Tag Archives: Wall Street Pit

Reading Is Fundamental, Mr. Krugman

Paul Krugman:

A followup on the post about mostly economics reading; on politics, culture, etc. there are other blogs I read fairly often. On politics, Greg Sargent, Josh Marshall, Digby, and I still get a kick out of Atrios, who gets to use all the words I can’t. And I’m a big fan of the folks at Crooked Timber.

Some have asked if there aren’t conservative sites I read regularly. Well, no. I will read anything I’ve been informed about that’s either interesting or revealing; but I don’t know of any economics or politics sites on that side that regularly provide analysis or information I need to take seriously. I know we’re supposed to pretend that both sides always have a point; but the truth is that most of the time they don’t. The parties are not equally irresponsible; Rachel Maddow isn’t Glenn Beck; and a conservative blog, almost by definition, is a blog written by someone who chooses not to notice that asymmetry. And life is short …

Mark Hemingway at The Weekly Standard:

Bear in mind that this paragraph comes right after Krugman lists a lot of perfectly respectable (though shamelessly ideological and hyperbolic) liberal blogs.

So in other words, if you’re reading this you’re probably more informed than at least one Nobel Prize Winner.

Scott Sumner at Wall Street Pit:

That’s right, and George Will isn’t Michael Moore; and a liberal blog, almost by definition, is a blog written by someone who chooses not to notice that asymmetry.  No need to read Marginal Revolution, Becker/Posner, Econlog, John Taylor, Greg Mankiw, Robin Hanson, Steven Landsburg, etc, etc.  Nothing of interest, just move right along folks.  I’m always amazed when someone so brilliant can be so clueless about life.  How someone can reach middle age and still live in a kindergartener’s world of good guys and bad guys.

Perhaps if Krugman would get out a bit more he might make fewer embarrassing errors,  like this one, where he forgot the fallacy of composition, something taught in EC101.  I guess none of his liberal friends have the nerve to point out these sorts of silly errors.  So it’s still there, uncorrected after two weeks.  A monument to his pride at being ignorant of the views of those with whom he disagrees.

You might ask whether I’m being a bit harsh calling him “ignorant.”  Actually, he’s the one who proudly flaunts his ignorance of conservative thought.

I find that reading good liberal blogs like Krugman, DeLong, Thoma, Yglesias, etc, sharpens my arguments.  It forces me to reconsider things I took for granted.  I’d guess that when Krugman tells people at cocktail parties that the post-1980 trend of lower tax rates, deregulation, and privatization was a plot devised by racist Republicans, they all nod their heads in agreement.  If he occasionally read a conservative blog he might learn that all those trends occurred in almost every country throughout the world after 1980, usually much more so than in the US.

I wonder if his blanket condemnation of reading conservative outlets would include books that attack silly liberal arguments for protectionism.  Or articles that show the folly of liberal opposition to sweatshops.  Are those conservative ideas also no longer worth reading?

Kevin Drum:

The problem is sort of a Catch-22: reading the loony tunes blogs isn’t worthwhile except for entertainment value, so I mostly don’t bother. Conversely, the more moderate types have interesting things to say, but they’re so out of touch with mainstream conservatism that they often don’t seem worthwhile engaging with either. I mean, what’s the point in arguing over some technocratic point that’s a million light years away from the views of actual, existing conservatism, which doesn’t yet admit that cutting taxes reduces revenues or spewing carbon into the air heats the globe? It all has a very ivory tower feel to it.I’ll go on reading the non-insane conservatives, because (a) it’s worth having my views challenged by smart people and (b) you never know: maybe someday the tea party version of conservatism will collapse and the moderates will regain a bit of power. That sure seems like a pipe dream right now, though.

James Joyner:

This is a recurring theme and, while I certainly read plenty of conservative pundits–and, indeed, still consider myself one–like Kevin, I read fewer than I used to. I prefer rational, facts-based analysis and find more of it across the aisle than on my own side.

Partly, it’s a function of the fact that academics and policy wonks with strong academic backgrounds are more likely to produce the kind of writing I find interesting and those groups tilt to the leeward side. But I’m not the only conservative who has noticed that even mainstream journals on the right have gone crazy. And the David Frums, Bruce Bartletts, and Daniel Larisons have largely been written off as RINOs angling for invites to liberal cocktail parties.

Are the rational conservatives simply being outshouted? Out-promoted? Or are there just too few to matter anymore?

Leave a comment

Filed under Mainstream, New Media

No Telethon, No Tweetathon, No Nothing

Max Fisher at The Atlantic with the round-up. Fisher:

The United Nations has warned that the biggest challenge in the ongoing relief efforts for the millions displaced by flooding in Pakistan is the lack of money and supplies. Over a million Pakistanis lack even a tent to sleep in, and as many as 13.8 million have no access to clean drinking water, threatening outbreaks of serious diseases such as cholera, particularly among children. In the wake of the earthquake in Haiti, agencies and individuals around the world were far more generous, donating $1 billion USD within days. Why has the world been so much more sparing with Pakistan?

Colum Lynch at Foreign Policy:

Pakistan’s Foreign Minister Shah Mehmood Qureshi presented the U.N.’s members with a stark challenge: Help Pakistan recover from its most devastating natural disaster in modern history or run the risk of surrendering a key front in the war on terror.

“This disaster has hit us hard at a time, and in areas, where we are in the midst of fighting a war against extremists and terrorists,” Qureshi warned foreign delegates, including U.S. Secretary of State Hillary Rodham Clinton, at a U.N. donor’s conference on the Pakistani flood. “If we fail, it could undermine the hard won gains made by the government in our difficult and painful war against terrorism. We cannot allow this catastrophe to become an opportunity for the terrorists.”

Qureshi provided one of his darkest assessments to date of the political, economic and security  costs of Pakistan’s floods, which have placed more than 20 million people in need of assistance, destroyed more than 900,000 homes and created financial losses of over $43 billion. “We are the people that the international community looks towards, as a bulwark against terrorism and extremism,” he said, adding that Pakistan “now looks towards the international community to show a similar determination and humanity in our hour of need.”

The blunt speech was part of a broader effort by Pakistan, the United Nations, the United States and its military allies in the region to goad the international community into stepping up funding for the relief effort, which has been severely underfunded. U.S. Secretary of State Hillary Rodham Clinton pledged an additional $60 million to the U.N. flood relief in Pakistan, bringing the total U.S. contribution to $150 million. Britain’s development minister, Andrew Mitchell, pledged an additional $33 million, saying that the pace of funding for has been “woefully inadequate.”

Tunku Varadarajan at Daily Beast:

All of this leads me to offer a few socio-cultural and political observations on the floods in Pakistan, and their possible consequences.

1. An obvious reason why so little private money has flowed to Pakistan from the West, and from America in particular, is the absence of Christian charities working in Pakistan. In the event of a natural (or other) disaster abroad, American Christians are the most generous donors of aid: Witness the response, for example, to the earthquake in Haiti. “Americans who practice their faith”—and an overwhelming majority are Christian—“give and volunteer far more than Americans who practice less or not at all,” says Arthur Brooks, the author of Who Really Cares. These Christian Americans often take their cue from their churches; but if these institutions have little or no presence in Pakistan (as they don’t in most radical Islamic countries), a reliable and generous conduit for charitable donation is, quite simply, missing altogether.

2. But what of the “ummah,” the Muslim brotherhood of nations, whose people have given virtually nothing to Pakistan in its time of despair? According to The New York Times, “although the disaster has fallen in the Muslim holy month of Ramadan, when charity is considered a duty, Muslim states have donated virtually nothing via the United Nations and relatively small sums on their own.” One is hardly surprised: Most Islamic charitable giving is ideo-theological, designed to consolidate the Muslim faith, particularly in its Wahhabi manifestation. If money is given to alleviate poverty or distress, it is most often given in the donors’ own neighborhood, and almost always with ideological strings attached.

3. By far the biggest giver of emergency succor to Pakistan is the U.S. One trusts that the Muslim world, as slow to give aid to its brethren in Pakistan as it is reliably unhesitating when it comes time to anathematize America, is paying heed to the immense American contribution. And yet, radical Islamist sections of the Pakistani media have been deranged enough to blame the floods on manipulations of weather patterns by the U.S.

