Tag Archives: Andrew Leonard

Erlernen Sie Von Uns, Amerika, Part III

David Leonhardt at NYT:

Remember the German economic boom of 2010?

Germany’s economic growth surged in the middle of last year, causing commentators both there and here to proclaim that American stimulus had failed and German austerity had worked. Germany’s announced budget cuts, the commentators said, had given private companies enough confidence in the government to begin spending their own money again.

Well, it turns out the German boom didn’t last long. With its modest stimulus winding down, Germany’s growth slowed sharply late last year, and its economic output still has not recovered to its prerecession peak. Output in the United States — where the stimulus program has been bigger and longer lasting — has recovered. This country would now need to suffer through a double-dip recession for its gross domestic product to be in the same condition as Germany’s.

Yet many members of Congress continue to insist that budget cuts are the path to prosperity. The only question in Washington seems to be how deeply to cut federal spending this year.

If the economy were at a different point in the cycle — not emerging from a financial crisis — the coming fight over spending could actually be quite productive. Republicans could force Democrats to make government more efficient, which Democrats rarely do on their own. Democrats could force Republicans to abandon the worst of their proposed cuts, like those to medical research, law enforcement, college financial aid and preschools. And maybe such a benevolent compromise can still occur over the next several years.

The immediate problem, however, is the fragility of the economy. Gross domestic product may have surpassed its previous peak, but it’s still growing too slowly for companies to be doing much hiring. States, of course, are making major cuts. A big round of federal cuts will only make things worse.

So if the opponents of deep federal cuts, starting with President Obama, are trying to decide how hard to fight, they may want to err on the side of toughness. Both logic and history make this case.

Let’s start with the logic. The austerity crowd argues that government cuts will lead to more activity by the private sector. How could that be? The main way would be if the government were using so many resources that it was driving up their price and making it harder for companies to use them.

In the early 1990s, for instance, government borrowing was pushing up interest rates. When the deficit began to fall, interest rates did too. Projects that had not previously been profitable for companies suddenly began to make sense. The resulting economic boom brought in more tax revenue and further reduced the deficit.

But this virtuous cycle can’t happen today. Interest rates are already very low. They’re low because the financial crisis and recession caused a huge drop in the private sector’s demand for loans. Even with all the government spending to fight the recession, overall demand for loans has remained historically low, the data shows.

Similarly, there is no evidence that the government is gobbling up too many workers and keeping them from the private sector. When John Boehner, the speaker of the House, said last week that federal payrolls had grown by 200,000 people since Mr. Obama took office, he was simply wrong. The federal government has added only 58,000 workers, largely in national security, since January 2009. State and local governments have cut 405,000 jobs over the same span.

The fundamental problem after a financial crisis is that businesses and households stop spending money, and they remain skittish for years afterward. Consider that new-vehicle sales, which peaked at 17 million in 2005, recovered to only 12 million last year. Single-family home sales, which peaked at 7.5 million in 2005, continued falling last year, to 4.6 million. No wonder so many businesses are uncertain about the future.

Without the government spending of the last two years — including tax cuts — the economy would be in vastly worse shape. Likewise, if the federal government begins laying off tens of thousands of workers now, the economy will clearly suffer.

Doug J.:

Bobo six months ago on German austerity:

The early returns suggest the Germans were. The American stimulus package was supposed to create a “summer of recovery,” according to Obama administration officials. Job growth was supposed to be surging at up to 500,000 a month. Instead, the U.S. economy is scuffling along.

[….]

The economy can’t be played like a piano — press a fiscal key here and the right job creation notes come out over there. Instead, economic management is more like parenting. If you instill good values and create a secure climate then, through some mysterious process you will never understand, things will probably end well.

An actual economics reporter (Dave Leonhardt) today:

With its modest stimulus winding down, Germany’s growth slowed sharply late last year, and its economic output still has not recovered to its prerecession peak. Output in the United States — where the stimulus program has been bigger and longer lasting — has recovered. This country would now need to suffer through a double-dip recession for its gross domestic product to be in the same condition as Germany’s.

[…..]

“It’s really quite striking how well the U.S. is performing relative to the U.K., which is tightening aggressively,” says Ian Shepherdson, a Britain-based economist for the research firm High Frequency Economics, “and relative to Germany, which is tightening more modestly.” Mr. Shepherdson adds that he generally opposes stimulus programs for a normal recession but that they are crucial after a crisis.

It’s pretty much a guarantee that any argument involving the idea of government as parent will be a faulty argument.

No one could have predicted that Paul Krugman would be right about austerity.

David Dayen at Firedoglake:

David Leonhardt is speaking simple economic truths in what must sound like a foreign language, given the tenor of debates over the past few months. Standard economic theories haven’t applied in Washington for a while, so Leonhardt’s essay has the force of the running man throwing the hammer into the Big Brother TV screen in the famous Apple 1984 commercial.

Leonhardt manages to mention that GDP is still growing too slowly in the US for mass hiring, even with a higher growth rate than Germany. He manages to note the state and local cuts that will blunt recovery. He manages to look at interest rates, which are historically low, and reason that government spending is not crowding out the private sector in any way. He calls John Boehner a liar for saying the federal workforce has grown by 200,000 employees since Barack Obama’s tenure in office (it’s about 1/4 that). He says that the problem right now is a lack of demand. He cites the much better example of Britain, which has gone whole-hog for austerity and seen negative job growth and negative GDP growth since.

I’d like to think that this kind of truth would, like resuscitating a dying patient, shock the political class back to life. More likely it will just fall down the memory hole, drowned out by the bipartisan cries of “we all want to cut spending.” The unemployed are still invisible, economic theory is still upside down, and one article won’t change that.

It would be nice if it did.

Andrew Leonard at Salon:

What do we learn from the correlation between states with the worst housing bust and budget shortfalls? If U.S. economic growth slows, the federal deficit situation will get worse. Republicans believe that cutting government spending will spur economic growth. But the evidence we have from countries that have attempted such a strategy since the Great Recession began to ebb — Germany and the United Kingdom — suggests exactly the opposite. Austerity policies are not the right medicine for a fragile economy.

Felix Salmon:

One of the best aspects of being a journalist is that you get to talk at length to the most knowledgeable and interesting experts on just about any subject you can think of. For me, yesterday was a prime case in point: a long and fascinating lunch with James Macdonald, the author of my favorite book on the history of sovereign debt. Turns out he also has a microscopic vineyard in Tuscany, so the conversation ebbed wonderfully from economics to wine and back.

Macdonald has an economic historian’s view of the current austerity debate, and he was very clear: if you look at the history of countries trying to cut and deflate their way to prosperity while keeping their currencies pegged, it’s pretty grim — all the way back to Napoleonic times. Sometimes, the peg is gold. For a good example of the destructive abilities of that particular peg, look at the UK in the 1920s, which Macdonald says was arguably worse than the US in the 1930s: shallower, to be sure, but substantially longer. The devaluation of the pound, when it finally came, was very long overdue.

At other times, the peg is simply political: Macdonald gives the example of southern Italy being locked into what was essentially the Piedmontese monetary system at the time of the Risorgimento. That might have been well over a century ago, but there’s a case to be made that it has hobbled just about everywhere south of Rome to this day — and that’s in a country with about as much internal labor mobility as between EU countries.

So from a historical perspective, the prospects for countries like Portugal, Ireland and Greece are pretty grim. They can cut their budgets drastically and stay pegged to the euro, but most of them would be better off in the position of Iceland, which can and did devalue in a crisis (and allowed its banks to default, too). So far, the Baltic states have stuck to their deflationary guns with the most determination and discipline, but such things work until they don’t: at some point it’s entirely possible that Latvia or Estonia could pull an Argentina and kickstart growth by devaluing.

Jonathan Chait at TNR:

I’m sure that, in the light of this new evidence, American conservatives will undertake a thorough rethinking of their anti-stimulus beliefs. After all, as they told us at the time, this was a natural experiment.

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Weekend At Bernie’s Jail Cell

Diana Henriques at NYT:

Bernard L. Madoff said he never thought the collapse of his Ponzi scheme would cause the sort of destruction that has befallen his family.

In his first interview for publication since his arrest in December 2008, Mr. Madoff — looking noticeably thinner and rumpled in khaki prison garb — maintained that family members knew nothing about his crimes.

But during a private two-hour interview in a visitor room here on Tuesday, and in earlier e-mail exchanges, he asserted that unidentified banks and hedge funds were somehow “complicit” in his elaborate fraud, an about-face from earlier claims that he was the only person involved.

Mr. Madoff, who is serving a 150-year sentence, seemed frail and a bit agitated compared with the stoic calm he maintained before his incarceration in 2009, perhaps burdened by sadness over the suicide of his son Mark in December.

Besides that loss, his family also has faced stacks of lawsuits, the potential forfeiture of most of their assets, and relentless public suspicion and enmity that cut Mr. Madoff and his wife Ruth off from their children.

In many ways, however, Mr. Madoff seemed unchanged. He spoke with great intensity and fluency about his dealings with various banks and hedge funds, pointing to their “willful blindness” and their failure to examine discrepancies between his regulatory filings and other information available to them.

“They had to know,” Mr. Madoff said. “But the attitude was sort of, ‘If you’re doing something wrong, we don’t want to know.’ ”

Matt Schneider at Mediaite:

Bernie Madoff, the con artist who pleaded guilty two years ago to a series of financial crimes, gave his first jailhouse interview to The New York Times and was angry with a lot of his critics. Most notably, he attacked the news media for their “disgraceful” coverage of his son’s suicide.Appearing “noticeably slimmer,” “frail” and “agitated,” Madoff disclosed that banks and hedge funds were complicit all along and “had to know” about his schemes. He again claimed that his family was unaware of his crimes until the very end. In reporting on the interview, ABC’s Brian Ross quotes a prosecutor who concludes “Madoff is incapable of telling the truth still to this day.”

Uri Friedman at The Atlantic:

Madoff’s statements are particularly relevant at a time when Irving Picard, the trustee for Madoff’s victims, has accused JPMorgan Chase of harboring serious concerns about Madoff’s investment business but not notifying authorities or halting business with him. Yet, as Henriques notes, federal prosecutors have yet to accuse the major banks and hedge funds that dealt with Madoff “of knowingly investing in his Ponzi scheme.”

Madoff Has Helped Trustee

Madoff claimed he’s met with his victims’ trustee, Irving Picard, and provided him with information about the banks and hedge funds he did business with, though he says he hasn’t shared this information with federal prosecutors working on criminal cases.

Family Crisis Unforeseen

Madoff said he didn’t foresee the extent of the suffering his fraud would inflict on his family. His relations are confronting a barrage of lawsuits and his son, Mark, committed suicide in December. Madoff called some of the press coverage of Mark’s death “disgraceful” and stated that he didn’t attend Mark’s funeral because of prison regulations and because he didn’t want to turn the funeral into a “media circus.”

Mets Owner ‘Knew Nothing’

Picard alleges that New York Mets Owner Fred Wilpon and his brother-in-law, Saul Katz, knew or should have known from their financial dealings with Madoff that he was defrauding investors, but Madoff vehemently denies this: “They knew nothing. They knew nothing,” he asserted.

Andrew Leonard at Salon:

Should we trust him? After all, if there is one thing we know about Bernie Madoff, it is that he is one hell of a liar. But as evidence emerges that bank executives were exchanging e-mails wondering about Madoff’s amazing investment record, the possibility that the banks were purposefully looking the other way is not inconceivable.

The question is: What to do about it?

How about: Make sure government regulatory agencies entrusted with oversight over financial markets are adequately funded and staffed for the job?

Wouldn’t you know it — Obama wants to boost the budget for the Securities and Exchange Commission and the Commodity Futures Trading Commission, the two key government agencies watching over Wall Street

Jacob Heilbrunn at The National Interest:
As Frank Rich recently observed, Madoff was a “second-tier player.” But he could lead to bigger fry. The Wilpons, who own the New York Mets, are already in big financial trouble for their extensive dealings with Madoff–Donald Trump is angling to buy a majority stake in the team. Then there are the hedge funds and banks that were linked to, or in cahoots with, Madoff.

At this point Madoff has little to lose. President Obama shows little appetite for curbing the excesses that led to the last financial crash. Madoff cannot achieve redemption. His historical role as the biggest Ponizi schemer (so far) in history is set. He became the type-cast bad guy. For awhile Madoff took all the credit, if that’s the right phrase, for the malversation he oversaw. That’s changed. Now he seems to be interested in ensuring that his collaborators, witting or unwitting, also take the fall (though he is notably exempting his own family members from any knowledge of his transgressions).

