnifies small changes. Think of the efficient system as a high-performance aircraft. Each minute of steering input creates a rapid and violent shift of course, speed, or altitude. The system itself is souped up even before you add the debt. Once you do, the pilot is equally jacked up and twitchy, creating an explosive combination. Now imagine that fighter jet trying to fly in a 1,000-plane formation, and you get an idea of the world financial system in the 21st century.

We can't erase the technology that created the planes, so we'll have to make sure we fly sober, maybe even with an onboard computer that dampens the controls. That means getting rid of the debt. It's that simple.

A deleveraged financial system is a stable one, especially if we increase the redundancy within the system. That's an idea Taleb has taken from biology. But in finance, redundancy means two things: not having players in the game who are "too big to fail" and not allowing anyone—from the individual to the institution—to play with too much money. Redundancy means have cash on the side, not risking it all, and not becoming dependent upon financial assets for your economic well-being.

Krugman Passes Judgement

Paul Krugman has been nipping at the ankles of the Obama economic "team" for months. He thought a little criticism would bring them around. But over the last few weeks he has thrown in the towel. He sees no hope. In his latest NY Times op-ed, he explains that they are wedded to a financial model that they think is fixable, but which he deems broken and irredeemable:

Which brings us back to the Obama administration’s approach to the financial crisis.

Much discussion of the toxic-asset plan has focused on the details and the arithmetic, and rightly so. Beyond that, however, what’s striking is the vision expressed both in the content of the financial plan and in statements by administration officials. In essence, the administration seems to believe that once investors calm down, securitization — and the business of finance — can resume where it left off a year or two ago. 

To be fair, officials are calling for more regulation. Indeed, on Thursday Tim Geithner, the Treasury secretary, laid out plans for enhanced regulation that would have been considered radical not long ago.

But the underlying vision remains that of a financial system more or less the same as it was two years ago, albeit somewhat tamed by new rules.

As you can guess, I don’t share that vision. I don’t think this is just a financial panic; I believe that it represents the failure of a whole model of banking, of an overgrown financial sector that did more harm than good. I don’t think the Obama administration can bring securitization back to life, and I don’t believe it should try.

Historical Revisionists are Busy!

Here's a bit from an article by James Surowieski in the New Yorker Magazine looking at some people are "re-interpreting" history in order to shape the emerging debate over how fix & avoid this problem:

Did Lehman Brothers’ Failure Matter?

By this point, it’s become conventional wisdom that the failure of Lehman Brothers last September was the catalyst for a massive selloff in the credit and stock markets and a general flight to safety from which the markets have yet to recover. Had the government found a way to save Lehman, the assumption has been, things today would still be pretty terrible, but we probably would not have seen the economy “fall off a cliff,” as Warren Buffett said this weekend.

In the past few days, though, a new meme has started circulating through the economics blogosphere, suggesting that Lehman’s failure actually did not wreak the havoc that everyone who lived through last September thought it did. This argument, which was floated by the well-respected macroeconomist Willem Buiter on Friday, is based on a paper from last November by the Stanford economist John Taylor, which purports to show (pdf) that the credit markets actually did not react all that badly to Lehman going under and that the crisis was really the product of market uncertainty about the effects of government action. Taylor’s conclusion is based on one piece of evidence: a graph of the 3-Month LIBOR—the interest rate that banks charge to lend to each other—which he says shows that the real terror in the credit markets didn’t emerge until well after Lehman Brothers failed.

...

More important, Taylor’s assumption in his paper is that investors would have known right away how severe the repercussions of Lehman’s bankruptcy would be. But this is simply untrue—for whatever reasons (some suggest fraud, others panic), the hole in Lehman’s balance sheet was much bigger than people initially thought it would be, which meant that the losses its lenders suffered were much bigger than anticipated. (One study suggests that the chaotic nature of Lehman’s bankruptcy alone cost creditors tens of billions of dollars.) As the magnitude of the losses became clearer, so too did banks’ risk aversion, since Lehman’s failure seemed to demonstrate starkly the risks of lending to any other big financial institution.

...

This may seem like an academic debate. But it’s not, because those who want to convince us that Lehman’s failure was not a big deal are doing so in order to shape future policy. In other words, they are arguing that when it comes to institutions like, say, Citigroup, the government can, in fact, let them implode—which means, in practical terms, allow their creditors to be wiped out—without any disastrous effects. Maybe they’re right, but it’s an awfully big gamble to take on the basis of a single dubiously interpreted graph.

Mary Roach's "Bonk: The Curious Coupling of Science and Sex"

I like Mary Roach's serious but humourous approach to unusual subjects. I loved Stiff (dead bodies). Now I've been equally captivated by Bonk (sex). Great books!