Daniyal Noorani at Huffington Post:

The US media is at least partly to blame for the lack of response from the US public. Instead of spotlighting the plight of the Pakistani people, the media have been focused on how Islamist organizations are stepping in to fill the void in the relief efforts. Their performance is all the more disappointing when compared with the inspiring media campaigns waged to raise awareness – and funds – for victims of other, recent natural disasters.

Take, for example, media coverage of the Haiti earthquake, which set a gold standard in how the media can really drive fundraising efforts. The call-a-thons, TV commercials, and extensive use of social media to drive outreach allowed relief organizations to raise some $1.3 billion in donations. Given the magnitude of the Pakistani floods, it is shocking that similar efforts are not being undertaken on behalf of victims there.

The lackadaisical response is also in part due to the lack of organization among members of the Pakistani diaspora.  Instead of reaching out to the general public, the diaspora has kept its fundraising efforts narrowly focused on the Pakistan-American community. This is a mistake. Now is the time for Pakistani-Americans to step up, get organized, and channel the generosity of their fellow Americans in support of their compatriots back home. And it wouldn’t hurt to have a Pakistani Wyclef Jean: someone visible to champion the cause and raise awareness. Media indifference to the situation in Pakistan – and the Pakistani diaspora’s failure to get its act together in this grave time – cannot persist.

Of course, the ultimate responsibility for helping Pakistanis rests with the Pakistani government. But the US does have a golden chance to kill two birds with one stone. Americans can help out the victims of one of largest natural disasters in recent history and in the process change Pakistanis’ perception of the United States in the long term – something that the US has been struggling to do for many years.

Robert Reich at Wall Street Pit:

This is a human disaster.

It’s also a frightening opening for the Taliban.

Yet so far only a trickle of aid has gotten through. As of today (Thursday), the U.S. has pledged $150 million, along with 12 helicopters to take food and material to the victims. (Other rich nations have offered even less – the U.K., $48.5 million; Japan, $10 million, and France, a measly $1 million. Today (Thursday), Hillary Clinton is speaking at the UN, seeking more.)

This is bizarre and shameful. We’re spending over $100 billion this year on military maneuvers to defeat the Taliban in Pakistan and neighboring Afghanistan. Over 200 helicopters are deployed in that effort. And we’re spending $2 billion in military aid to Pakistan.

More must be done for flood victims, immediately.

Beyond helping to prevent mass disease and starvation we’ll also need to help Pakistan rebuild. Half of the nation’s people depend on agriculture for their livelihood, and a large portion of the nation’s crops and agricultural land have been destroyed. Roads, bridges, railways, and irrigation systems have been wiped out.

Last year, Congress agreed to a $7.5 billion civilian aid package to Pakistan to build roads, bridges, and schools. That should be quadrupled.

While they’re at it, Congress should remove all tariffs on textiles and clothing from Pakistan. Textiles and clothing are half Pakistan’s exports. More than half of all Pakistanis are employed growing cotton, weaving it into cloth, or cutting and sewing it into clothing. In the months and years ahead, Pakistan will have to rely ever more on these exports.

Yet we impose a 17 percent tariff on textiles and clothing from Pakistan. If we removed it, Pakistan’s exports would surge $5 billion annually. That would boost the wages of millions there.

That tariff also artificially raises the price of the clothing and textiles you and I buy. How many American jobs do we protect by this absurdity? Almost none. Instead, we’ve been importing more textiles and clothing from China and other East Asian nations. China subsidizes its exports with an artificially-low currency.

If you’re not moved by the scale of the disaster and its aftermath, consider that our future security is inextricably bound up with the future for Pakistan. Of 175 million Pakistanis, some 100 million are under age 25. In the years ahead they’ll either opt for gainful employment or, in its absence, may choose Islamic extremism.

We are already in a war for their hearts and minds, as well as those of young people throughout the Muslim world.

Stephen Walt at Foreign Policy:

As everyone knows, the United States is widely despised among broad swathes of Pakistani society.  Some of this hostility is unmerited, but some of it is a direct result of misguided U.S. policies going back many decades.  As the U.S. experience with Indonesia following the 2004 Asian tsunami demonstrated, however, a prompt and generous relief effort could have a marked positive effects on Pakistani attitudes.  Such a shift could undermine support for extremist groups and make it easier for the Pakistani government to crack down on them later on.  It is also the right thing to do, and the U.S. military is actually pretty good at organizing such efforts.

The United States has so far pledged some $76 million dollars in relief aid, and has sent 19 helicopters to help ferry relief supplies.  That’s all well and good, but notice that the U.S. government sent nearly $1 billion in aid in response to the tsunami, and we are currently spending roughly $100 billion annually trying to defeat the Taliban.  More to the point, bear in mind that the United States currently has some over 200 helicopters deployed in Afghanistan (and most reports suggest that we could actually use a lot more).

So imagine what we might be able to do to help stranded Pakistanis if we weren’t bogged down in a costly and seemingly open-ended counterinsurgency war, and didn’t have all those military assets (and money) already tied up there?   It’s entirely possible that we could do more to help suffering individuals, and more to advance our own interests in the region, if some of these military assets weren’t already committed.

Of course, Obama didn’t know that there would be catastrophic flooding in Pakistan when he decided to escalate and prolong the Afghan campaign.  But that’s just the point: when national leaders make or escalate a particular strategic commitment, they are not just determining what the country is going to do, they are also determining other things that that they won’t be able to do (or at least won’t be able to do as well).

Thus, another good argument for a more restrained grand strategy is that it might free up the resources that would allow us do some real good in the world, whenever unfortunate surprises occur.   As they always will.

UPDATE:  Doug Mataconis

Reihan Salam

UPDATE #2: More Fisher at The Atlantic


Filed under Af/Pak, Natural Disasters

And The Silver Medal Goes To China… Or Does It?

Heather Horn at The Atlantic with the round-up

Ryan Avent at DiA at The Economist:

CHINA has, at long last, surpassed Japan in terms of nominal GDP, making the Chinese economy the world’s second largest. Second quarter output in China came in at $1.337 trillion, to Japan’s $1.288 trillion (Japan’s output was larger in the first quarter; for comparison, America’s second quarter nominal output was $3.522 trillion). The shift is sure to be widely discussed and widely misinterpreted. There are a few key things to mention.

First, while Chinese growth has been truly impressive in recent decades, the rapid overtaking of the Japanese economy also reflects years of disappointing growth there. This story is as much about Japan’s travails (and the risk to other rich economies facing a descent into Japanese-style stagnation) as it is China’s boom.

Second, China remains a very poor country in per capita terms. It uses over four times as many citizens as America to produce less than half America’s output. That’s a bit misleading—urban productivity in China doesn’t lag America by quite as much but is offset by the limited growth contribution of China’s hundreds of millions of rural poor. Still, the total output figures encourage observers to vastly overstate the developmental level of the Chinese economy.

Joshua Keating at Foreign Policy:

The world economy reached a major milestone Monday when China officially became the world’s second-largest economy, displacing Japan, which has held the title for more than four decades. The recognition of China’s new status came after the Japanese government reported that, after a quarter of slow economic growth, the country’s annual gross domestic product (GDP) was estimated to be around $1.28 trillion, slightly below China’s $1.33 trillion. Do all countries use the same method for estimating GDP?

They’re supposed to. The System of National Accounts (SNA), a set of guidelines developed jointly by the United Nations, the European Commission, the International Monetary Fund (IMF), the Organization for Economic Co-operation and Development, and the World Bank, specifies the methods by which countries measure the size of their economies.

There are two main methods for estimating GDP. One involves looking at production. This includes the value of the goods produced by all the firms in the country, the added value of government work projects, and — particularly in developing countries — the value of goods produced for personal consumption, like the crops grown by subsistence farmers. Not all wealth counts toward GDP. For instance, if you build a new house, that’s considered value added to the economy.  If a pre-existing house increases in value, the owner may be better off, but the country’s GDP is unaffected. Of course, companies often have a vested interest in exaggerating their profits, so reliable figures can sometimes be tough to calculate.