Madoff’s own crediblity is shot. But if the information that he’s apparently providing to Picard pans out, then he may get his own measure of revenge for the humiliations he has suffered, and is suffering.  Balzac said that behind every great fortune is a crime. Madoff now seems intent on demonstrating the truth of that axiom. One thing seems clear: Madoff is not going to go down quietly. The aftershocks from his exposure may well continue to roil the financial world.

Joe Weisenthal at Business Insider

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Look, Children, It’s A Thing Spoke Of As Myth (An Actual Filibuster, Or Not)

Heather Horn at The Atlantic with the round-up.

Jordan Fabian at The Hill:

Sen. Bernie Sanders (I-Vt.) is railing against President Obama’s tax-cut package in a lengthy floor speech.

Sanders, one of the Senate’s leading liberals, is protesting Obama’s deal with Republicans, which would extend tax cuts on all income that were initially signed by President George W. Bush in 2001 and 2003.

Sanders began his speech on Friday at 10:24 a.m. and was still speaking at 5:31 p.m. Friday afternoon. He has threatened to filibuster the Obama-GOP deal when it is brought to the Senate floor next week.

“You can call what i am doing today whatever you want, you it [sic] call it a filibuster, you can call it a very long speech … ,” read a message posted on Sanders’s Twitter account after he’d taken to the rostrum.

Joe Weisenthal at Business Insider:

Update: Sanders is into hour 8.

Update 2: They’re in hour 6

Update: It’s in its 5th hour, and Senator Sanders is talking again, after having handed the baton to Mary Landrieu.

Original post: The Bernie Sanders filibuster against the tax deal is now in its 4th hour, and currently Louisiana Sen. Mary Landrieu has joined in. They’re railing against the deal, and in general inequality in America >

Just one thought: This is a disaster for Obama.

It’s the first time we can recall that something happening on the liberal side is getting people excited — #filibernie is a hot topic on Twitter right now — and Obama isn’t part of it. In fact, he’s against it.

Allah Pundit:

You’ll be pleased to know that, in his frantic search for subject matter to keep him going, he’s already somehow detoured into chatting about Arianna Huffington. If that’s where he’s at in hour six, lord only knows where he’ll be in hour twelve. Reading aloud from “Jersey Shore” transcripts, probably.

Daniel Foster at The Corner:

Regardless of the merits of Mr. Sanders’ position on the bill, this is my favored brand of filibuster-reform: make Senators actually do it. You’d retain the Senate’s best counter-majoritarian feature but see it reserved only for the most important measures.

Brian Beutler at Talking Points Memo:

It’s a filibuster as filibusters were originally intended — and, as such, makes a mockery of what the filibuster’s become: a gimmick that allows a minority of senators to quietly impose supermajority requirements on any piece of legislation.

Joined at different times by Sen. Sherrod Brown (D-OH) and Sen. Mary Landrieu (D-LA), Sanders has been decrying the Obama tax cut plan for bailing out the wealthiest people in America. “How can I get by on one house?” Sanders railed, sarcastically. “I need five houses, ten houses. I need three jet planes to take me all over the world! Sorry, American people. We’ve got the money, we’ve got the power.”

As a result of his efforts, he’s shot up to near the top Twitter trending topic chart. Filibusters like these were much more common decades ago, before the rules changed and Senators could really run out the clock by holding the floor and talking and talking without pause. Things are different today — and, whatever Sanders does, the Senate isn’t scheduled to hold any votes until Monday, so its practical effects may not amount to much.

David Dayen at Firedoglake:

It’s not a filibuster. Not unless he holds the floor until at least Monday and beyond.

There’s a set vote on the tax cut bill on Monday. Nothing else has been scheduled to move today. Bernie is not really blocking anything. This puts Sanders’ speech into the Congressional record; I’m not sure there’s an additional purpose.

But that’s not to say it isn’t important. Sanders is calling attention to the massive inequality in America, which will only be stratified further by a tax cut bill that raises taxes from current law for 25 million low-income workers and gives millionaires a tax cut of about $139,000 a person. He’s explaining America’s insane trade policies, which have cut out the American manufacturing base and hollowed out the middle class. He’s taking on corporate CEO pay, and the two-income trap, and basically making the progressive critique of an economy bought and paid for by the very rich.

What’s more, he’s picked up support, not only from usual suspects by Sherrod Brown but from conservative Democrat Mary Landrieu, who acknowledged she doesn’t always agree with her colleague but said that he has “done his homework” about the tax cut deal. After slamming the deal as unfair to the poor and to minorities and giving a very cogent argument about inequality, Landrieu hilariously concluded by saying she might vote for the bill, but she’d be “loud” about it. Nevertheless, you’re seeing issues discussed on the Senate floor that almost never come up in any other context. Political theater is sadly one of the few ways to cut through the clutter in America, and that’s what Sanders is up to, I suspect.

Andrew Leonard at Salon:

His epic rant — perhaps one of the most extraordinary critiques of how the American economy has been managed over the last several decades delivered in living memory — is an endless sequence of connecting the dots from one outrage to another. Even as I wrote this paragraph, he segued effortlessly from trade policy to Wall Street.

“But it is not just a disastrous trade policy that has brought us where we are today. The immediate cause of this crisis, and it gets me just sick talking about it … is what the crooks on Wall Street have done to the American people.”

Sanders then delivers a capsule history of deregulation, blasts Alan Greenspan, notes that in the late ’90s he had predicted everything that ultimately happened, but failed to rally legislative support to stop the runaway train — “and the rest is, unfortunately, history.”

From there, a class warfare sideswipe: “Understand, that in this country when you are a CEO on Wall Street — you can do pretty much anything you want and get away it.”

“And what they did to the American people is so horrible.”

On to the bailout! His scorn is so caustic it could disintegrate an aircraft carrier: “We bailed these guys out because they were too big to fail, and now three of the four largest banks  are now even larger. ”

As Sanders’ great oration enters its seventh hour, it is, by its very nature, impossible to summarize. It is a ramble, a rant, a critique, a cry of rage, a wail of despair, and a call to action. And it is amazing. I’ve heard stories of filibusters in which senators read phone books. And I’ve watched with disgust as for years Republicans have merely threatened to filibuster, without ever actually being forced to exercise their vocal cords. But here is Bernie Sanders, seven hours in, calling for the biggest banks to be broken up, voice still hale and hearty, and looking like he could easily go another seven hours.

Give credit to the citizens of Vermont, who know how to elect someone not afraid of speaking truth to power.

David Kurtz at Talking Points Memo:

Sen. Bernie Sanders all-day speech on the Senate floor has ended after about 8 1/2 hours.

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Filed under Economics, Legislation Pending, Political Figures

Economics Is Hard And Then You Die

Michael Wade at The Examiner:

A senior research economist with the Federal Reserve Bank of Richmond, Mr. Kartik Athreya, recently penned an essay “to open-minded consumers of the economics blogosphere” in which he argued that bloggers, and other economics writers, who portray macro-economic policy as simple matters are doing us all a disservice. In short (with apologies to Douglas Adams), Athreya asserts that “Economics is hard. Really hard. You just won’t believe how vastly hugely mindboggingly hard it is. I mean you may think doing the Sunday Times crossword is difficult, but that’s just peanuts to economics. And because it is so hard, people shouldn’t blithely go shooting their mouths off about it, and pretending like it’s so easy.  In fact, we would all be better off if we just ignored these clowns.”

Or at least, that’s what I took from it anyway.

As examples, he specifically cites not only Matt Yglesias, John Stossel, Robert Samuelson and Robert Reich, but also the hugely popular Paul Krugman and Brad DeLong. For the most part, these are leading lights of the politically liberal point of view, but Athreya’s critique does not appear to be aimed at either left or right commentators. Instead, he questions why we should listen to anyone who assumes complicated economic matters can be so easily dispensed with:

But why should it be otherwise? Why should anyone accept uncritically that Economics, or any field of human endeavor, for that matter, should be easy either to process or contribute to?  To some extent, people don’t. Would anyone tolerate the equivalent level of public discussion on cancer research? Most of us readily accept the proposition that Oncology requires training, and rarely give time over to non-medical-professionals’ musings. Do we expect advances in cell-biology to be immediately accessible to anyone with even a college degree? Science journalists routinely cite specific studies that have appeared in specific journals. They generally do not engage in passing their own untrained speculations off as insights. But economic blogging and much journalism largely does not operate this way. Naifs write books, and sell many of them too. People as varied as Matt Ridley and William Greider make book-length statements about economics. I’ve never done that, and this is my job. This is, to say the very least, bizarre.

Although there is a bit of a “don’t cast pearls before swine” attitude to his essay, as someone who likes to write about and analyze economics, I think Athreya has a good point. It certainly isn’t uncommon for writers such as myself (not to mention those with vastly more expertise than I) to opine about economic policy in a way that assumes certain underlying premises are unassailable fact, rather than difficult and sometimes contentious theory. Whether it’s a discussion of how the Community Reinvestment Act is responsible for the collapse of Wall Street, or why universal health care would boost our GDP in the long-term, bloggers/writers of both left and right are surely guilty of assuming too much at times.

By the same token, I think Mr. Athreya is missing an important distinction. Although economics lies at the heart of what many of these writers discuss, it is in fact politics that is the real subject. As opposed to laymen arguing the finer points about advances in cell-biology, Yglesias, et al., are making political policy arguments and supporting them with economic reasoning. Even when writers such as Krugman or Delong tackle macro-economic subjects head on, they are typically doing so in order to advance a specific policy position that they prefer, rather than seeking to refine our knowledge about economics itself.

In other words, while the economic principles may be oversimplified to an extent, the same came be said about computer science when arguing the pros and cons of owning an Apple or PC. You don’t need to be a computer expert to make a choice.

Mark Thoma:

Let me start by noting that the essay is not even digitized in a convenient form — it is a pdf — and to me that says a lot about the writers knowledge of how the digital world works. Why not make it available in a convenient form (unless the goal is to overcome the fact that federal reserve work cannot be copyrighted by making it difficult to reproduce)?  (This is an irritation more generally, and the Kansas City Fed is the worst. Even the president’s speeches are offered only as pdfs — and they are locked to prevent copying — rather than in a more convenient digital form. Are they trying to discourage this information from more general circulation? If so, why?) [Update: I added a few follow up comments on pdfs at the end of the post.]

Scott Sumner:

That’s right; no need to pay attention to Gary Becker, John Taylor, Paul Krugman, and all the other quacks who lack Athreya’s sophisticated understanding of the “science” of economics.  BTW, any time someone wields the term ’science’ as a weapon, you pretty much know they are an intellectual philistine.  Am I being defensive yet?

To get serious for a moment, in this essay Athreya is confusing a bunch of unrelated issues:

1.  The style of bloggers; are they polite or not?

2.  The ideology of bloggers

3.  The views of bloggers on methodological issues

4.  Are bloggers competent to opine on important public policy issues?

I don’t recall ever reading a Greg Mankiw post that I didn’t feel knowledgeable enough to write.  On the other hand I’ve read lots of Mankiw posts that I didn’t feel clever enough to write.  That’s an important distinction.  Mankiw is a great economist in the “scientific” tradition, and he’s a great blogger—but for completely different reasons.  He’s a great blogger for the same reason he is a great textbook writer.  There are other bloggers who are also very clever; Krugman, Tyler Cowen, Robin Hanson, Steve Landsburg, Nick Rowe, etc, etc.  Several on that list also wrote textbooks.

I don’t know if Krugman has done a lot of recent research on macro, but he knows enough about the literature to offer an informed opinion.  I often disagree with the views of Krugman, DeLong, Thoma, et al, on fiscal policy, but they can cite highly “scientific” papers by people like Woodford and Eggertsson for all of their fiscal policy views.  There must be dozens of economics bloggers who either teach at elite schools, or have a PhD from elite schools, and who are qualified to comment on current policy issues.

Arnold Kling:

He is suggesting that bloggers supply more noise than signal on economic topics. I understand his point, but I disagree with it.

It is a fair point that it is tempting when writing for an audience that includes non-professionals to try to oversimplify, to make your views sound more well-grounded than they are, and to make others’ views sound sillier than they are. If you read just one economics blogger, you will get that blogger’s prejudices and blind spots along with whatever insights might be on offer.

It is possible, however, for the collective efforts of many bloggers to produce more signal and less noise. That would be the case if the competitive market serves as a check on the more unsound ideas. I am not saying that it works that way, but it might.

Athreya takes the view that the academic process of refereed journals is more rigorous and works well. I do not fully share that view. The peer-reviewed journal process may be the better than anything else someone has come up with, but it is a deeply flawed process. It rewards ritual over substance, and trend-following over originality. The process failed badly in the area of macroeconomics over the past thirty years, an era which I believe Paul Krugman is justified in describing as a Dark Age.