This is a soups-to-nuts approach to sex research. For those amateurs who love to collect arcane tidbits, this book is a rich resource. Of course there are the campy, over-the-top, jokey interjections by Mary Roach into her subject matter. Some find that off-putting, but for me it makes the book more endearing. I love her enthusiasm. I love her openness and honesty.

This book is a real eye-opener. You will discover things you never even thought, or thought possible. You will discover just how deeply researchers have delved into the topic of sex. And you will be amazed at how much the research "subjects" put up with in their willingness to assist the march of progress. Penis cameras, dildos, the clitoris, orgasm, vibrators, coital imaging (with a cameo appearance by Mary Roach and her husband), erectile dysfunction, testicular implants, hormones, pheromones, etc. are all covered with a light touch but serious content. It is a rich resource, and a must-read book.

The Knives are Out, Get the Economists!

Forget going after the big bonus recipients at AIG. The mobs with pitchforks and torches are about to turn on the academic economists. I'll be on the sidelines cheering them on.

Here is the opening bit of an article by Anatole Kaletsky in the Prospect Magazine of the UK:

Was Adam Smith an economist? Was Keynes, Ricardo or Schumpeter? By the standards of today’s academic economists, the answer is no. Smith, Ricardo and Keynes produced no mathematical models. Their work lacked the “analytical rigour” and precise deductive logic demanded by modern economics. And none of them ever produced an econometric forecast (although Keynes and Schumpeter were able mathematicians). If any of these giants of economics applied for a university job today, they would be rejected. As for their written work, it would not have a chance of acceptance in the Economic Journal or American Economic Review. The editors, if they felt charitable, might advise Smith and Keynes to try a journal of history or sociology.

If you think I exaggerate, ask yourself what role academic economists have played in the present crisis. Granted, a few mainstream economists with practical backgrounds—like Paul Krugman and Larry Summers in the US—have been helpful explaining the crisis to the public and shaping some of the response. But in general how many academic economists have had something useful to say about the greatest upheaval in 70 years? The truth is even worse than this rhetorical question suggests: not only have economists, as a profession, failed to guide the world out of the crisis, they were also primarily responsible for leading us into it.

By “economists” in this context I do not mean the talking heads and commentators (myself included) employed by the media and financial institutions to explain the credit crunch or the collapse of house prices or the rise of unemployment or the movements of currencies and stock markets—usually well after the event. Neither do I mean the forecasters whose computer models churn out scientific-looking numbers on future growth or inflation, numbers that have to be revised so drastically whenever something “unexpected” happens (as it always does) that they are not really forecasts at all but descriptions of recent events. An IMF study of 72 recessions in 63 countries found, for example, that in only four of these cases had economic forecasters predicted a recession three months or more before the event. Economic forecasters and pundits cannot predict the future for the same reason that weather forecasters cannot predict the weather—the world economy is too complex and too susceptible to random shocks for precise numerical forecasts to have any real meaning.

This doesn’t mean that economics is useless, any more than unreliable weather forecasts should lead us to ignore Newton’s laws of motion, on which they rely. But economics should recognise that, as a discipline, it cannot be about predicting, but is instead about explaining and describing. Smith, Ricardo and Schumpeter explained why market economies generally work surprisingly well, often in defiance of common-sense expectations. Others have explained why capitalist economies can fail very badly and what then needs to be done. This was the mission of Keynes, Milton Friedman, Walter Bagehot and, in his way, Karl Marx. And the economists who got us into this mess saw themselves as the self-proclaimed successors of these great theorists. Many of them are the academics who win Nobel prizes, or dream of winning them, and who regard themselves as intellectually superior to the journeymen who work for banks and governments, never mind the populist hoi polloi whose musings appear in newspaper columns or on television.

Academic economists have thus far escaped much blame for the crisis.

And here is the expected summary:

Economics today is a discipline that must either die or undergo a paradigm shift—to make itself both more broadminded, and more modest. It must broaden its horizons to recognise the insights of other social sciences and historical studies and it must return to its roots. Smith, Keynes, Hayek, Schumpeter and all the other truly great economists were interested in economic reality. They studied real human behaviour in markets that actually existed. Their insights came from historical knowledge, psychological intuition and political understanding. Their analytical tools were words, not mathematics. They persuaded with eloquence, not just formal logic. One can see why many of today’s academics may fear such a return of economics to its roots.

Should the economists start finding Dick Cheney "undisclosed locations" to hide alongside the AIG bonus recipient counterparts? Judging from the above... maybe!