The other method of calculating GDP involves measuring total consumption of products by a country’s population. Since it relies mostly on household surveys, this method also has flaws. People tend to underreport the amount they spend on alcohol and cigarettes, for instance. But hopefully, the two measures should come up with close to the same number and when the results from the two approaches are compiled, they should give you a pretty good idea of the size of a country’s economy.


But for most countries, there’s no international legal authority to ensure that statistical offices are following the SNA guidelines, and international economists largely have to rely on self-reported numbers. While no one’s disputing China’s new status, the country has often been suspected of cooking its books. Although China is not a member of the OECD, it does cooperate with the organization in producing statistics according to the SNA guidelines.

Those guidelines are updated every few years. The most recent edition, which was made in 2008 and has so far only been implemented by Australia, was revised so that a firm’s investments in research and development are considered added value. This means that as the new standard is implemented worldwide over the next four years or so, many countries will see their GDP numbers increase by as much as 1 percent. That’s one way to stimulate growth.

Joe Weisenthal at Business Insider:

Let’s just put some of today’s headlines about Japan’s GDP being surpassed by Chinese GDP in perspective.

In the quarter, Japan had economic output of $1.28 trillion, or $10,085 per capital, based on a population of 127 million.


It had economic output of $1.337 trillion for the quarter, but a population of about $1.3 billion, so per-capita output of… $1000, about a 1/10th as big.

Let us know when China passes Albania.

Derek Scissors at Heritage:

It’s true that simple GDP does matter. The increasing size of China’s economy means the entire world is now affected by its voracious demand for oil, iron ore, and other commodities, as well as its low-cost supply of consumer electronics, clothing, and other goods.

But for successful economic development, what matters far more is the wealth of individuals and families. Japanese economic weakness is not shown in its still impressive 3rd place in world GDP but in its roughly 40th place on measures of personal income. From an economy once thought better managed and better performing than the U.S., the average citizen of Japan is now poorer than the average citizen of Mississippi. American citizens are noticeably richer than citizens of most other developed countries, such as in the EU. But Japan, in particular, is moving backward.

In contrast to Japan’s 20 years of weakness, there has been stunning growth in Chinese GDP per capita for 30 years. Yet China is still a developing economy. Chinese GDP per capita, even adjusted for purchasing power, is about 15 percent the level of the U.S. Further, GDP per capita actually exaggerates China’s performance.

The PRC’s incomplete data revisions undermine comparisons but, from the middle of 2000 to the middle of 2010, GDP per capita increased by more than 9500 yuan or, at present exchange rates, another $2800 in annual income. However, urban disposable income increased less than 6800 yuan, or about $2000 in annual income. And rural income increased less than 2000 yuan, or $600 in annual income.

Razib Khan at Discover

Robert Reich at Wall Street Pit:

Think of China as a giant production machine that’s growing 10 percent a year (this year, somewhat less). The machine sucks in more and more raw materials and components from rest of world – it’s now the world’s #1 buyer of iron ore and copper, and close to the #1 importer of crude oil – and spews out a growing mountain of stuff, along with huge environmental problems.

But because the Chinese consume a smaller and smaller proportion of this stuff, it has to be exported to consumers elsewhere (Europe, North America, Japan) to keep the Chinese working. Much of the money China earns by selling it around the world is reinvested in factories, roads, trains, and power plants that enlarge China’s capacity to produce far more. Another big portion is lent to or invested in the rest of the world (helping to finance America’s budget deficit at very low cost).

But this can’t go on. China’s workers won’t allow it. Workers in other nations who are losing their jobs won’t allow it, either.

The answer is not simply more labor agitation in China or an upward revaluation of China’s currency relative to the dollar. The problem is bigger. All over the world, we’re witnessing a growing gap between production and consumption, while the environment continues to degrade. The Chinese machine is fast heading for a breakdown only because it’s growing fastest.

Leave a comment

Filed under China

Uh… They’re Number One?

Frank James at NPR:

The U.S. is no longer the single largest consumer of the world’s energy resources. That distinction now goes to China, according to the International Energy Agency.

The IEA says that according to an analysis of its data for 2009, China, with a population of 1.33 billion compared with the U.S.’s 310.2 million, has outstripped the U.S.

It’s been known for some day that this day would come. But it happened faster than was forecast because China was hurt less by the global recession than the U.S.

Nicholas Deleon at Crunch Gear:

The actual numbers are pretty impressive, particularly when you consider that a mere 10 years ago China was quite a bit behind the U.S.

China consumed some 2,252 millions tons of the oil equivalent of sources such as coal, nuclear power, natural gas, and hydropower. The U.S. consumed 4 percent less. These are numbers from last year, by the way.

But that’s where energy efficiency comes into play. Since the year 2000, the U.S. has increased its energy efficiency by about 2.5 percent annually. China? 1.8 percent. So not a huge difference, but a difference nonetheless.

Does this really mean anything to you? Eh, maybe. Certainly it’ll have implications for the world at large though. Now that China is the biggest consumer of energy, it alone is in the position to tell energy providers, “Look, we’re willing to pay X for Y units of energy.” If China’s X is bigger than the U.S.’s X, then we may be looking at a situation where energy prices will go up simply because “someone else” is willing to pay more.

Which could mean that all the factories that produce all the lovely electronic gizmos we talk about day in, day out, could see their costs of doing business go up. And who would make up the difference? Yes, you!

Then again, it could have the very opposite effect, and end up lowering prices.

Mark Wilson at Gizmodo:

A different metric? Three years ago, China was the world’s biggest exporter of coal. Now it’s the leading importer. And last year, for the first time ever, Saudi Arabia sold more oil to China than the US.

Given that China’s consumption will give them more negotiation power in the world’s power market, it may be a good time to buck our trend of a mere 2.5% energy efficiency increase per year.

Frank Holmes at Wall Street Pit:

While most, if not all, had predicted China would become the world’s largest energy user, many didn’t think it was going to happen for another five years. China’s rise to the top can largely be attributed to a decline in energy usage in the U.S. China’s 2009 energy usage was below that of the U.S. from 2004-2008, before the financial crisis.

In fact, just ten years ago China’s energy consumption was less than half that of the U.S., according to the Wall Street Journal. The U.S. remains the biggest energy consumer on a per capita basis, the IEA economist said, consuming three times more per citizen than China. The U.S. also consumes more than twice the amount of oil that China does in a day.

But like most things with China, that statistic won’t last long. The IEA reported in last year’s World Energy Outlook that China and India will represent more than half of all incremental demand increases by 2030.

Well aware of the global politics of energy, the Chinese government was quick to dismiss the story as an overestimation by the IEA. Probably not the last time we’ll see modesty from Beijing as the country continues to put “world’s largest” in front of more and more resources.

Paul Denlinger at Forbes:

This is why the Chinese government has chosen to invest in developing new green energy technology.

The country is very fortunate in that most of the discovered deposits of rare earths used in the development of new technologies are found in China. While these deposits are very valuable, up until recently, the industry has not been regulated much by the Chinese central government. But now that Beijing is aware of their importance and value, it has come under much closer scrutiny. For one, Beijing wants to consolidate the industry and lower energy waste and environmental damage. (Ironically, the rare earth mining business is one of the most energy-wasteful and highly polluting industries around. Think Chinese coal mining with acid.)

At the same time, Beijing wants to cut back rare earth exports to the rest of the world, instead encouraging domestic production into wind and solar products for export around the world. With patents on the new technology used in manufacturing, China would control the intellectual property and licensing on the products that would be used all over the world. If Beijing is able to do this, it would control the next generation of energy products used by the world for the next century.

1 Comment

Filed under China, Energy

” Take A Load Off Fannie, Take A Load For Free, Take A Load Off Fannie, And You Put The Load Right On Me”

Lorraine Woellert and John Gittelsohn at Bloomberg:

The cost of fixing Fannie Mae and Freddie Mac, the mortgage companies that last year bought or guaranteed three-quarters of all U.S. home loans, will be at least $160 billion and could grow to as much as $1 trillion after the biggest bailout in American history.