Athreya draws an interesting contrast between reactions to the economic crisis and reactions to natural disasters. He points out that the tsunami in East Asia and the earthquake in Haiti combined to kill hundreds of thousands and to impose hardships on many others that are far worse than what has been inflicted by the recession. Yet neither of those disasters was met by a denunciation of seismology for failing to predict them nor an outpouring of ill-informed speculation about what happened. He may be forgetting the “God’s revenge” explanation proposed for the Haiti earthquake, but his point is well taken.

My pushback would be that economists have claimed to know more about the process of recessions than seismologists have claimed to know about earthquakes and tsunamis. No seismologist has ever said that we have “conquered” such events the way that economists have in the past claim to have conquered the business cycle.

I agree with Athreya that non-economists should express opinions about macroeconomics only with great humility. Where I disagree is that I think that economists, too, need to show humility.

Brad DeLong:

I’m going to duck out of this one, and leave it to Federal Reserve Bank of Minneapolis President Narayana Kocherlakota.

He will explain to Kartik Athreya that someone who has taken a year of Ph.D. coursework in a decent economics department (and passed their Ph.D. qualifying exams) is unlikely to be able to say anything coherent about our current macroeconomic policy dilemmas:

Why do we have business cycles? Why do asset prices move around so much? At this stage, macroeconomics has little to offer by way of answer to these questions. The difficulty in macroeconomics is that virtually every variable is endogenous – but the macro-economy has to be hit by some kind of exogenously specified shocks if the endogenous variables are to move. The sources of disturbances in macroeconomic models are (to my taste) patently unrealistic. Perhaps most famously, most models in macroeconomics rely on some form of large quarterly movements in the technological frontier. Some have collective shocks to the marginal utility of leisure. Other models have large quarterly shocks to the depreciation rate in the capital stock (in order to generate high asset price volatilities). None of these disturbances seem compelling, to put it mildly. Macroeconomists use them only as convenient short-cuts to generate the requisite levels of volatility in endogenous variables…

If Narayana is right, Kartik is wrong. I’m betting on Narayana.

Matthew Yglesias:

I think there’s a lot that’s wrong about Athreya’s essay, much of it explained by Scott Sumner, but most of all I think his argument hinges on two category errors, one about what I’m doing and one about what he’s doing.

First me. Do I have anything interesting to say about economics? Well, “interesting” is relevant to audience. I should hope that PhD economists working in central banking systems aren’t learning about economics from my blog! That’s what grad school, conferences, the circulation of academic papers, etc. is for. But perhaps you’re a citizen of a liberal democracy who speaks English and tries to keep abreast of political controversies. Well you’ve probably heard politicians talking a lot about jobs and the economy. You’ve probably noticed that voters keep telling pollsters that jobs and the economy matter to them. Jobs and the economy may matter to you! You may have seen that political scientists have found that presidential re-election is closely linked to economic performance, and thus deduced that the fate of a whole range of national policy issues hinges on economic growth. Well then I bet you are probably interested in the fact that a wide range of credible experts (with PhDs, even) believe the world’s central banks could be doing more to boost employment. Is Athreya interested in this? Well, I hope he would know it whether or not he reads my blog—he’s working at a central bank somewhere and probably knows a lot more about this than most people.

But now to Athreya. His essay seems to partake of the conceit that what economic policymakers do is just economics and that for political pundits to second-guess their decisions would be on a par with me trying to second-guess someone doing particle physics. Completely apart from the fact that the “science” of economics is a good deal less developed than what you see in real sciences, the fact is that economic policy is economics plus politics. For example, according to Ben Bernanke, the Fed could reduce unemployment by raising its inflation target but this would be a bad idea because it runs the risk of causing inflation expectations to become un-anchored. That’s a judgment that contains some “economics” content but it’s largely a political judgment. It’s part of his job to make those judgments, but it’s the job of citizens to question them.

At any rate, the next time anyone finds me claiming to have broken original ground in macroeconomic theory I hope someone will call the expertise police. But you don’t need a PhD in sociology to see how it might be the case that the Federal Reserve Board of Governors would be unduly attuned to the interests of college educated Americans to the exclusion of the working class, or that the European Central Bank might be unduly attuned to the needs of Germans to the exclusion of Spaniards and Italians.

Tyler Cowen:

My view is a little different than Brad’s.  I would say that economics is really, really, really, really, really, really, really hard.  And that’s leaving out a few of the “reallys.”

It’s so hard that experts don’t always do it well.  The experts are constantly prone to correction by non-experts, by practitioners, by people who are self-educated economic experts but not professional economists, and by people who know some economics and a lot about some other field(s).  It is very often that we — at least some of us — are wrong and at least some of those other people are right.  Furthermore those other people are often more meta-rational than a lot of professional economists.

Even very simple problems can be quite hard, such as why nominal wages are sometimes sticky or why particular markets don’t always clear, in the absence of legal impediment.  Why doesn’t the restaurant charge more on a Saturday night?  You can imagine how hard the hard problems are, such as what level of public expenditure is consistent with an ongoing and workable democratic equilibrium.

Putting aside agreement and ideology, and just focusing on how one understands an issue, I’ll take my favorite non-Ph.d. bloggers over most professional economists, six out of seven days a week.  Not to estimate a coefficient, but to judge public policy, thereby integrating and evaluating broad bodies of knowledge?  It’s not even close.

Ryan Avent at Free Exchange at The Economist

Atrios:

I got bored pretty quickly with that essay, a poorly written combination of “people I agree with are smart, people I disagree with are stupid” and “elites know what they’re doing so shut up Shut Up SHUT UP SHUT UP SHUT UP SHUT UP.”

There’s little reason to believe the high priests at the Fed had any clue what they were doing as the housing bubble was happening. More than that, there’s plenty of reason to believe that they are much more concerned with inflation than unemployment, and millions will continue to suffer because of it.

Economics provides a framework for thinking about certain problems, but there’s rarely any one “right” answer. Too often the existence of tradeoffs are unacknowledged or completely ignored. If the priests knew what they were doing we wouldn’t have 9.7% unemployment. They, uh, failed.

Mike Konczal at Rortybomb:

Never, and I mean never, during the financial crisis, where we’d leave work on Friday and wonder whether or not the world would collapse during that weekend or what kind of market we’d walk into on Monday, did I think “man I wish there were more academic economists around.” Academic economists had very little language with which to describe the crisis. Most of our narratives come straight from journalism or sociology. There are no “toxic assets” in economics, that evocative description comes to us from business world and journalism. Same with the culture and pitfalls of high mathematical finance, math predicated on the efficient markets hypothesis. Even now it feels kind of sad to see them try and shoehorn the entire financial crisis into agency problems. The last time we had one of these it changed economics completely with the Keynesian revolution. I am really rooting for INET to change some paradigms, but it’s going to be an uphill battle. You can barely move old-school Keynesian thought into academia, and I can easily see the journals publishing as if this crisis was just us “forgetting” some technology.

I think he took down the essay, but he mentioned how bloggers who haven’t taken the first year of Economics PhD coursework, and passed the prelim exam, shouldn’t be writing. I think I’ve pieced together the first year between some coursework and self-study, and here are my thoughts: My very first economics class ever was auditing a graduate macroeconomics class where we went through the Lucas/Stokey “Recursive Methods in Economic Dynamics” and Ljungqvist and Sargent “Recursive Macroeconomic Theory.” I still remember asking my classmates “no seriously, this isn’t what macroeconomics is, is it?” It was like they were training to be electrical engineers, but could do no actual engineering. I still am terrified of what macro graduate students are cooking.

And speaking as someone who has taken graduate coursework in “continental philosophy”, and been walked through the big hits of structural anthropology, Hegelian marxism and Freudian feminism, that graduate macroeconomics class was by far the most ideologically indoctrinating class I’ve ever seen. By a mile. There was like two weeks where the class just copied equations that said, if you speak math, “unemployment insurance makes people weak and slothful” over and over again. Hijacking poor Richard Bellman, the defining metaphor was that observation that if something is on an optimal path any subsection is also an optimal path, so government just needs to get out of the way as the macroeconomy is optimal absent absurdly defined shocks and our 9.6% unemployment is clearly optimal. (An unfair description perhaps, but I wasn’t an actual student. This is a better, though mathy, take on the problems.)

Will Wilkinson:

While I agree with Athreya that economics is very hard, it is not so hard to understand why it is so hard. His argument for why it is so hard –economics is full of phenomena ”pathologically riddled by dynamic considerations and feedback effects”– sounds to my ear like an argument for the unreliability of pathologically oversimplified economic models, and for the proposition that economists will more often than not fail to converge on a consensus position on which the rest of us can rely.

Economics is a grab bag of theories,  just like psychology, sociology, biology, and so on. Any intelligent person with a taste for abstraction and some degree of critical acuity can perfectly well grasp, explain, even cogently criticize most scientific theories. When it comes to formal training, I find that the rigorous standards of argumentation taught in good philosophy programs are useful generally, and certainly have enabled me to detect and explain defects in the arguments of even highly esteemed economists. More specifically, a solid background in the philosophy of science is especially useful when it comes to explaining why many economic theories fail to meet the basic standards of adequate science. Most economists, sad to say, have a woefully poor grasp of the ways the idealized assumptions of their models affect the relevance of those models to the explanation of the real economy and the evaluation of economic policy. And here we arrive at the real the issue: economic policy and who governs.

It seems to have escaped Athreya that this here country is a liberal democracy, and not some kind of bloated Singapore. His response to worries about the rule of experts seems to be that there is no reason to worry because of peer review. Yet as far as I can tell, there is no reason at all to believe that academic peer review in economics favors work relevant to policymaking in the real, embodied political economy as opposed to clever mathematical accounts of phenomena in fictional worlds that bear at best some tenuous structural similarities to this world. I guess it’s not all that surprising when someone who labors inside a technocratic institution with limited democratic accountability fails to wonder whether technocracy on average delivers better policy than democracy. (I don’t know, but I wonder!) And it’s not all that surprising that he would assume that free and open public discussion of economic policy by amateurs threatens to undermine the authority of quiet experts who, as we all know, have a stellar track record of wrangling professional consensus and truth from topics “pathologically riddled by dynamic considerations and feedback effects.”

Andrew Leonard at Salon:

The stupidest part of Athreya’s essay is its title: “Economics is Hard,” which automatically summons up the memory of Teen Talk Barbie’s “Math class is tough” utterance. (Sadly, Wikipedia tells me that Barbie never actually said “math is hard,” and call me a crazy mob-trusting fool, but I’m going to go with the group mind fact check on this one.) The reason why many women were upset with Teen Talk Barbie was obvious: It played into stereotypes that assumed women just couldn’t do the math. So why even bother try?

I will be the first to acknowledge that I stumble flat on my face when I hit the math sections included in cutting-edge economic theory. But that doesn’t mean I am discouraged from trying to learn more, an important part of which means learning who to trust in the cacophony of econoblogospheric debate. Whose articulations of the problem more closely resemble reality, and resonate with history? Who is best able to take the economic data of the day and slot it into a narrative that makes sense? Who is obviously a cynical, ideologically shuttered fool? I marvel every day at the power of the Internet to put me in the middle of conversations between trained economists and a vast universe of interpreters and filters. I once called the econoblogosphere an ongoing graduate-level seminar in economics, open to everyone, and see no reason to back off on that now. Sure, the democratization of information means that there is a lot of silliness out there — Sturgeon’s 90 percent of everything is crap law undoubtedly applies to Internet discussions of economics.

But pay enough attention, do your homework, and you will find yourself more able to educate your more thoroughly on topics relevant to the pressing matters of the moment than ever before.

The good stuff floats to the top. That, I fear, is not likely to be the fate of “Economics is Hard.”

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Popping Out Children Like Brooms In The Sorcerer’s Apprentice Part Of “Fantasia”

Bryan Caplan at Wall Street Journal:

Amid the Father’s Day festivities, many of us are privately asking a Scroogely question: “Having kids—what’s in it for me?” An economic perspective on happiness, nature and nurture provides an answer: Parents’ sacrifice is much smaller than it looks, and much larger than it has to be.

Most of us believe that kids used to be a valuable economic asset. They worked the farm, and supported you in retirement. In the modern world, the story goes, the economic benefits of having kids seem to have faded away. While parents today make massive personal and financial sacrifices, children barely reciprocate. When they’re young, kids monopolize the remote and complain about the food, but do little to help around the house; when you’re old, kids forget to return your calls and ignore your advice, but take it for granted that you’ll continue to pay your own bills.

Many conclude that if you value your happiness and spending money, the only way to win the modern parenting game is not to play. Low fertility looks like a sign that we’ve finally grasped the winning strategy. In almost all developed nations, the total fertility rate—the number of children the average woman can expect to have in her lifetime—is well below the replacement rate of 2.1 children. (The U.S. is a bit of an outlier, with a rate just around replacement.) Empirical happiness research seems to validate this pessimism about parenting: All else equal, people with kids are indeed less happy than people without.