Fannie and Freddie, now 80 percent owned by U.S. taxpayers, already have drawn $145 billion from an unlimited line of government credit granted to ensure that home buyers can get loans while the private housing-finance industry is moribund. That surpasses the amount spent on rescues of American International Group Inc., General Motors Co. or Citigroup Inc., which have begun repaying their debts.

“It is the mother of all bailouts,” said Edward Pinto, a former chief credit officer at Fannie Mae, who is now a consultant to the mortgage-finance industry.

Daniel Foster at The Corner:

You’d think reversing the thrusters and getting us away from the event horizon of this fiscal black hole would be higher-up on the list congressional priorities than telling Macy’s how much it can charge you to use your debit card, wouldn’t you? Well, you’d be wrong. The Goldman-Sachs endorsed Dodd Bill barely lays a finger on the GSEs (though, if you’re lucky, maybe the newly-created consumer protection agency will send you a little pamphlet outlining the risks of investing in the housing sector).

But hey, thank Kevin for giving us a little perspective here. That $1 trillion is little more than a rounding error against the figure of our total public debt.

Matt Welch at Reason

James Poulos at Ricochet:

One treeeeeeelion dollars. It’s one thing for a government to spend more money than we have. It’s another to spend more than we can imagine. Cross that threshold, and people will start to ask: how imaginary is the value of this unimaginable amount of money?

Rod Dreher

Mike Shedlock at Howe Street:

The amazing thing to me is the credit given to Bernanke for doing nothing but kicking the can down the road. We had an easy chance to do the right thing which was to make the Fannie and Freddie bondholders share in the pain.

Instead, Bernanke, Congress, and the Treasury collectively forced broke taxpayers to bail out wealthy bondholders. Now Bernanke is scrambling for an exit and praying for a miracle, but no exit or miracle will be found.

How the hell can Fannie and Freddie pay a 10 percent annual dividend on the shares owned by taxpayers when they are losing billions of dollars a year? Secondly, can the Fed unload the $trillion in Fannie and Freddie debt on its balance sheet without disrupting the market?

What can’t happen, won’t happen.

Meanwhile, Congress, the Fed, and the Obama administration all foolishly wants to “support” housing although we have more houses sitting vacant than anyone knows what to do with. To top it off, FHA Volume is Sign of ‘Very Sick System’; Fannie, Freddie, FHA Account for 90% of Mortgage Market

Without government guarantees, there would be no mortgage market. With government guarantees taxpayer losses mount by the minute. … And supposedly Bernanke is a genius for this setup.

Scott Sumner at Wall Street Pit:

We could pump up the economy through monetary policy, or we can have Fannie and Freddie continue to throw $100s of billions down the drain, socialize the auto industry, extend unemployment benefits to 99 weeks, etc.  And if that isn’t enough there are also calls to move away from free trade policies.  And then there’s the higher taxes we’ll pay in the future to cover the costs of debts run up in a futile attempt to stimulate the economy.

Just as in the 1930s, the right seems to have decided that a little bit of socialism is better than a little bit of inflation.  What do I mean by a little bit of inflation?  I mean enough so that the post-September 2008 trend rate of inflation is the same as the pre-September 2008 trend rate of inflation.  Apparently even that little bit of inflation is more distasteful than massive government intervention in the economy.

And the irony is that many of the policies I describe, such are Fannie and Freddie propping up the housing market, unemployment insurance extensions, and trade barriers, are themselves slightly inflationary.  But they don’t just raise the price level, they also cause all sorts of distortions—they move prices away from their free market equilibrium.   (I’m looking at you Morgan.)

The even greater irony is that this isn’t even one of those pick your poison cases.  The inflation I am calling for would be nothing more than a continuation of the inflation that occurred in the previous two decades.  We’d want it even if we hadn’t had a housing crisis and recession.  I don’t recall conservatives complaining loudly that 2% inflation was a disaster when Clinton was president.  So why the sudden and hysterical opposition to 2% inflation?  Is that really a fate worse than socialism?


Just to get serious for a moment; when I get upset at “Those People,” I am thinking about the Congressmen who created Fannie, Freddie and the CRA.  And yes, I know that the CRA was only a minor factor in the crisis, but everyday it becomes clearer that Washington’s attempts to enlist Fannie and Freddie into their crusade to make every American a homeowner lies at the center of this crisis.  Indeed the misdeeds of the “too-big-to-fail” banks (and their associated bailout with TARP funds), now comes in a distance third (or fourth if you include the Fed), far less costly to taxpayers than even the misbehavior of smaller banks that exploited the incompetence of the FDIC.

The experts say we can’t eliminate F&F right now, and I suppose they are right.  But only because we don”t have a monetary policy that stabilizes NGDP growth expectations.

Leave a comment

Filed under Economics, The Crisis

Bailouts Now, Bailouts Never, Bailouts Later, Bailouts Forever

C.S. McCoy at Redstate:

The Dems will be able to tap into voter anger at the banks and will argue that they’re preventing the next crisis, all while framing Republicans as the bankster’s evil cronies.  Conservatives, of course, know better.  Each financial reform bill coming down the pipeline adds more layers to the existing bureaucracy.  We can expect higher bank fees, decreased and more expensive access to credit for individuals and businesses of all sizes, and of course, a future crisis brought on by an unforeseen side-effect of the proposed legislation.

Real reform involves fixing the perverse incentive structures in the current system.  The moral hazard created by various Federal Reserve initiatives, aspects of the FDIC, and whatever goodies are offered up by whatever Goldman Sachs alum-turned-bureaucrat is in a position of power at a given time each contributed to the financial crisis.  And of course, let’s not forget Freddie, Fannie, affirmative-action lending, and similar pieces of legislation that set the housing market on a one-way path to bubble city.

Unfortunately, given the political realities in DC, there may not be much that conservatives can do to transform the current bills into positive legislation.  At this point, we must focus instead on minimizing not only the economic consequences but also the political damage that we could very well incur should we appear to be on the wrong side of the fight over financial reform.  This issue could very well blunt some of our momentum going into November, and given the importance of retaking the House to prevent funding of various health care initiatives, fighting the tax increases that the Dems will offer up to conquer mounting deficits, and controlling the narrative for the 2012 election, that is simply a chance we cannot take.

This fight has been framed terribly for Republicans.  The Democratic aide in the above quote has it exactly right.  Already this battle has been described as the consumer vs Wall Street bankers, and we’re poised to appear to be fighting on the side of one of the least popular groups in America.  Fortunately, one thing more unpopular than Wall Street is bailing out Wall Street.  And fortunately (from a political standpoint), each of the proposed bills has a mechanism to entrench the Federal bailout trough.  Republicans must play up this aspect of the legislation to have any hope of turning this fight into a win.

And we need to start by referring to it simply as the “Bailout Bill.”  “Financial Reform” has a positive connotation, when none is deserved for the proposed bills.  Additionally, “Bailout Bill” does a considerably better job actually describing the legislation.  Regardless of whether or not one has been following this debate, does the term “Financial Reform” actually make it clear what the bill entails?  No, but the term “Bailout Bill” makes it quite clear.  Let’s face it, the Republican leadership in the Senate isn’t exactly the most charismatic bunch.  Do we really want to see them on TV droning on about the intricacies of what’s wrong with the “Financial Reform” legislation?  No, the typical viewer most likely neither cares nor is knowledgeable enough to accurately assess Mitch McConnell’s criticisms.  Boehner, Pence, and Ryan would do a better job, but nevertheless, the topic isn’t particularly engaging.  The term “Bailout Bill” delivers the message to the viewer in a clear and concise manner.

On top of that, it throws the Dems’ attempts to appear to be combating “special interests” right back in their faces.  Regardless of your opinion of Ron Paul, he brought up a great point this weekend when he referred to Obama as a “corporatist” (although the other part of his statement was wrong…Obama has shown both corporatist and socialist tendencies).  We need to harp on about how this “Bailout Bill” will forever put taxpayers on the hook for Wall Street’s misdeeds.  The public already knows that Democrats have been handing out goodies to special interests: auto companies, big Pharma, unions, and even the insurance companies.  Let’s hammer it home.  The Dems of course will respond that Wall Street will actually be the ones paying for the bailouts since special taxes on the banks will go into a bailout trust fund.  This may be true, but it requires that the public trust that these funds won’t get looted in the future, something with which Washington doesn’t exactly have a stellar track record (see: social security).  Additionally, as seen during the health care debate, the more that proponents of the legislation have to defend its complex and unpopular components, the more difficulty they will have selling the entire package.

Brian Beutler at TPM:

About a week or two. That’s how long Republicans have to decide how they ultimately want to play their hand on financial regulatory reform. According to numerous Democratic aides and key senators, the GOP will either have to join forces with Democrats on a bill that hews very much to the White House’s demands, or they’ll have to do their best to block a bill that enjoys wide popularity. But as much as Democrats want to change the rules that govern Wall Street quickly and smoothly, they also love the politics of moving the bill forward without GOP support and letting Republicans publicly justify their decision to protect hated financial institutions from the regulations they oppose.

“We are ready to go forward. The bill’s ready…if I have to go it alone, I’ll go it alone…. I’m ready to go to the floor tomorrow if they want.” said Senate Banking Committee Chairman Chris Dodd last night, after a brief meeting with his counterpart, Sen. Richard Shelby (R-AL).

Aides go further, admitting that they’d relish the prospect of putting Republicans on the side of big banks in opposition to reg reform.

In stark contrast to their approach to the year-long fight over health care reform, Democrats now say broad bipartisan agreement isn’t worth it if it sucks up too much time, and needlessly weakens the bill.

“Having an agreement that at the end of the day would largely have no teeth…would be a sham,” DSCC chair Robert Menendez told reporters yesterday, off the Senate floor. “If you just want bipartisanship for a figleaf, I think that would be a huge mistake on a policy basis, and a huge political mistake as well.”

“This is not going to be a repetition of the health care [debate],” Dodd said last night. “That was one of the biggest mistakes ever made, in my view–people waiting around, praying and hoping, day to day, that someone might show up and be supportive of the view.”

Christopher Buckley at The Daily Beast:

Senator McConnell, whose facial opacity amounts to a kind of poker-face magnificence, sallied forth to the microphones outside the White House to denounce the bill as a means of perpetuating federal bailouts of too-big financial institutions. The bill’s defenders rushed to the same microphones to proclaim that in fact, it does the exact opposite. There’s rather a lot of… swing between those two positions. The two top headlines Wednesday on Realclearpolitics.com were a study in Washington yin and yang:

“Financial Reform Bill Ends Bailouts.” Sen. Dodd

“Dodd Bill Institutionalizes Wall Street Bailouts.” Sen. McConnell

Perhaps between now and the November elections, one of these interpretations will emerge as the true one. In the meantime, as Bette Davis used to say, fasten your seatbelts. It’s going to be a bumpy summer and fall.

Edmund L. Andrews at Wall Street Pit:

When Mitch McConnell charged that the Senate Democrats’ bill to reform financial regulation would lead to “more bailouts” for Wall Street, I could almost imagine how GOP word-smiths had racked their brains for ways to spin the effort.

Here was a bill aimed at clamping down on the rapacious mortgages and wanton risk-taking by Wall Street firms that nearly destroyed the financial system and led to huge bailouts. It would be hard to find groups that are more detested by voters — including populist Tea Partiers and End-the-Fed supporters of Ron Paul — than big banks and Wall Street.

GOP leaders know exactly why they oppose the bill: it’s a Democratic bill. Full-stop. But will that fly with ordinary voters? Do red-state conservatives hate derivatives regulation even more than they hate Wall Street greed, trillion-dollar bailouts and all the bad things that led to the epic meltdown? Doubtful.

That’s why McConnell’s attack was so clever. He appeared to be on the ramparts fighting Wall Street rather than helping Wall Street firms avoid all the things they hate: a consumer protection agency, regulated trading for credit default swaps and new levies on the banks to pay for past and future calamities.

Is McConnell right? Let’s nip this in the bud.

It is true that the Senate bill would require financial institutions to put up $50 billion to deal with possible future meltdowns. It is also true that federal regulators would have new “resolution authority” to shut down failing institutions in an orderly way.

But those are very different things from pre-authorizing future bailouts. The recent bailouts kept zombie banks and AIG alive, because both the Bush administration and the Federal Reserve correctly feared that their collapse would set of a chain-reaction of failure. The bailouts were necessary because the government didn’t have the authority to shut the companies down in a orderly way.

One big example: Fed and Treasury officials didn’t have the legal power to force creditors of AIG and others to take haircuts. They had two stark alternatives: push the companies bankruptcy, let them default on hundreds of billions worth of obligations and let the chips fall where they may; or prop them up, bail out the creditors and hope taxpayers would get their money back after the crisis.

The new resolution authority would give the government new powers to take over and shut down failing giants. That is quite different from bailing out a bank and keeping it alive.

James Gattuso at Heritage:

President Obama met today with members of Congress to jawbone them on the pending financial reform bill. A key part of his message: “we must end taxpayer bailouts.” Few statements are less controversial than that. Nobody wants to see more bailouts.

But wait a second. Doesn’t the very legislation he’s plumping for — and which will soon be voted on in the Senate — itself provides for bailouts. When asked that by a reporter just before the meeting, the President hedged, saying only “…I am absolutely confident that the bill that emerges is going to be a bill that prevents bailouts. That’s the goal.”

Well, that goal, as it turns out, only survives up to page 134 of the 1,334 page Senate bill. On that page begins a section entitled “Funding for Orderly Liquidation.” The text reads that the Federal Deposit Insurance Corporation, the designated federal receiver for failing financial firms, “may make available…funds for the orderly liquidation of [a] covered financial institution.”

Where are those funds to come from? Well, on page 272 the bill creates an “Orderly Resolution Fund” within the U.S. Treasury. The target size of this fund? Fifty billlion dollars.

That sure looks like a bailout fund. Yet, the bill’s supporters deny it. Elizabeth Warren, a leading proponent of the plan, calls the idea that it perpetuates bailouts “just nuts.”

The argument is that no funds could be provided to to compensate a firm’s shareholders. They would be forced to bear the cost of a firm’s failure, so it’s true they they aren’t being bailed out. But the failing firm’s other creditors would be eligible for a cash bailout. The situation is much like the scheme implemented for AIG in 2008, in which the largest beneficiaries weren’t stockholders, but rather other creditors, including foreign firms such as Deutsche Bank. Hardly a model to be emulated.

The second line of defense is that, bailout or not, the funds are to come from fees on big banks, not from taxes. But that’s a distinction without a difference — whether it’s called a fee or a tax, the effect is the same. And the fact that it will be paid by “big banks” is hardly cause for relief. Like other taxes, these would certainly be passed on to consumers, who would ultimately pay the tab.

Peter Wallison at American Enterprise Institute:

Does the bill, as McConnell has said, provide for permanent bailouts? Yes, again without question. The administration and the Democrats, especially Dodd, seem wounded by this suggestion. To them it seems obvious that this can’t be true. Why, they protest, the bill says that these firms have to be wound down, not bailed out. But why then is there a $50 billion fund set up to assist this wind down? In his statement yesterday on the Senate floor, in which he said the opposition had used “falsehoods” to oppose his bill, Dodd said: “And middle class families on Main Street won’t have to pay a penny: the largest Wall Street firms will have to put up money for a $50 billion fund to cover the costs of liquidating the failed financial firm.” The costs of liquidating the failed financial firm? What might those costs be?

The answer is that the $50 billion will be used to pay off the creditors, so that the market’s fear of a general collapse will be allayed. Remember, the theory under which the administration and Dodd are operating is that the failure of one of these large companies will cause a systemic breakdown or instability in the economy. The way to avoid that is to assure the market—in other words the creditors—that they will be paid. Otherwise, they will run from the failing company, and every other company similarly situated. That act—paying off the creditors when the government takes over a failing firm—is a bailout. It doesn’t matter that the management lose their jobs, or that the shareholders get nothing. When the creditors are aware that they will get a better deal with the failure of a large company than they will get with a small one that goes the ordinary route to bankruptcy, that is a bailout. And the signal it sends to the market is the most dangerous part of this bailout, because it tells the market that creditors will be taking less risk when they lend to small companies than if they lend to large ones, and this—as noted above—will simply provide the credit advantages to large companies that will not be available to small companies. Again, like too big to fail, this will distort and suppress competition in financial markets.