[…]

A closer look at the General Social Survey also reveals that child No. 1 does almost all the damage. Otherwise identical people with one child instead of none are 5.6 percentage points less likely to be very happy. Beyond that, additional children are almost a happiness free lunch. Each child after the first reduces your probability of being very happy by a mere .6 percentage points.

Happiness researchers also neglect a plausible competing measure of kids’ impact on parents’ lives: customer satisfaction. If you want to know whether consumers are getting a good deal, it’s worth asking, “If you had to do it over again, would you make the same decision?” The only high-quality study of parents’ satisfaction dates back to a nation-wide survey of about 1,400 parents by the Research Analysis Corp. in 1976, but its results were stark: When asked, “If you had it to do over again, would you or would you not have children?” 91% of parents said yes, and only 7% expressed buyer’s remorse.

You might think that everyone rationalizes whatever decision they happened to make, but a 2003 Gallup poll found that wasn’t true. When asked, “If you had to do it over again, how many children would you have, or would you not have any at all?” 24% of childless adults over the age of 40 wanted to be child-free the second time around, and only 5% more were undecided. While you could protest that childlessness isn’t always a choice, it’s also true that many pregnancies are unplanned. Bad luck should depress the customer satisfaction of both groups, but parenthood wins hands down.

The main problem with parenting pessimists, though, is that they assume there’s no acceptable way to make parenting less work and more fun. Parents may feel like their pressure, encouragement, money and time are all that stands between their kids and failure. But decades’ worth of twin and adoption research says the opposite: Parents have a lot more room to safely maneuver than they realize, because the long-run effects of parenting on children’s outcomes are much smaller than they look.

Think about everything parents want for their children. The traits most parents hope for show family resemblance: If you’re healthy, smart, happy, educated, rich, righteous or appreciative, the same tends to be true for your parents, siblings and children. Of course, it’s difficult to tell nature from nurture. To disentangle the two, researchers known as behavioral geneticists have focused on two kinds of families: those with twins, and those that adopt. If identical twins show a stronger resemblance than fraternal twins, the reason is probably nature. If adoptees show any resemblance to the families that raised them, the reason is probably nurture.

Parents try to instill healthy habits that last a lifetime. But the two best behavioral genetic studies of life expectancy—one of 6,000 Danish twins born between 1870 and 1900, the other of 9,000 Swedish twins born between 1886 and 1925—found zero effect of upbringing. Twin studies of height, weight and even teeth reach similar conclusions. This doesn’t mean that diet, exercise and tooth-brushing don’t matter—just that parental pressure to eat right, exercise and brush your teeth after meals fails to win children’s hearts and minds.

Parents also strive to turn their children into smart and happy adults, but behavioral geneticists find little or no evidence that their effort pays off. In research including hundreds of twins who were raised apart, identical twins turn out to be much more alike in intelligence and happiness than fraternal twins, but twins raised together are barely more alike than twins raised apart. In fact, pioneering research by University of Minnesota psychologist David Lykken found that twins raised apart were more alike in happiness than twins raised together. Maybe it’s just a fluke, but it suggests that growing up together inspires people to differentiate themselves; if he’s the happy one, I’ll be the malcontent.

David Mills at First Things:

“Many conclude that if you value your happiness and spending money, the only way to win the modern parenting game is not to play. Low fertility looks like a sign that we’ve finally grasped the winning strategy,” writes Bryan Caplan in The Breeder’s Cup, published in The Wall Street Journal‘s weekend edition. Readers will remember the widely promoted study of a few years ago declaring that having children made parents less happy or, depending on the writer, outright unhappy.

In yet another example of the mainline press picking up on what our own David Goldman had been saying for years in his Spengler columns (search “demography” and “population”) and in Demographics and Depression, Caplan argues that the studies we have show that this equation of limited families with the good life is wrong. After challenging the study I just mentioned, he writes:

Happiness researchers also neglect a plausible competing measure of kids’ impact on parents’ lives: customer satisfaction. If you want to know whether consumers are getting a good deal, it’s worth asking, “If you had to do it over again, would you make the same decision?”

The only high-quality study of parents’ satisfaction dates back to a nation-wide survey of about 1,400 parents by the Research Analysis Corp. in 1976, but its results were stark: When asked, “If you had it to do over again, would you or would you not have children?” 91% of parents said yes, and only 7% expressed buyer’s remorse.

You might think that everyone rationalizes whatever decision they happened to make, but a 2003 Gallup poll found that wasn’t true. When asked, “If you had to do it over again, how many children would you have, or would you not have any at all?” 24% of childless adults over the age of 40 wanted to be child-free the second time around, and only 5% more were undecided.

While you could protest that childlessness isn’t always a choice, it’s also true that many pregnancies are unplanned. Bad luck should depress the customer satisfaction of both groups, but parenthood wins hands down.

He goes on to argue that parents could make themselves happier, but his reason is a little uncomfortable: “the long-run effects of parenting on children’s outcomes are much smaller than they look.”

Matt Zeitlin:

For Caplan, you start with what economists think, then see what voters think and then chalk up the difference as evidence as irrationality. He, in accordance with this general faith in what economists think, proposes all sorts of reforms that would take decision making power out of the hands of the public and into the hands of economists, like giving the Council of Economic Advisors “the power to invalidate legislation as ‘uneconomical,’”  and giving college graduates an extra vote.

The problem for Caplan is that economists generally agree that voters are rational and that insomuch as voters are misinformed, it tends to cancel itself out. So, Caplan has to make a further argument for why we should trust economists on policy issues, but why we should ignore their collective judgment on whether or not voters are rational.

He seems to have pulled this trick again in regard to his arguments for why, despite the rather robust finding in happiness research that having kids decreases reported happiness, people should have lots of kids. And, to take this argument even further, that they should have kids for selfish reasons; they should do so for themselves. Now, he makes some arguments for why this research need not lead to non-fertile outcomes and why the stuff that leads to the negative happiness effects due to having kids isn’t all that useful or important, but we are still left with another case where Caplan is making a significant, contestable point that is at odds with what economists’ think about the issue.

I’m not saying that this is a bad thing in and of itself, but it sure puts Caplan in a weird position where he agrees with economists on everything except the stuff he devotes his time to researching and writing about.

Will Wilkinson at Megan McArdle’s place:

Bryan really struggles with the fact that children tend to have a negative effect on self-reported happiness. (Most economists are dismissive of survey evidence, but, to his credit, Bryan isn’t.) He tries to minimize the damage this finding does to his argument by pointing out that the negative effect is small for the first kid, and even smaller for additional kids. But it remains that if one is trying to maximize happiness, no kids appears to be the best bet and fewer is better than more.

Of course, self-reported happiness is just one dubiously reliable piece of evidence about the effect of kids on well-being. The trouble with Bryan’s strategy in the WSJ essay is that he resorts to even less reliable survey evidence to support his position. He cites polls that show that people tend not to report regrets about having had kids, but that a large majority of those who have not had kids say that would choose to have them if they “had it to do over again.” Now, Darwinian logic suggests that the belief that one would be better off without children will not tend to be widespread. That is, as Harvard psychologist Daniel Gilbert argues, we should expect to find conviction in the satisfactions of parenthood to be strong and all-but universal whether or not those convictions reflect the truth. So one would want check them against, say, the self-reported life satisfaction of those with and without children. Or, if one is inclined to think like an economist, one might say “talk is cheap” and check these beliefs against what people actually do.

In that case, what one finds is that increases in average levels of education, levels of disposable income, gender equality, and access to birth control — that is, increases in the ability of people (and especially women) to deliberately control the conditions of their own lives — generally lead people to choose a smaller rather than larger number of children. As far as I can tell, Bryan’s response is that it “lacks perspective” to take at face value this truly striking tendency of choice under conditions of increasing personal control. If Bryan really thinks rising education, wealth, and gender equality have somehow made us worse at evaluating the costs and benefits of children, he probably ought to turn in his economist card.

None of this is to say that there aren’t excellent reasons to have families larger than the relatively small rich-country norm. It’s just that these tend not to be the kinds of reasons economists consider “selfish.”

Razib Khan at Discover:

Being an economist he focuses on rational individual behavior, but I want to point to another issue: group norms. In the left-liberal progressive post-graduate educated circles which I come into contact with in the USA childlessness is not uncommon, and bears no stigma (on the contrary, I hear often of implicit and explicit pressure on graduate students to forgo children for the sake of maximizing labor hour input into research over one’s lifetime from advisors). On the other hand, the norm of a two-child family is also very strong, and going above replacement brings upon you a fair amount of attention. The rationale here is often environmental, more children = more of a carbon footprint. But my friend Gregory Cochran has stated that as an individual who is well above replacement whose social milieu is more conservative that he perceives that more than two children is also perceived as deviant in Middle American society. In other words, the reasoning may differ, but the intuition is the same (in Italy the reasoning mostly involves the cost of raising children from the perspective of parents, both in cash and time).

The numbers in the General Social Survey tell the tale. In 1972 42% of adults had more than 2 children. In 2008 32% did. More relevantly in 1972 47% of adults between the ages of 25 and 45 had more than 2 children. In 2008 the figure for that age group is 27% for those with more than 2 children.

Of course the numbers mix up a lot of different subcultures. One anecdote I’d like to relate is a conversation I had with a secular left-of-center university educated couple. They expressed the aspiration toward 4 children. I asked them out of curiosity about the population control issue, and they looked at me like I was joking. It needs to be mentioned that they weren’t American, rather they were from a Northern European country which seems on the exterior to resemble the United States very much. But it reminds us of the importance of group norms in shaping life choices and expectations, the implicit framework for our explicit choices.

All that goes to my point that Bryan Caplan’s project will be most effective among demographics geared toward prioritizing individual choice, analysis and utility maximization, as opposed to relying upon the wisdom of group norms. Economists, quantitative social science and finance types, libertarians, etc.

Andrew Leonard at Salon:

But that leads us to the truly deranged part of the argument: Caplan believes that we shouldn’t be working so hard to be good parents, because, hey, the quality of our parenting doesn’t really make any difference to how our kids turn out. He cites a few behavioral genetics studies, mostly on sets of twins, that purport to show very little difference in outcomes when children with the same genetic makeup are raised by different parents.

It’s the ultimate get-out-of-jail-free parenting card!

Many find behavioral genetics depressing, but it’s great news for parents and potential parents. If you think that your kids’ future rests in your hands, you’ll probably make many painful “investments” — and feel guilty that you didn’t do more. Once you realize that your kids’ future largely rests in their own hands, you can give yourself a guilt-free break.

If you enjoy reading with your children, wonderful. But if you skip the nightly book, you’re not stunting their intelligence, ruining their chances for college or dooming them to a dead-end job. The same goes for the other dilemmas that weigh on parents’ consciences. Watching television, playing sports, eating vegetables, living in the right neighborhood: Your choices have little effect on your kids’ development, so it’s OK to relax. In fact, relaxing is better for the whole family. Riding your kids “for their own good” rarely pays off, and it may hurt how your children feel about you.

So we should have more kids, and spend less time and effort parenting them, and just kick back and enjoy the fruits of our non-labors, presumably generated when our offspring stroke our egos by visiting us in our nursery homes and telling us how cool we were for setting no curfews and letting them play videogames until they keeled over in front of their computers from lack of proper hydration.

I guess I do see a certain libertarian world view integrity here. If you judge modes of political organization from the foundational precept that good government is impossible, then why not also assume that good parenting is, if not impossible, merely useless? If you’re going to dump John Maynard Keynes then why not throw out Dr. Spock as well?

Who knew that lazy permissiveness would become a calling card of libertarian parenting ideology? I’ll concede that there are tendencies towards over-parenting in American culture that verge on the extreme, and could quite possibly be counter-productive. The frantic competition to get your baby into the best pre-school in Manhattan — a struggle that seems to start before the child is even born — may not be the most efficient use of resources. Caplan is certainly right on one point, we should relax more — relaxed parents, I would submit, are better parents. But to leap from that starting point to the contention that our choices have little effect on our children’s development seems, in my own anecdotal understanding of the world, to go too far. Even worse, it smacks of an abdication of responsibility, a surrender to the worst kind of easy rationalization. Good parenting is hard, but even if the differences we are making are only perceivable at the margins, that shouldn’t absolve us from the necessity and pleasure of making any effort at all. It’s not a winning or losing strategy: It’s a way to be in the world.