Michael Barone at Human Events

Ezra Klein:

In negotiations stretching from the spring of 2009 to February of 2010, Sens. Bob Corker (R-Tenn.) and Mark Warner (D-Va.) worked together to agree on financial-regulation bill. Their work produced the resolution authority section of Dodd’s legislation, which is to say, the section that attempts to avoid future bailouts. After that, Corker continued to work with Dodd on other elements of the bill. So after Sen. Mitch McConnell said that the legislation ensures “endless taxpayer-funded bailouts for big Wall Street banks,” I called Corker to get his perspective. What follows is a transcript of our conversation, lightly edited for clarity.

Was Sen. Mitch McConnell correct? Is the Dodd bill, as currently written, a permanent bailout?

I’ve cautioned against hyperbole. But the fact is that the bill as it now is written allows numerous loopholes that allow a situation where you could have bailouts in perpetuity. It’s a fair statement. This all happened after Mark [Warner] and I finished our work but my negotiations with Dodd ceased. Treasury and FDIC became involved and there are provisions that have been added that change the effect of our work. It can be fixed pretty easily. And everyone already knows how to fix it. To be fair, every administration wants unto themselves as much flexibility and freedom as they can get. What we need to do is take some of that back.

I think it would be useful for us to get very concrete here. So what is a “bailout,” exactly?

A bailout is when the government comes to the aid of a company after the company begins to fail. The government comes in and creates mechanism for its survival.

My understanding is that the bill’s resolution authority mandates that a company gets liquidated if it has to tap into the $50 billion resolution fund. Shareholders get wiped out. Management gets wiped out. The company gets taken apart. Am I wrong in any of that?

That’s exactly right. What you’ve just said is true. But there are a ton of technical things that have to do with the FDIC’s ability to guarantee indebtedness, the ability of the Federal Reserve to do things that act like a bailout. I have a list of 14 items that we’re sharing with Treasury that we want them to look at. And by the way, I think they’re very willing to look at them.

I hope what you get out of this is that Mark and I have no issue. But there’s some bankruptcy court language that’s not in here. There are some issues regarding judicial review of the FDIC’s activities. Some of these things, if you read the language, the FDIC could have the ability to inject equity into the company. They want something called incidental powers. Unless things are clearly defined, they can cause problems. The biggest issue is narrowing what the Fed is able to do, what the FDIC is trying to give itself in order to create flexibility.

It sounds like what you’re saying is that the issue here is not a philosophical dispute between the two parties, but technical changes to make sure the language of the law accords with its intent.

That’s exactly right. Let me give you another example. The way the language is written right now, the resolution process could be used on an auto company. We want this clearly, solely to apply to financial institutions. That’s just one example of a definition type of thing that has to be dealt with. But I think the rhetoric has been overheated, and I’ve cautioned against it. Little words mean a lot here. And I think we’re better off discussing this issue on the substance. And there are other things, too. The bill does not adequately deal with one of the basic causes of this crisis, which was that underwriting was really bad. Now, we have to end any discussion of companies being too big to fail. But there are other important issues.

Matthew Yglesias:

Sheila Bair explains that the regulatory reform bill will end bailouts and that Mitch McConnell and others who say it institutionalizes them are lying:

Would this bill perpetuate bailouts?
SHEILA BAIR: The status quo is bailouts. That’s what we have now. If you don’t do anything, you are going to keep having bailouts. Bankruptcy doesn’t work — we saw that with Lehman Brothers.

But does this bill stop them from happening?
BAIR: It makes them impossible and it should. We worked really hard to squeeze bailout language out of this bill. The construct is you can’t bail out an individual institution — you just can’t do it.

In a true liquidity crisis, the FDIC and the Fed can provide systemwide support in terms of liquidity support — lending and debt guarantees — but even then, a default would trigger resolution or bankruptcy.

As I said this morning, there are some questions as to whether the process the Dodd bill sets up is genuinely 100 percent airtight. But there can be no denying that it makes bailouts less likely. Some conservatives are trying to outline alternative approaches to this goal, but what McConnell and John Boehner have on the table is a policy of make believe—don’t regulate banks, let Wall Street run wild, pretend there won’t be bailouts, then when the casino goes bust show up with a bailout.

Steve Benen:

To prevent the bill from moving forward towards a vote, all 41 Senate Republicans would have to unanimously agree to filibuster the motion to proceed. (In other words, the GOP would refuse to allow the debate to even get underway.) As of yesterday afternoon, Senate Minority Leader Mitch McConnell (R-Ky.) did not yet have commitments from all 41 members of his caucus.

Today [Friday the 16th], that changed.

Every member of the Senate Republican Caucus has signed a letter, delivered to Senate Majority Leader Harry Reid, expressing opposition to the Democrats’ financial regulatory reform bill, which they all claim will lead to more Wall Street bailouts.

“We are united in our opposition to the partisan legislation reported by the Senate Banking Committee,” the letter reads. “As currently constructed, this bill allows for endless taxpayer bailouts of Wall Street and establishes new and unlimited regulatory powers that will stifle small businesses and community banks.”

The Republican caucus was not specific about the path ahead. Indeed, the GOP’s letter did not even specifically vow to block the motion to proceed, but rather, simply articulated the caucus’ collective “opposition.” It stands to reason, though, that the point of the letter is that Republicans are prepared to block the vote and the debate on bringing some safeguards to the industry that caused the economic disaster.

It’s worth remembering that Senate Democrats, by and large, didn’t really expect it to come to this. Given Wall Street’s scandalous recklessness, and the public’s disgust for irresponsible misconduct in the financial industry, Dems thought it would be politically suicidal for Republicans to reject reform efforts.

As of this afternoon, it appears Republicans are prepared to link arms and take their chances, fighting to protect Wall Street from accountability.

UPDATE: PolitiFact

Andrew Sullivan

1 Comment

Filed under Economics, Legislation Pending, The Crisis

Beat On The New York Times Columnist With A Baseball Bat

Paul Krugman at The New York Times:

To give you a sense of the problem: Widespread complaints that China was manipulating its currency — selling renminbi and buying foreign currencies, so as to keep the renminbi weak and China’s exports artificially competitive — began around 2003. At that point China was adding about $10 billion a month to its reserves, and in 2003 it ran an overall surplus on its current account — a broad measure of the trade balance — of $46 billion.

Today, China is adding more than $30 billion a month to its $2.4 trillion hoard of reserves. The International Monetary Fund expects China to have a 2010 current surplus of more than $450 billion — 10 times the 2003 figure. This is the most distortionary exchange rate policy any major nation has ever followed.

And it’s a policy that seriously damages the rest of the world. Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.

So how should we respond? First of all, the U.S. Treasury Department must stop fudging and obfuscating.

Twice a year, by law, Treasury must issue a report identifying nations that “manipulate the rate of exchange between their currency and the United States dollar for purposes of preventing effective balance of payments adjustments or gaining unfair competitive advantage in international trade.” The law’s intent is clear: the report should be a factual determination, not a policy statement. In practice, however, Treasury has been both unwilling to take action on the renminbi and unwilling to do what the law requires, namely explain to Congress why it isn’t taking action. Instead, it has spent the past six or seven years pretending not to see the obvious.

Will the next report, due April 15, continue this tradition? Stay tuned.

Ryan Avent at Free Exchange at The Economist:

But that’s just the warm-up. Here’s the call to action:

Some still argue that we must reason gently with China, not confront it. But we’ve been reasoning with China for years, as its surplus ballooned, and gotten nowhere: on Sunday Wen Jiabao, the Chinese prime minister, declared — absurdly — that his nation’s currency is not undervalued. (The Peterson Institute for International Economics estimates that the renminbi is undervalued by between 20 and 40 percent.) And Mr. Wen accused other nations of doing what China actually does, seeking to weaken their currencies “just for the purposes of increasing their own exports.”