Tony Woodlief at Megan McArdle’s place:

To be sure, there are too many parents who, despite their children, remain narcissistic nimrods. But the nature of parenting is to beat that out of you. There’s just no time to spend on ourselves, at least not like we would if we didn’t have babies to wash and toys to clean up, usually in the middle of the night, after impaling our feet on them.
People are inherently self-centered, and especially in a peaceful, prosperous society, this easily leads to self-indulgence that in turn can make us weak and ignoble. There’s something to be said for ordeals — like parenting, or marriage, or tending the weak and broken — which push us into an other-orientation. When we have to care for someone, we get better at, well, caring for people. It actually takes practice, after all. I’m still trying to get it right.
I suppose an economist could make this all fit. What I’m really saying, the economist might contend, is that one element of my self-interest, in addition to enjoying a leisurely meal, and plenty of sleep, and the ability to go away on vacations without worrying about who will watch the youngsters, is not becoming (remaining?) a jerk. Kids certainly don’t guarantee that won’t happen, but they help mitigate the risk. And if we conceptualize that self-interest, in turn, as happiness, we’re right back where we started.
But I wonder if the questions would change. Instead of asking parents and non-parents whether they are happy right now, we might ask whether they are becoming more like the people they want to be. And then we might see children not as factors that may or may not be contributing to our happiness, but as opportunities to practice what most of us — perhaps me most of all — need to do more often, which is to put someone else before ourselves.

James Poulos at Ricochet:

The unique thing about children is that, at one and the same time, we both share our identity with them and don’t. In some ways, there’s no one more deeply ‘identical’ than you and your child. But in other ways, of course — marvelously awesome and frustrating ways — there’s no one more deeply different, precisely because your kid’s differences with you are so intimately connected to your own differences with him or her. That’s the amazing foundation of an astonishing kind of relationship. There’s nothing like it. Not even friendship compares.

In our broader relations with at first undifferentiated ‘others’, it makes us happy to develop friendships. There’s something inherent, I think, in the connection between friendship and happiness. A happy society is one where lots and lots of people are friends with each other — where there are ‘thick webs of social trust,’ as an academic might say. And yes, a happy family is one where relations are of a kind we’d describe in popular shorthand as ‘friendly’…but that’s not quite it. That’s not the full story, is it?

Happiness might not be beside the point of life. But the stubborn persistence of family leads me to believe that oftentimes we humans want, maybe desperately, maybe in spite of ourselves, something more than happiness. If we ignore this in our political life, we’re going to wind up with a system of laws and a power structure that cuts against the grain of that powerful human longing. And the costs of that might be very high indeed.

James Joyner:

Moreover, I’d argue that the definitions of “happiness” at work here are dubious.

My 17-month-old woke up a few minutes ago and interrupted my writing.  She does that kind of thing a lot.   Indeed, pretty much every morning.   And when she does, I have to stop what I’m doing, usually at an inopportune time.   And that makes me unhappy!

Is this momentary inconvenience outweighed by the joy she brings me?  Of course.

But having kids means constant diversion from doing what you want to be doing at any given moment.  And having multiple children, I’m reliably told, tends to increase that phenomenon geometrically.    Indeed, parents the world over agree:  Kids are a giant pain in the ass!

Those of us who are reasonably intelligent and had children by conscious decision knew all this going in.   Indeed, one of the amusing things about impending first-time fatherhood is the number of people who dispense the advice “It’ll change your life!”   But that doesn’t make the sacrifices and trade-offs less real.

While I’m a social scientist by training, I’m not a sociologist, much less steeped in the literature in question here.   But I don’t know that it’s possible to develop measures to quantify the thousands of instances of “unhappiness” that come from the annoyances of parenthood and the less frequent but far more potent joys.   And I certainly don’t think it’s possible to do it in a way that satisfies an economist’s notion of “happiness.”

UPDATE: Jennifer Senior in New York Magazine

Ezra Klein

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We’ve Been Hit By A Smooth, And Oily, Criminal

Image from Gawker

Giles Whittell, Robert Lea and Ian King at The Times:

BP’s future as a global concern was at stake tonight after the US Attorney General, announced that he was launching a criminal and a civil investigation into the Louisiana oil spill.

As Eric Holder made his announcement, the British company’s chief executive fought to halt a headlong slide in its stock price.

After losing a third of its value in just six weeks, BP is expected to promise shareholders their full annual dividend in a last-ditch bid to retain their loyalty. More than £12 billion was wiped off the company’s value today alone, as Mr Obama dispatched his top prosecutor to Louisiana and vowed to bring to justice those responsible for what he called “the greatest environmental disaster of its kind in our history”.

Shares in what used to be Britain’s biggest company endured their worst day’s trading in more than two decades, dragging down the FTSE 100 index and with it the value of dozens of leading pension funds.

In Washington, Mr Obama stepped up his efforts to assert control over the disaster response with his second televised address in less than a week. “If our laws have been broken leading to this death and destruction, my solemn pledge is that we will bring those responsible to justice on behalf of the victims of the catastrophe and the people of the Gulf region,” he said.

Mr Holder announced that he was launching a criminal and a civil investigation into the oil spill. Earlier, he met Louisiana law enforcement officials in New Orleans after ordering BP to preserve records that could shed light on what led to the disaster. He has also instructed US Department of Justice staff to look for evidence of “malfeasance” in the days and hours before the Deepwater Horizon rig blew up.

Gus Lubin at Business Insider:

Attorney General Eric Holder has launched a criminal and civil investigation into Deepwater Horizon. Although expected, this confirms the worst fears of BP CEO Tony Hayward and associated executives.

“If I were an exec at BP, I wouldn’t be sleeping for the next several years,” said Tony Buzbee, a trial lawyer who has faced BP in several cases.

Buzbee expects a federal criminal investigation to occur in secrecy over several years. The most likely charge is violation of the Clean Air and Water act, which could lead to one year in jail for persons deemed responsible.

Manslaughter charges are unlikely, as these fall outside the ambit of a federal prosecutor, according to Buzbee.

Matthew McDermott at Treehugger:

I can here the collective cry of ‘Right on!’ and ‘About effing time!’ rising up from the TreeHugger readership… CNN is reporting that US Attorney General Eric Holder has announced that the Justice Department has launched a criminal investigation into the Gulf Gusher. We’ll have more as it emerges, but this is what we know so far:

Holder said the investigation would be comprehensive and aggressive. He promised that the federal officials will prosecute anyone who broke the law. Holder, who made the announcement during a visit to the Gulf, called early signs of the spill heartbreaking and tragic. The attorney general was in the Gulf to survey the BP oil spill and meet with state attorneys general and federal prosecutors from Louisiana, Alabama and Mississippi, according to the Justice Department.

This all comes after a group of Senators sent Holder a letter last week urging an investigation of potential criminal and/or civil wrongdoing by BP; and statements by Holder last month that the Justice Department would “ensure that BP is held liable.”

Again, more as it emerges. It’s likely to take some time. Though hopefully not as long as it’s taking BP to stop this madness…

Andrew Leonard at Salon:

Some context for understanding possible points of interest for DoJ investigators comes from a preliminary report released last week by Robert Bea, the Director of UC Berkeley’s Catastrophic Risk Management Center: “Failures of the Deepwater Horizon Semi-Submersible Drilling Unit.” Bea’s report, which he describes as “preliminary insights … based upon more than 500 hours of analyses of currently available data provided by approximately 60 informants,” places joint responsibility for the disaster on both BP and the regulatory authority, MMS.

Here’s the most relevant excerpt:

  • Based on the information available to me thus far, I believe the Deepwater Horizon failure developed due to:
  • improper well design (configuration of well tubulars),
  • improper cement design and placement (segmented discontinuous cement sheath, minimal volume placed adjacent to lost circulation zone),
  • flawed Quality Assurance and Quality Control (QA / QC) — no cement bond logs, ineffective oversight of operations,
  • bad decision making — removing the pressure barrier — displacing the drilling mud with sea water 8,000 feet below the drill deck,
  • loss of situational awareness — early warning signs not properly detected, analyzed or corrected (repeated major gas kicks, lost drilling tools, including evidence of damaged parts of the Blow Out Preventer [BOP] during drilling and/or cementing, lost circulation, changes in mud volume and drill string weight),
  • improper operating procedures — premature off-loading of the drilling mud (weight material not available at critical time),
  • flawed design and maintenance of the final line of defense — including the shear rams of the Blow Out Preventer (BOP) and the associated electrical and hydraulic equipment.

I’m not sure at what point any of the multiple instances of BP incompetence cross the line into criminal malfeasance, but we will certainly be learning more about that in the weeks and  months to come. In the meantime, BP CEO Tony Hayward says: “I want my life back.” I don’t think he’s going to get it.

Annie Lowrey at The Washington Independent:

And Congress is starting to take a hard look at regulatory legislation surrounding the oil industry as well. Sen. Patrick Leahy (D-Vt.) said the Senate Judiciary Committee, which he heads, will hold a hearing next week “to examine how recent court decisions and federal liability caps influence corporate behavior, affect American taxpayers, and provide justice to victims.”

New laws are coming. One option would be to address the negative externality of cleanup costs: taxing all oil companies and processors in the United States, and forcing them to use the funds to explore new technologies to be used in the event of a disaster. For even if BP had managed to prevent the Deepwater Horizon incident, another catastrophic oil spill would have happened somewhere else, sometime soon. The technologies used to contain and clean up oil remain rudimentary and highly ineffective, particularly those used at sea — top kill, bags of hair, faulty seals. (Of all the well shut-down methods I have seen, it is distressing that the Russians’ controlled nuclear explosion has seemed most promising.) The next conflagration will take light at some point. It would be useful to force the companies at fault to invent the fire hydrant before then.

How to structure the tax? I leave it to the public policy experts to figure that out. But I would imagine either requiring oil companies’ U.S. subsidiaries to spend one or two percent of profits on cleanup and prevention research, then allowing them to license or sell their products to one another; or taxing the oil companies’ U.S. subsidiaries, putting the funds into a pool and having the government disburse the money to vetted research organizations.

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Here I Thought BP Just Had An Intense Case Of Gallows Humor

Capture from Huffington Post

Craig Kanalley at Huffington Post:

A fake BP Twitter account tweeting its “public relations” response to the oil spill now has five times more followers than the official BP Twitter feed, and it continues to grow.

Just today, @BPGlobalPR passed the 25,000-follower mark, compared to the less than the 5,000 accumulated by the real account @BP_America.

The @BPGlobalPR Twitter account gives users no indications it’s a fake account. Its bio reads, “This page exists to get BP’s message and mission statement out into the twitterverse!” and its location says “Global.”

But according to AdAge, BP officials are aware of the account, and so far have seen it as people’s right to express their opinions. Twitter is unlikely to take the account down without an objection from BP.

The account began on May 19 with this tweet: “We regretfully admit that something has happened off of the Gulf Coast. More to come.” It has enjoyed a boost in attention due to hundreds of retweets, including from celebrities.

Caroline McCarthy at Wired:

Update 4 p.m. PDT: Wired magazine writer Mat Honan outed Mike Monteiro as the author of @BP_America on Wednesday, which Monteiro initially denied via Twitter until he obliquely admitted it later in the day with an “I give up.” The headline of this story has been changed to reflect the update.

Along the beleaguered Gulf Coast, the emergency measure known as “top kill” appears to have halted the flow of oil from a ruptured offshore BP well–but the bogus Twitter sensation known as @BPGlobalPR continues to gush out black comedy gold.

“Just got the concession call from Exxon Valdez. They were great competitors and remarkably evil about everything,” the account, which claims to be written by the British oil giant’s public relations department, tweeted shortly after the unfortunate revelation that the recent Gulf Coast disaster had surpassed the 1989 Exxon Valdez oil spill in volume. “They want to fine us $4,300 for every barrel of oil spilled? Umm, we’re not spilling barrels, the oil is going directly into the gulf. DUH,” @BPGlobalPR asserted irreverently on Wednesday.

Chris in Paris at AmericaBlog:

I might add a few more.

A lot of people are asking if we could have prevented this mess. Honestly, we have no clue. Our hindsight is 20/80.

They want to fine us $4,300 for every barrel of oil spilled? Umm, we’re not spilling barrels, the oil is going directly into the gulf. DUH

Lots of people blaming this on Bush or Obama. Pph, we wish. The truth is Presidents don’t have any control over what we do.

Just saw new satellite images of the spill. Actually, it kinda looks like the Earth has a beauty mark! Ooolala!

Please help us with rebranding. We’re not calling it an “oil spill” anymore, now it’s a “Southern Fun Party”.

Bernhard Warner at Big Money:

What is really hard to understand is why BP, with its well-paid crisis PR team working round-the-clock, is allowing someone to completely hijack its message so thoroughly. What could it have done better? Well, for starters, it could have had its Twitter accounts “verified” so the public would know at least that its own tweets are legit and that others are not to be trusted. And BP has done nothing that we can see to distance itself from the fake tweeter. Not a single alert to say don’t trust the person behind the @BPGlobalPR curtain.

Maybe BP really doesn’t care.

Jen Doll at Village Voice:

Mark Smith of the Free Press says “BP has a strong case to ask Twitter to remove the account, which will surely happen any moment now. Take a look while the account is still valid; it won’t be around for much longer.”

Do, because fake BP Twitter is amusing. But what’s not amusing is that the leak is still going, and that no one seems to have more than the barest of inklings of how to actually fix it. (By the way, that hair boom thing didn’t work.) Oh, yeah, and BP has continued spraying the hilariously named but rather toxic chemical dispersant “Corexit” into the Gulf despite the EPA’s demand that they use something less toxic.

Andrew Leonard at Salon:

It must be more than a little crazy-making to watch people make mean jokes about your nonexistent attempt to quash a source of mean jokes about you. But BP is making the right call by not making a big deal of the parody. Social media networks are the adult playgrounds of the 21st century — better to let the masses let off steam there than, oh, filing class action suits, or chaining themselves to dead pelicans. Besides, the company obviously has more important things to focus on at the moment — the latest news from the New York Times suggests that the “top kill” effort to plug the leak isn’t working quite as well as some reports indicated earlier Thursday.

With each day that the leak continues, frustration swells, from the White House on down to the Twitter masses. But on Twitter, at least, there is some humor to be found, even if most of it is the same color as the oil.

UPDATE: Leroy Stick, the guy behind the twitter account

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Filed under Energy, Environment, New Media

K-Thug And The Kid

Andrew Ross Sorkin at Dealbook at NYT:

You may recall that during the most perilous months of 2008 and early 2009, there was a vigorous debate about how the government should fix the financial system. Some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.

They argued that Wall Street was occupied by the walking dead, and that no matter how much money we threw at the banks, they would eventually topple the system all over again and cause a domino effect worldwide.

So were they wrong after all?

Paul Krugman:

Andrew Ross Sorkin Owes Several People an Apology

I certainly never said anything like that, and I don’t think Nouriel did either. First of all, I never called for “nationalizing the entire banking system” — I wanted the government to take temporary full ownership of a few weak banks, mainly Citigroup and possibly B of A. I defy Sorkin to find any examples of me calling for a total takeover.

And the argument was never that “no matter how much money we threw at the banks, they would eventually topple the system all over again”. Again, where did I say that? The argument was always that if we were going to rescue the banks — and we were — taxpayers should get the potential upside as well as the potential downside.

If you want to say that the advocates of nationalization were excessively pessimistic about the prospects for a light-touch bank strategy, fine. But caricaturing their position, making it sound far more extreme than it actually was, is definitely not OK.

Jessica Pressler at New York Magazine:

As New York noted this past winter, Andrew Ross Sorkin is somewhat of a polarizing figure at the Times. A number of his fellow reporters are jealous of his success, unconvinced of his reportorial skills, and suspicious of his fawning attitude toward sources. And this morning, Sorkin made a new enemy at the Times, when in an amazingly credulous column (even for him) lauding the effectiveness of the bailout, he declared confidently that “some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.”

This did not please Krugman, who equally disdains imprecision and being referred to, even obliquely, as wrong. So the graybearded Times columnist did what he always does when he gets angry: He padded over to his computer and wrote a somewhat blistering rebuttal on his Times blog. The resulting post, unsubtly headlined “Andrew Ross Sorkin Owes Several People An Apology,” takes issue with Sorkin’s statement and makes clear that the person who is owed an apology is Krugman. “I certainly never said anything like that, and I don’t think Nouriel did either,” he wrote. “I never called for ‘nationalizing the entire banking system’ — I wanted the government to take temporary full ownership of a few weak banks, mainly Citigroup and possibly B of A.”

Joe Weisenthal at Clusterstock:

So did Krugman really want to nationalize all the banks?

No.

Here’s Krugman’s best defense, a post written on March 11, 2009, right at the bottom and in the fog of war.

John Hempton somewhat misunderstands my point, but that’s OK. I should have been clearer — and he and I actually seem to be mainly in agreement.

I was not saying “nationalize all the banks”; I was saying do what the Swedes did — in tandem with a guarantee on bank liabilities, take the banks with zero or negative capital into receivership. It’s really important that you do this: if you offer a blanket guarantee on the assets of a bank that’s already underwater, you (a) are very likely to take a large hit on taxpayers’ money, without any share in the upside (b) create a huge moral hazard/looting incentive.

Is he picking nits?

We don’t think so. Winding down banks that are technically insolvent is not the same thing as nationalizing all the banks.

Here’s another post where he’s saying that nationalization wouldn’t involve all the banks.

That being said, in retrospect, it’s hard to imagine this approach having worked any better than Geithner’s, given how surprisingly smooth things have gone.

So Sorkin’s critique of Krugman (and perhaps Roubini) is narrowly correct, if overstated.

SCORING: on February 1st, 2009, Krugman wrote:

If taxpayers are footing the bill for rescuing the banks, why shouldn’t they get ownership, at least until private buyers can be found? But the Obama administration appears to be tying itself in knots to avoid this outcome.

Later, on February 23, 2009, Krugman noted:

What Alan Greenspan, the former Federal Reserve chairman — and a staunch defender of free markets — actually said was, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” I agree.

And just how were Krugman’s views characterized by other publications back then? Two headlines:

“Paul Krugman: Nationalize the banks” – Pittsburgh Post-Gazette

“Obama Should Nationalize U.S. Banks, Krugman Says” – Bloomberg

As opposed to, say

“Paul Krugman: Temporarily Nationalize the banks” – Pittsburgh Post-Gazette

“Obama Should Temporarily Nationalize U.S. Banks, Krugman Says” – Bloomberg

See how one word changes everything?

The closest he might’ve come in context to noting something resembling Sorkin’s piece is this, from a March 2009 Newsweek profile of him:

Krugman’s suggestion that the government could take over the banking system is deeply impractical, Obama aides say. Krugman points to the example of Sweden, which nationalized its banks in the 1990s. But Sweden is tiny. The United States, with 8,000 banks, has a vastly more complex financial system. What’s more, the federal government does not have anywhere near the manpower or resources to take over the banking system.

But (1) that’s Sweden, not Switzerland, and (2) Newsweek doesn’t specify what kind of takeover he’s referring to in the piece, only writing about it in vague terms as a “takeover.”

Krugman, who apparently was always advocating the temporary takeover solution and he appears to be correct in having pimpslapped Sorkin earlier today.

DECISION: Krugman. To be fair, we didn’t look into what Nouriel Roubini might’ve said, but unless Sorkin comes up with something better on Krugman, in that respect, he was wrong. Not only was he wrong, but his attempt to shell-shock readers by calling someone out in his own building backfired, miserably, and in doing so, likely just threw his “haters” both in and outside of the Times some fuel for their fire.

We contacted both Times executive editor Bill Keller for quote on the matter, we didn’t hear back. New York Times spokesperson Robert “Call Me Bob” Christie declined to comment.

Felix Salmon

Hamilton Nolan at Gawker:

Big time beef at the New York Times! Paul Krugman, chief beard-wearing columnist, took to his blog to attack Andrew Ross Sorkin, chief young reporter who will one day be an investment banker. Krugman says Sorkin mischaracterized Krugman’s position in his column today. He says Sorkin “Owes several people an apology.” First and foremost, Paul Krugman! In any case, this simply must end in a celebrity boxing match, which we will be happy to set up guys, just let us know.

Sorkin responds to Krugman:

Dear Professor Krugman,

I read your blog post about my column in Tuesday’s newspaper.

As you know, I’m a big fan of yours. I just want to point to some of the source material I had consulted for the column.

You quoted part of my column that said, “Some economists, including Nouriel Roubini of New York University and The Times’s own Paul Krugman, declared that we should follow the example of the Swedes by nationalizing the entire banking system.”

On your blog, you wrote, “I certainly never said anything like that, and I don’t think Nouriel did either.”

Just so there is no confusion, I based that passage on what you and Mr. Roubini had said and written during the crisis about a Swedish-style nationalization of the banking system.

Mr. Roubini began an Op-Ed in The Washington Post by writing, “The U.S. banking system is close to being insolvent, and unless we want to become like Japan in the 1990s — or the United States in the 1930s — the only way to save it is to nationalize it.” Later in the piece, he added, “We believe that, if applied correctly, the Swedish solution will work here.”

On your blog on Sept. 28, 2008, after reading a piece by Brad DeLong, an economist, which you linked to, you wrote, “Brad DeLong says that Swedish-style temporary nationalization is the right answer to a financial crisis; he’s right.”

In your column on Feb. 23, 2009, you asked, “Why not just go ahead and nationalize? Remember, the longer we live with zombie banks, the harder it will be to end the economic crisis.”

I appreciate that you may have articulated the details of your views differently, or more specifically, in other columns and forums.  And I appreciate that you could quibble with my words. But I do think it is clear that both you and Mr. Roubini had pressed for a Swedish-style nationalization. (By the way, at the time, I had thought the Swedish model was a pretty interesting approach, too.)

Again, I love reading your column and the bailouts are certainly an issue that is the subject of much debate.

Best,

Andrew

Andrew Leonard at Salon:

Now, I’m pretty sure Krugman doesn’t need my help in a duel-to-the-death, but I went and read the full text of both columns Sorkin linked to. And in both cases the authors make it explicitly clear that when they say “nationalization” they are talking about temporarily putting only specific insolvent banks into receivership. Sure, you can cherry pick a sentence from the lead paragraph and ignore the lengthy explication that comes afterward, but excuse me for my naive impertinence: I expect better from a New York Times reporter.

Krugman:

How would nationalization take place? All the administration has to do is take its own planned “stress test” for major banks seriously, and not hide the results when a bank fails the test, making a takeover necessary. Yes, the whole thing would have a Claude Rains feel to it, as a government that has been propping up banks for months declares itself shocked, shocked at the miserable state of their balance sheets. But that’s O.K.

And once again, long-term government ownership isn’t the goal: like the small banks seized by the F.D.I.C. every week, major banks would be returned to private control as soon as possible. The finance blog Calculated Risk suggests that instead of calling the process nationalization, we should call it “preprivatization.”

It is of course true that Krugman advocated a more forceful approach to the banking system than that ultimately chosen by the White House. History has yet to rule on whether the Obama administration will get away with the path of least aggressiveness. It would not have taken much rewriting of Sorkin’s original column to make his same point. But Sorkin was sloppy, and made a factually incorrect claim that Krugman had recommended “nationalizing the entire banking system.”

Hey, no big deal. People make mistakes like that all the time. But when called on it, proper form demands that you admit what you got wrong. The classic formulation for this might be something along the lines of “My statement that Krugman demanded the complete nationalization of every bank in the United States was inartful, but my main point still holds.”

Instead, Sorkin dug in and cited evidence that proved his opponent’s point. And careless sloppiness suddenly becomes willful disingenuousness.

Clark Hoyt, NYT’s Public Editor:

I am not an economist or a business writer, but I have always understood nationalization to be a government takeover, not guarantees to creditors.

Sorkin did not address Krugman’s contention that he misstated Krugman’s reason for supporting the nationalization of some banks. Krugman has had “20 reasons,” Sorkin said.

Andrew Rosenthal, the editorial page editor, who is in charge of the Op-Ed page, where Krugman’s column appears, said, “Paul does not favor a Swedish-style nationalization of the banking system because they would fail no matter how much government threw at them. He never did.”

Bill Keller, the executive editor, who has responsibility for the Business section, where Sorkin works, said he had not reviewed the record, but if Sorkin got it wrong, “he – and we – should correct it, of course.”

Krugman and Sorkin told me that they talked Thursday. Sorkin said the conversation was “very cordial.” Krugman called it “not much fun.” They agreed that they disagree on the definition of nationalization.

I think the right thing to do is to simply acknowledge that, in trying to quickly summarize Krugman’s nuanced position, Sorkin over-simplified and got it wrong. Krugman did not call for the nationalization of the entire banking system, and, unless Sorkin can produce a citation to the contrary, he did not say it was necessary because otherwise the banks would fail again and cause a worldwide domino effect.

Sorkin said he is going back to his editors to discuss whether some sort of clarification is needed.