But if sweet reason won’t work, what’s the alternative? In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand.

This is really remarkable. Mr Krugman is careful to explain why we shouldn’t fear that China, as a major creditor, has the leverage to punish America, but it seems as though he has given no thought at all to what leverage America has over China. Neither does he seem to pay the least mind to the potential fallout from such a reckless rush to a more aggressive approach to China. Perhaps the decision to impose these surcharges will have the desired effect. Or perhaps, the Chinese government will retaliate, touching off a trade war at the worst possible economic moment. The potential upside to Mr Krugman’s recommendation is trifling; the potential downside is massive.

And Mr Krugman seems entirely uninterested in the domestic political constraints facing China’s leaders. He doesn’t consider for a second the possibility that a bullying strategy on America’s part might make China less likely to do what the administration wants. Why on earth would a nationalistic nation anxious to establish itself as great power want to come off to all observers as a weakling in the face of American bluster? Mr Krugman would paint China into a corner, forcing them to take steps detrimental to all involved.

The general tone of his column—focused on toughness, insensitive to the internal politics of foreign nations, blind to potential negative outcomes, reckless and impatient—is familiar. It looks like nothing so much as the argumentation deployed by the Bush adminstration as it rushed to war in Iraq. Mr Krugman was prescient and prudent in fighting back against that misguided policy. He would do well to stop for a moment, take a deep breath, and think again before urging America to “take a stand”, damn the consequences.

He should respect China enough to know that its leaders understand that RMB appreciation is in their interest. And he should be humble enough to understand that patience and reserve is far more likely to lead to his desired outcome than ill-considered sabre rattling.

Krugman responds:

I never thought of it that way: Ryan Avent says that my advocacy of a get-tough approach to the renminbi is just like the Bush administration’s push for war with Iraq.

But now that he mentions it, it’s true, it’s true! My case for action is entirely based on dubious claims made by unstable informants with code names like “Curveball”, questionable evidence about things like aluminum tubes, and obviously forged letters allegedly from Niger. The actual, public facts and figures I cited have nothing to do with it.

And the real tell is the fact that I’m closely following arguments made by rabble-rousers like Fred Bergsten and the Institute for International Economics, which, um, is a big supporter of free trade and international cooperation … but nonetheless is just like PNAC.

Oh, and I’m showing disrespect for China’s leaders by not giving them credit for understanding the need for appreciation, even though they consistently say that no change in the exchange rate is warranted. The respectful thing would be to assume that everything they say in public about the issue is a lie.

Ryan has me nailed.

Avent responds:

This is extremely disappointing, because it ignores the substance of my criticism and because it so wildly distorts the analogy I drew. I never said Mr Krugman was using false data. I never said he was relying on faulty sources. I never implied anything like that. What I suggested was that he seemed to be ignoring the potential for things to go badly wrong with his plan, overestimating the potential that they may go right, and misreading the net benefit of both of those potential outcomes. His response basically sidesteps all of these issues.Let me briefly rephrase my argument and see if I can’t provoke a more substantive answer from Mr Krugman. I agree with him that there would be some benefit to China, America, and the rest of the world if China allowed its currency to appreciate against the dollar. But it seems to me that this benefit is easily overstated; both China and America can trace their current account situations to significant structural imbalances, and even without an end to the dollar peg, America’s trade balance with China has improved and continues to improve through the recovery. It also seems to me that an aggressive American push for currency revaluation is unlikely to work, because China’s government does not want to be seen, at home and abroad, as a weakling in the face of American pressure. And there is a not insignificant risk that America’s decision to “take a stand”, and particularly to pursue a series of trade surcharges, would provoke a trade war with China which, given the current feeble state of the global economic recovery, could prove extremely costly. The downside risk to such a policy is quite large relative to the potential upside from Chinese revaluation.

What’s more, I think China understands that it is in its interest to revalue and will do so eventually. Why do I think this? Well, China was more than willing to revalue before the onset of the global recession. Mr Krugman hints that I am the one being disrespectful to China for not taking its leadership at its word when they say that no change in the RMB exchange rate is warranted. But this is par for the course where currency levels are concerned. In America, it’s a time-honoured tradition for leaders in Washington to declare that a strong dollar is warranted, good, right, proper, and so on, despite the fact that this clearly isn’t the case. I suppose we could say that they’re fools or liars, but we generally just note that this is something they say because they feel it is in their interest to do so, for political and economic reasons. Meanwhile, it isn’t as though it’s been ages since a Chinese official hinted that RMB appreciation was just a matter of time.

Krugman responds:

I got a little snippy with Ryan Avent yesterday over the remminbi issue; I guess I don’t like being compared to Donald Rumsfeld. In any case, however, I think it would be useful for me to explain how I think about the current China syndrome, and why I believe that most of the responses I hear are missing the point. In what follows, I’ll focus on three questions: the macroeconomics of Chinese currency intervention, the fallacies of elasticity pessimism (which I’ll explain when I get there), and the political economy issue of how to deal with Chinese intransigence.

1. Macroeconomics of intervention

Let me start with a proposition: the right way to think about China’s exchange rate is, initially, not to think about the exchange rate. Instead, you should focus on China’s currency intervention, in which the government buys foreign assets and sells domestic assets, on a massive scale.

Although people don’t always think of it this way, what the Chinese government is doing here is engaging in massive capital export – artificially creating a huge deficit in China’s capital account. It’s able to do this in part because capital controls inhibit offsetting private capital inflows; but the key point is that China has a de facto policy of forcing capital flows out of the country.

Now, bear in mind the two basic balance of payments accounting identities:

Capital account + Current account = 0

Current account = Domestic savings – Domestic investment

By creating an artificial capital account deficit, China is, as a matter of arithmetic necessity, creating an artificial current account surplus. And by doing that, it is exporting savings to the rest of the world.

In normal times, you could argue that this policy provides benefits to the rest of the world, by reducing borrowing costs (although given what we did with those capital inflows, maybe not). But these aren’t normal times. We’re currently living in a world in which both central banks and governments are unable or unwilling to pursue sufficiently expansionary policies to eliminate mass unemployment; so it’s a paradox of thrift world, in which anyone who tries to save more reduces demand, reduces employment, and – because investment responds to excess capacity – ends up actually reducing investment. By exporting savings to the rest of the world, via an artificial current account surplus, China is making all of us poorer.

Notice that I didn’t mention the value of the renminbi at all in this account. It’s there implicitly: a weak renminbi is the mechanism through which China’s capital-export policy gets translated into physical exports of goods. But you want to keep your eye on the ball: it’s the artificial capital exports that are the driving force here.

What this means, in particular, is that you can disregard people who offer calculations suggesting that by some criterion – say, Balassa-Samuelson adjusted purchasing power parity – the renminbi isn’t undervalued. We know that the renminbi is grossly undervalued, not through questionable estimates that can be endlessly debated, but on a PPE (proof of the pudding is in the eating) basis: the current value of the renminbi is consistent with massive artificial capital export, and that’s that.

Avent responds:

This is a happy world, is it not, when Europe and America slap punitive import surcharges on China and China just sits there and takes it? What if China responds with tariffs of its own? What if it seeks to carve out its own regional trade bloc in Asia? What if it refuses to help America with Iran or North Korea? What if it occupies Taiwan? Where are the careful considerations of all the possible ways China might respond? Certainly we should be very aware of and concerned with these risks.

Especially since it was just one week ago that China central bank governor Zhou Xiaochuan said of the dollar peg that, “These kinds of policies sooner or later will be withdrawn.”

So, to recap. In recent years, exchange rate shifts in China and America have not produced the changes in trade balances one might expect, suggesting that structural issues are an important reason for these persistent imbalances, further suggesting that the benefits of revaluation may not be that big. Meanwhile, despite China’s currency policy, the Chinese trade balance has shrunk. An aggressive campaign to get China to revalue might not generate the desired results, and it might lead to unpredictable and costly retaliation from the Chinese government. And there is recent evidence that Chinese leaders are aware of the problems with the dollar peg and plan to adjust it, even in the absence of American action.