Maureen O’Connor at Gawker:

The winner is Nobel-winning economist and crotchety columnist Paul Krugman. The loser is Dealbook wunderkind Andrew Ross Sorkin, who got a slap on the wrist in today’s New York Times Corrections page.Lest you forget (or didn’t bother to follow this feud in the first place) Sorkin said Krugman is dumb because he wanted to nationalize the U.S. banking system, so Krugman said am not and did not, but Sorkin said yuh-huh you did because Krugman’s position was the temporary nationalization of banks, but Sorkin thought he meant nationalize forever. Anyway, mom finally stepped in to settle this fight once and for all. And it’s Professor Krugman for the win! In a Times correction dated April 17, 2010:

The DealBook column on Tuesday, about the possibility of the government’s making a profit on its bailout of banks, overstated the position of the economists Paul Krugman and Nouriel Roubini, at the height of the financial crisis, on nationalizing banks. While both supported guaranteeing the liabilities of the banking industry and a temporary government takeover of certain failing institutions, they did not recommend nationalization of the entire banking system. (Go to Article)

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Evidence Of Inflation Unseen

Michael Kinsley in The Atlantic:

In short, I can’t help feeling that the gold bugs are right. No, I’m not stashing gold bars under my bed. But that’s only because I lack the courage of my convictions.

My fear is not the result of economic analysis. It’s more from the realm of psychology. I mean mine. The last time I wrote about this subject, The Atlantic’s own Clive Crook called me a “fiscal sado-conservative.” I would put it differently (you won’t be surprised to hear). Maybe, at least on economic matters, I’m a puritan. The recession we’ve been going through did not occur for no reason. Even though serious misbehavior by the finance industry triggered it, sooner or later it was bound to happen. For a generation—since shortly after Volcker saved the country, and except for a brief period of surpluses under Bill Clinton—we partied on borrowed money. We watched a real-estate bubble get larger and larger, knowing but not acknowledging that it had to burst. Then it did burst, and George W. Bush slunk off to Texas, leaving Barack Obama to clean up the mess. Obama has done the right things, mostly, pushing through a huge stimulus package and bailing out a few big corporations and banks. Krugman says we need yet another dose of stimulus, and maybe he’s right.

But this cure has been one ice-cream sundae after another. It can’t be that easy, can it? The puritan in me says that there has to be some pain. That’s not to say that there hasn’t been plenty of economic pain. But that pain has come from the recession itself, not the cure.

My specific concern is nothing original: it’s just the national debt. Yawn and turn the page here if you’d like. We talk now of trillions, not yesterday’s hundreds of billions. It’s not Obama’s fault. He did what he had to do. However, Obama is president, and Democrats do control Congress. So it’s their responsibility, even if it’s not their fault. And no one in a position to act has proposed a realistic way out of this debt, not even in theory. The Republicans haven’t. The Obama administration hasn’t. Come to think of it, even Paul Krugman hasn’t. Presidential adviser David Axelrod, writing in The Washington Post, says that Obama has instructed his agency heads to go through the budget “page by page, line by line, to eliminate what we don’t need to help pay for what we do.” So they’ve had more than a year and haven’t yet discovered the line in the budget reading “Stuff We Don’t Need, $3.2 trillion.”

There is a way out. It’s called inflation. In 1979, for example, the government ran a deficit of more than $40 billion—about $118 billion in today’s money. The national debt stood at about $830 billion at year’s end. But because of 13.3 percent inflation, that $830 billion was worth what only $732 billion would have been worth at the beginning of the year. In effect, the government ran up $40 billion in new debts but inflated away almost $100 billion and ended up with a national debt smaller in real terms than what it started with. Ten percent inflation for five years (if that were possible) would erode the value of our projected debt nicely—but along with it, the value of non-indexed pensions, people’s savings, and so on. The Federal Reserve is independent, but Congress and the White House have ways to pressure the Fed. Actually, just spending all this money we don’t have is one good way.

Compared with raising taxes or cutting spending, just letting inflation do the dirty work sounds easy. It will be a terrible temptation, and Obama’s historic reputation (not to mention the welfare of the nation) will depend on whether he succumbs. Or so I fear. So who are you going to believe? Me? Or virtually every leading economist across the political spectrum? Even I know the sensible answer to that.

And yet …

Matthew Continetti at The Weekly Standard:

Welcome to the team! Slight addendum: Contrary to Kinsley, one guy has put out a way to get out from under the national debt (though right now he might not be in “a position to act”).

Brad DeLong:

If Kinsley seriously believes that inflation is on the way, he and his wife could take their entire household portfolio and go short 20-year Treasury bonds @4.43% and long 20-year TIPS @2.11%. Each year over the next 20 that inflation is above 2.32% they make money.

I’m not one who pledges to always believe that markets have gotten it right. But I do believe that someone who doesn’t think that market prices are aggregating information needs to tell a story about why markets have gotten it wrong before they set pen to paper.

That is all.

Derek Thompson at The Atlantic:

First, inflation doesn’t just chew up the debt. It also swallows the value of non-inflation-indexed savings. For savings tied to inflation, like Social Security, inflation would in nominal terms cost tax payers more money down the line.

Second, inflation at a level high enough to quickly reduce fiscal deficits could spiral out of control back home. If you’re setting prices in an economy where future prices are expected to rise, your temptation is to set prices higher. In this way, inflationary expectations can outrun the Fed’s target.

Third, there’s a decent chance that inflation won’t actually reduce our deficit in the first place. If inflation begins to creep up, investors will demand higher interest rates on US debt to beat expected inflation in the future. As Anne Vorce, director for the Fiscal Roadmap Project of the Committee for a Responsible Federal Budget at the New America Foundation, told me this morning, “Our creditors would go nuts. The Chinese premier specifically said he was concerned about inflation in our debt. Inflation is tempting in the short run. In the middle or long it has costs.”

Matthew Yglesias:

So neither leading economists nor Michael Kinsley himself believe that hyperinflation is just around the corner, and yet the thesis of Kinsley’s piece is that “when and if the recession is well and truly over, there is a serious danger of another round of vicious inflation” and that “[t]his time, inflation will be a lot harder to stop before it turns into hyperinflation.”

I note that not only does Kinsley’s column explicitly discuss the lack of evidence for Kinsley’s thesis, but it also details the theoretical error Kinsley is making—thinking too moralistically about the economy. He says “on economic matters, I’m a puritan.” And also that “The recession we’ve been going through did not occur for no reason.” He feels, metaphorically speaking, that it was sent by God to punish us for our overindulgence. And that while we’ve had plenty of economic pain over the past 24 months, that’s not enough: “that pain has come from the recession itself, not the cure.” Kinsley’s view is that recovery has to come with some episode of ritual purging and mass suffering over and above the suffering caused directly by the recession. In his view, a greater punishment must be over the horizon for the sake of the moral order. And since recession is, by his lights, not enough the only other economic calamity on the menu is inflation. And so, he deduces, we must be heading for inflation, even though he himself recognizes the reasoning as so specious that he won’t use it as the basis for investment decisions.

Andrew Leonard at Salon:

Matthew Yglesias does such a scintillating job of eviscerating Michael Kinsley’s bizarre hyperinflation hyperventilation in the April issue of The Atlantic that it would be unsportsmanlike to pile on and offer my own line-by-line exegesis of his confounding nervous-nellyism. I’ll just note that it requires some very clever rhetoric to explain how you can’t sleep at night because of your inflation fears, even as you acknowledge that there is no evidence that your nightmare is something to worry about right now, and all the economists you respect don’t see it as a significant problem. Kinsley is a heck of a writer, but he’s not that good.

Paul Krugman:

Hyperinflation is actually a quite well understood phenomenon, and its causes aren’t especially controversial among economists. It’s basically about revenue: when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press, trying to extract large amounts of seignorage — revenue from money creation. This leads to inflation, which leads people to hold down their cash holdings, which means that the printing presses have to run faster to buy the same amount of resources, and so on.

The kind of inflation we had in the 1970s, the famous era of stagflation — high inflation combined with high unemployment — was quite different. Deficits weren’t the issue — actually, US deficits were much smaller in the inflationary 70s than in the disinflationary 80s. Instead, what you had was a combination of excessively expansionary monetary policies, based on an unrealistic view of how low the unemployment rate could be pushed without causing accelerating inflation (the NAIRU), plus oil shocks that pushed up inflation across the board thanks to widespread cost-of-living clauses in contracts. There was never any risk of hyperinflation; the only question was whether and when we’d be willing to pay the price in high unemployment of bringing inflation back down.

Kinsley seems to be confusing the logic of the natural rate argument, which says that expected inflation gets built into price-setting, so you need an accelerating inflation rate to keep unemployment below the NAIRU, with the very different logic of hyperinflation, which is about people fleeing money.

Brian Doherty at Reason:

Those with reasonable doubts as to the stability of this whole freakin’ system are in the unenviable position of, if struggling to be “prudent,” making lots of big decisions that are going to seem really short-sighted, depending on whether or not things go seriously awry. That is, going gold will make you either King of the World or the nuttiest of chumps. Well, that’s what hedging is all about, I suppose, but most hedging is done within the ol’ dominant paradigm. Gold seems more like a “all bets are off” bet.

Kevin Drum:

I’m going to defend Kinsley a bit. One reason is that although he freely talks about the inner demons that prompted his heresy, he does, in fact, also offer up a concrete reason for his fears: “My specific concern is nothing original: it’s just the national debt….We talk now of trillions, not yesterday’s hundreds of billions.” This is not a completely nonsensical concern, even if it would be better expressed as a percent of GDP rather than in raw dollars. What’s more, if Kinsley had wanted to write something a little more sophisticated, he could have spent some time on the Fed’s likely problems unwinding its trillion dollar balance sheet over the coming years, something that has at least the potential for sparking inflationary pressures if it isn’t timed pretty delicately.

But that’s not the real reason for defending Kinsley. The real reason is this: I sort of agree with him. Is it because we were both around for the 70s and remember what happened then? Maybe, though Paul Krugman and Brad DeLong were around then too and they’re not worried. And intellectually, like Kinsley, I agree with them: inflation just doesn’t seem like a big issue right now. But what about a few years from now? It really does look as if our political system is going to find it next to impossible to control our long-term federal deficit, and at the same time the dollar is going to have to come down in value eventually. Both of these things, along with the Fed’s operations, pose inflationary potential. And I have a fairly healthy respect for the proposition that if the Fed loses its reputation as an inflationary hawk, it’s much harder to get back than you might think.

So here’s the question: if all the people you respect say that inflation isn’t a big issue; if all the market evidence points toward moderate inflationary expectations; and if your fears of inflation are almost certainly grounded in demons from your youth — if all that’s true, but you still feel the fear anyway, what should you do? Nothing? Or should you write about it, being honest along the way about what’s driving you?

UPDATE: Kinsley responds to Krugman:

Krugman says that I mistakenly conflate inflation and hyperinflation, although “textbook economics…makes a real distinction” between the two. I will confess that I was not aware of this distinction. I thought hyperinflation was inflation out-of-control. Mea culpa. However:

(1) Krugman should stop bullying people with accusations of economic ignorance. I would never pretend to know a tenth of economics Paul knows. But if he means, in calling this distinction a matter of “textbook economics [subtext: you idiot],” that economic textbooks make this distinction, he is wrong. Or at least no such distinction between inflation and hyperinflation is made, despite an extensive discussion of inflation, in the leading economics textbook, by Harvard Professor Gregory Mankiw.

(2) Krugman’s definition of hyperinflation–“when governments can’t either raise taxes or borrow to pay for their spending, they sometimes turn to the printing press”–is more or less precisely what I wrote that I was afraid of. I suppose there’s a difference between the government printing money to pay off its debts (Krugman’s definition) and the government printing money to reduce the real value of its debts (my fear). But not much of one.

(3) Krugman, Brad DeLong, Matt Yglesias and others make the point that there is no current economic evidence of inflation on on the horizon. I conceded as much in the original piece. But using Krugman’s definition, hyperinflation is the result of explicit policy choices by public officials. There is a “real distinction” between this and inflation ordinaire, which results naturally from the interplay of economic forces. Therefore, the fact that there is no sign of inflation today says very little about whether there may be hyperinflation tomorrow.There are reasons to worry that our political leaders may opt for inflation even if there is no economic evidence of it happening naturally. (Of course the interplay of economic forces can force the hand of public officials. But if we go down this road, we are muddying that key distinction between hyperinflation and inflation.)

I have been waiting for Paul Krugman to tell me how we are going to handle the debt, once we get this recession out of the way. No, really. There’s no economist whose judgment I trust more. (About economics, that is.) I’ve been all for the stimulus and the jobs bill and even, I guess, the sundry bailouts. But don’t we at some point have to start paying the money back? And how are we going to do that? Krugman’s failure (unless I’ve missed it) to give us an answer to that question is one of the things that makes me worry.

Ryan Avent at Free Exchange at The Economist:

Contra Mr Kinsley, there is a massive difference between printing money to pay off debts and printing money to erode the real value of debt. In the immediate postwar period, America experienced annual rates of inflation up to 10%, which eroded the value of America’s war debt by some 40%. Hyperinflation was never a problem. And there is a big difference between governments that are reluctant to opt for painful budget fixes and governments that absolutely cannot do it. Moreover, the pain of hyperinflation is every bit as bad as and worse than the pain of tax increases, or spending cuts, or default. No politician would risk it, and even if the politicians were willing to, America’s independent Fed wouldn’t let them.

The truth about hyperinflation is that it isn’t so much an economic phenomenon as a political one; it corresponds to the complete breakdown of a country’s political institutions. It is no coincidence that episodes of hyperinflation are typically associated with very poor developing nations, those exiting major conflicts, and those suffering from other major economic dislocations (like the end of Communism).

To get from America’s current situation to one in which hyperinflation is a realistic possibility, one must pass through an intervening step in which America’s political institutions utterly collapse. And I submit that if Mr Kinsley has reason to believe that such a collapse is imminent, he should be writing columns warning about that rather than the economic messes which might follow.

Felix Salmon:

The logic here is that simply running large fiscal deficits is an “explicit policy choice” by officials who “opt for inflation”. Just by spending money, the government is pressuring the Fed to, um, what, exactly? Keep interest rates too low? Print money?It’s true that the Fed isn’t looking particularly independent these days, but that’s largely because inflation isn’t a problem, and therefore the Fed is rightly concentrating on the second part of its dual mandate, which is reducing unemployment through loose monetary policy. Fiscal policy and monetary policy should both be pulling in the same direction right now — which is the direction of trying to extricate the country from the deepest recession in living memory.

It’s also hard to see the dynamics by which hyperinflation — or even plain old ordinary high inflation, for that matter — could emerge. If there’s a panicked run away from the dollar and dollar-denominated assets, that would hurt both the stock market and the bond market, hitting wealth hard. It would also send the cost of imports up. But the US doesn’t import so much that import-price inflation would pass through into domestic hyperinflation. And with the markets in turmoil, weak unions, and unemployment surely rising, I don’t think that workers would be in any position to ask for double-digit wage increases on an annual basis. In any case, to have any hyperinflation you need a maniac helming the printing press, and Ben Bernanke is not a maniac. Yes, he’s expanded the money supply significantly, but only when disinflation was the greatest risk facing the economy. It’s almost impossible to imagine the Fed continuing to print money once consumer prices start rising sharply on Main Street — and, frankly, it’s hard to imagine the Obama administration putting pressure on the Fed to do so.

As Krugman notes, it’s instructive to take a hard look at Japan, which ran enormous deficits for many years and which still has no sign of any inflation any time soon. Deficits, in and of themselves, do not cause inflation. And while Kinsley is right that there’s no obvious way out of America’s current fiscal problems, he’s wrong that politicians can simply choose inflation as an option. Just as the Treasury secretary does not control the value of the dollar, the president does not control the trajectory of consumer prices. So in order for his fears about hyperinflation to be remotely justified, Kinsley first has to explain how the Fed is going to transmogrify into the Reserve Bank of Zimbabwe. And he hasn’t come close to doing that.

(h/t Sullivan)

UPDATE: Paul Krugman responds

UPDATE #2: Kinsley again

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And Who Will Sandra Bullock Play In The Movie?

Michael Lewis has a new book, The Big Short. Lewis on The Daily Show here.

Paul Smalera at The Big Money:

I am angry, outraged, and bitter. What I got from Michael Lewis was more like bemused, resigned, and weary.

Bemused, in that the pre-eminent American “industry” of the last 40 years, finance, is full of people, much like Lewis, an Ivy League art history major who wanted mostly, as he admits in Liar’s Poker, to get rich. They are pedigreed, and despite little to no initial understanding of finance, they work their ways into controlling the highest levers of capitalism. And the handful of them who seem to understand the mechanisms best are not running the financial casino but instead scheming to find out how the game can be gamed. It’s the Wall Street equivalent of counting cards in blackjack.

Resigned, in that even when the system woke up to its own massive mistakes on subprime in early 2008 and momentarily seized up, the only possible course of action was for it to creak back to life and continue the march to its demise, having identified another sucker (AIG) to assume some of the massive, synthetic risk it had created. These instruments were designed to act like a video-game cheat code entered into our economy, breaking all the rules of financial physics in order to rake up the highest possible score. The system had no way to process that the higher the score became, the faster it was actually racing toward a kill screen, a glitch in the matrix. One that only the government, the god of our financial video game, er, system, would be able to fix.

And weary. Lewis again confronts the inexorable fact that pursuit of profit is the only thing that ever changes the way business gets done on the Street. This is the sole reason for advances in the scale and scope by which money can be made since his departure from Wall Street more than 20 years ago. Social benefit, advancement of public good, and/or true innovation is not enough, as Lewis repeatedly laments in the text. Any regulation that limits profiteering will always be smeared by Wall Street as a frontal attack on the ability of all America to prosper. (Public statements and evidence to the contrary notwithstanding.)

Felix Salmon:

The Big Short is not the story of the crisis, as the crisis is commonly understood. The failure of Lehman brothers and of Fannie Mae and Freddie Mac; the stock-market crash; the bail-out of Detroit; the fevered all-nighters pulled at Treasury and the New York Fed; the fears that the entire global financial system was on the brink of collapse — little if any of that is in this book.

Instead, Lewis has found a different story — one which he started mining for a spectacular cover story in the December 2007 issue of Portfolio magazine, and which has culminated in this book, over two years later. It’s the story of what used to be called the “subprime crisis” before it metastasized into something much larger and more dangerous than that. And it’s also, like all Michael Lewis tales, a human story, which takes us deep inside unique characters like Steve Eisman and Mike Burry.

On the face of it, there’s almost nothing sympathetic about these men. Their social skills are all but nonexistent; they live in a world of arcane financial analysis which might as well be a different planet for all that it has any bearing on the way that most of us live our lives; and they made their outsize profits by wagering hundreds of millions of dollars on the proposition that Americans across the country would end up being thrown out of their homes after they found themselves unable to make their mortgage payments.

What these men did was not “socially useless,” to quote the chairman of the UK’s Financial Services Authority, Lord Turner. It was worse than that: it was actively harmful, since they provided the fuel which kept the subprime mortgage furnace burning even when the country was running out of new junk mortgages to write. In most financial markets, bearish bets act as a dampener; in this one, they were a necessary part of the subprime-mortgage machine, and a Deutsche Bank mortgage trader named Greg Lippmann ended up making billions of dollars for his employer — not to mention a $50 million bonus for himself — by aggressively going out and finding fund managers to put on the short bets needed to keep the market ticking. (This is the same Lippmann who, when accused of being a “Chicken Little” responded by saying “Fuck you, I’m short your house.”)

But Lewis has a soft spot for these misfits — fund managers who stumbled into the bond market from careers making bets on stocks, who suffered ridicule and ostracism even from their own investors before their bets paid off, and who he has now chosen to immortalize in print as the few clear-eyed men in a world of deluded bankers and investors.

At the same time, Lewis aims both barrels at the ratings agencies, happily quoting someone describing the staff there as “basically like brain-dead.” He also sets up a hapless fund manager named Wing Chau as a major villain for taking the long side of the bet and making millions of dollars by doing so, despite being spectacularly wrong.

The result is a rollicking narrative: a tale of beleaguered little guys betting against monster banks and fund managers, and, in the end, winning. (Lewis barely mentions the biggest and most famous of the shorts, John Paulson and Andrew Lahde, perhaps because they were too rich and successful to begin with.)

Tyler Cowen:

In terms of policy, Lewis attaches great weight to the fact that the major investment banks became publicly-traded companies rather than partnerships.  I liked the stories and much of the inside scoop, but it didn’t have the giddy fun of Liar’s Poker or Moneyball nor did it have the analysis of some other books.

Andrew Leonard at Salon:

There are passages in “The Big Short” that get seriously wonky — where most writers would be content to simply talk in generalities about “slicing and dicing up risk” — but Lewis makes a game effort to communicate the nitty-gritty of how the structured finance con game actually worked. It can be intimidating, but if you stick with it the end result is devastating.

Lewis does not attempt to explicitly resolve some of the bigger questions as to how it was possible for Wall Street to run so far off the tracks. If you’re looking to plug “The Big Short” neatly into a political narrative you may find it wanting. By now everyone has chosen their own favorite villain — some blame the dismantling of regulatory oversight, others point at government efforts to boost lower-class home ownership. Everybody’s mad at housing speculators and people who take out loans that they can’t afford. The ratings agencies, regulators, mortgage lenders and banks all clearly failed us.

It’s quite the toxic stew. But sitting at the center of the spider’s web are the investment banks — Goldman Sachs, Morgan Stanley, Merrill Lynch, Deutsche Bank, Bear Stearns, Lehman Brothers. These banks were not creating complex derivatives tied to subprime mortgages because of government policy pushing homeownership or because individual homeowners were irresponsibly prone to lying about their income. Far from it; these banks had discovered that billions of dollars could be made transforming lousy mortgage loans into securities supposedly safe enough that they could be sold to pension funds or anyone else. So they had a huge financial incentive to encourage the creation of even more crappy loans.

And even then, there wasn’t enough raw product! The hunger for garbage that could be turned into gold was beyond anything the craziest real estate markets in California or Arizona or Florida or Nevada could provide. The smart brains at Goldman Sachs found many innovative ways to get around this obstacle, to the point of taking the collateralized debt obligations that already, uh, sliced and diced subprime bonds, and reslicing those into synthetic CDOs that were even further removed from actual humans living in real houses.

And even that wasn’t enough, so they created a superstructure of credit default insurance swaps to buy and sell, ostensibly to protect against the possibility that their synthetic CDO or subprime mortgage bond might collapse, but really, just to have another way to make another speculative bet, in a world where there actually were physical limits to how many real mortgages could be created.

It all adds up to an extraordinary demonstration of how markets can fail disastrously. The tragedy, however, is that we appear, as a society, not to have learned anything lasting from this debacle. The most depressing part of “The Big Short” is realizing that now, more than a year into a new presidential administration, we have done nothing substantive to prevent a similar mess from occurring again in the future. The investment banks are minting money again, while millions of Americans have lost their jobs and their homes.

Janet Tavakoli at Huffington Post:

I was in the Salomon Brothers’ 1985 training class that Michael Lewis lampooned in his amusing book, Liar’s Poker. Imagine my surprise to see him billed as a trader on 60 Minutes, since he was actually a junior salesman. Well-heeled male peacocks strutted the trading floor, and junior salesmen were girlie-men, mere eunuchs serving their pashas.

Michael hit the roof when I ribbed him about the mischaracterization.* Yet, in January 2007 he didn’t spare the “wimps, ninnies, and pointless skeptics” at Davos. I wasn’t at Davos (Michael wasn’t either), but he derided people who staked their reputations–as I staked mine–on the fact that the financial system was in peril. One might think he’d have a thicker skin, when turnabout was fairplay and truth was his casualty.

[…]

Michael had it wrong in more than one profound way. The markets weren’t just “mispricing risk,” those in-the-know were manipulating prices–covering up malfeasance and losses. Meanwhile, some members of the fourth estate used their pernicious pens as pawns in the cover-up.

All of the legacy investment banks enabled predatory lending, yet they now perpetrate what Elizabeth Warren calls the “myth of the immoral debtor.” Wall Street banks were the key architects of the financial meltdown. The Fed provided cheap money, but irresponsible financiers exploited it. Banks massively over-borrowed, their agents extracted billions in bonuses, and now they blame hard-working taxpayers. These predators call this “God’s work,’ while most of the media covers-up for them.

Peter Lattman at WSJ:

Deal Journal has yet to read “The Big Short,” Michael Lewis’s yarn on the financial crisis that hit stores today. We did, however, read his acknowledgments, where Lewis praises “A.K. Barnett-Hart, a Harvard undergraduate who had just  written a thesis about the market for subprime mortgage-backed CDOs that remains more interesting than any single piece of Wall Street research on the subject.”

While unsure if we can stomach yet another book on the crisis, a killer thesis on the topic? Now that piqued our curiosity. We tracked down Barnett-Hart, a 24-year-old financial analyst at a large New York investment bank. She met us for coffee last week to discuss her thesis, “The Story of the CDO Market Meltdown: An Empirical Analysis.” Handed in a year ago this week at the depths of the market collapse, the paper was awarded summa cum laude and won virtually every thesis honor, including the Harvard Hoopes Prize for outstanding scholarly work.

Last October, Barnett-Hart, already pulling all-nighters at the bank (we agreed to not name her employer), received a call from Lewis, who had heard about her thesis from a Harvard doctoral student. Lewis was blown away.

“It was a classic example of the innocent going to Wall Street and asking the right questions,” said Mr. Lewis, who in his 20s wrote “Liar’s Poker,” considered a defining book on Wall Street culture. “Her thesis shows there were ways to discover things that everyone should have wanted to know. That it took a 22-year-old Harvard student to find them out is just outrageous.”

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