So why roll the dice? I appreciate Mr Krugman’s discussion of the macroeconomic issues involved here, but he hasn’t begun to address why it’s vital to risk international comity over this.

It’s certainly true that the dollar was overvalued back in 1971.  What Krugman forgets to mention — and see if this sounds familiar — is that the Johnson and Nixon administrations contributed to this problem via a guns-and-butter fiscal policy.  They pursued the Vietnam War, approved massive increases in social spending, and refused to raise taxes to pay for it.  This macroeconomic policy created inflationary expectations and a “dollar glut.”  Foreign exchange markets to expect the dollar to depreciate over time. Other countries intervened to maintain the dollar’s value — not because they wanted to, but because they were complying with the Bretton Woods system of fixed exchange rates. Nixon only went off the dollar after the British Treasury came to the U.S. and wanted to convert all their dollar holdings into gold.

In other words, the United States was the rogue economic actor in 1971 — not Japan or Germany.

So, how about acting multilaterally first before engaging in unilateral action that alienates America’s friends and allies alike?

Brad DeLong responds to Drezner:

I count four big howlers:

  • Paul Krugman is not a neoconservative.
  • There is no no multilateral institution that manages exchange rates within which the U.S. could work.
  • The current overvaluation of the dollar vis-a-vis the renminbi is in no wise due to large current U.S. budget deficits.
  • At the start of the 1970s other countries kept their pegs to the dollar rather than revaluing not because they were obliged by treaty to do so but because they wanted to: they had rejected U.S. requests for revaluation under Bretton Woods procedures.

Why would anybody do this?

More Drezner

Scott Sumner at Wall Street Pit:

Suppose China’s government began a new policy.  They announced their government would spend $500 billion each year adding to their foreign reserves, but would no longer peg the yuan.  Would that satisfy China’s critics?  Probably not, as Krugman noted the real issue is the Chinese accumulation of dollars, not the exchange rate per se.  If you are buying foreign reserves at a massive rate it is quite possible to lift exchange controls and let the currency float, and yet still end up with what most people would regard as an overvalued currency.  So the real question is whether China is justified in holding large and increasing quantities of foreign reserves.

I’d like to point out that there are many commonalities between China and 5 other East Asian economies; Japan, Taiwan, HK, Singapore and South Korea.  One of those similarities is that they all have huge stocks of foreign reserves.  In per capita terms China’s CA surplus is by far the smallest of any of the six East Asian powerhouse exporters.  The most recent data I could find in The Economist shows China’s CA surplus as $284.4 billion whereas the other five economies combine for a $286.7 billion surplus.  So if Krugman is right, those five economies actually are doing more damage to the world economy than China, which has 7 times the population and a modestly larger (PPP) GDP than other other five economies.

Krugman might respond that the other five economies are fairly wealthy, and have very low birthrates, so it makes sense for them to save a lot.  Their surpluses reflect the natural forces of their economy.  China is a developing country, and like South Korea in the 1970s and 1980s might be better off running deficits, and borrowing against future income.  There are many ways in which the government could use those funds to address domestic challenges.  Instead they accumulate massive stocks of foreign exchange, which help neither us nor the Chinese people.  I think that would be a respectable argument, but there are other considerations as well.  China faces a looming demographic nightmare that Korea did not face in the 1970s.  It is likely that in a few decades China will be much richer than today.  The hundreds of millions of Chinese that will then be retiring will expect to be provided with decent pensions.  Yet the Chinese social security system is woefully underfunded.  You can make a strong argument that the Chinese government should be setting aside a lot of money right now, in light of the fiscal challenges that they will face in the future.

I would add that there seems to be a big difference between East Asian and Western attitudes toward saving.  I think that there is a lot to be said for the high saving models developed by places like Singapore.  Even though I am a libertarian, I’d much prefer the sort of high forced saving/low tax economy of Singapore to the low saving/high tax economy that we have in the West.  Our fiscal situation reminds me of those guys who live week to week.  Who say “I should be able to swing that vacation to South Beach as long as my transmission doesn’t blow out on me.”  Yes, we should be able to just barely afford national health care as long as it doesn’t turn out to be much more expensive than expected, like Medicare turned out to be much more expensive than expected.  And if things really get bad we can always add a VAT.  Of course the Europeans already have a VAT, maybe they’re hoping some loose change will turn up under the cushions.  Seriously, in about 20 years, when the West is struggling to deal with ever-increasing debts, I predict that the Singapore high saving/low tax model will look clearly superior to the Western model.  So while there are many things I don’t like about the Chinese government, I am not willing to condemn them for setting aside a big pot of foreign exchange reserves.  It’s their choice.

Ryan McCarthy at Huffington Post:

In an interview with Bloomberg Television, Stephen Roach, Morgan Stanley’s Asia chairman blasted Nobel Prize-winning economist Paul Krugman over the latter’s stance on China’s economic policy.

Here’s the gist of the dispute: in comments earlier this week, Krugman said that the U.S. needs to get tough with China over its currency policy. According to Krugman, China is intentionally devaluing its currency in order to boost its booming export sector. Specifically, Krugman argues that a properly valued Chinese yuan could add 1.5 percent to global economic growth. (You can check out video of his comments here.)

Roach wasn’t having any of it. The U.S. needs to increase its savings rate, remake its economy and “handle its own business.” And, Roach told Bloomberg TV, the U.S. needs to stay out of Chinese affairs:

Here’s Roach:

I think we should take out the baseball bat on Paul Krugman. I think the advice is completely wrong. The US has had a conscious policy here of maintaining, quote, a strong and stable dollar. China is saying basically the same thing in terms of its stable currency. Isn’t it the height of hypocrisy for America to articulate to articulate a particular position in its currency but the Chinese are not allowed to do that, especially since they as a developing economy – with an embryonic financial system – need a currency anchor probably a lot more than a sophisticated, quote unquote, economies like the United States.”

Krugman responds:

I really don’t understand Roach’s argument here; he seems to have subscribed to the Underpants Gnomes theory of trade balances:

1. Increase savings
2. ?????
3. Exports!

To be honest, sometimes I feel that I’ve spent most of my adult life knocking down the same misunderstanding, over and over again. I wrote about more or less the same issue more than 20 years ago:

There is a widespread view that world payments imbalances can be remedied through increased demand in surplus countries and reduced demand in deficit countries, without any need for real exchange rate changes. In fact shifts in demand and real exchange rate adjustment are necessary complements, not substitutes.

Also, from the Bloomberg article:

“I’m a little curious what Steve thinks would happen if the U.S. increased savings” without a stronger yuan, Krugman said today. “Where would the demand” for goods and services come from, he asked. Boosting savings should be done “in the long run,” not now, he also said.

Krugman is “giving Washington very, very bad advice,” Roach said in a later interview when asked to respond to Krugman’s reaction to his remarks. “I totally reject his idea that savings is bad.”

(Btw, this was from a cell phone conversation held while I was, um, sitting on the beach).

What I wonder here is how Roach — or anyone thinks that increased savings would help right now. What would cause an attempt to increase savings to be translated into increased investment, or an improved trade balance, as opposed to simply a more depressed economy. Yes, I know that macroeconomics at the zero lower bound is different from the normal scene — but how can an economist as good as Steve Roach not get that after more or less two years in a liquidity trap?

Update: I probably should add that I never said anything about taking a baseball bat to China. That was Bloomberg’s characterization of what I’ve been saying, and not one I would agree with.

1 Comment

Filed under China, Economics, Foreign Affairs, Mainstream, New Media, The Crisis

The Autopsy Report Shows Repo 105 In The Soul

Michael J. de la Merced and Andrew Ross Sorkin in NYT:

It is the Wall Street equivalent of a coroner’s report — a 2,200-page document that lays out, in new and startling detail, how Lehman Brothers used accounting sleight of hand to conceal the bad investments that led to its undoing.

The report, compiled by an examiner for the bank, now bankrupt, hit Wall Street with a thud late Thursday. The 158-year-old company, it concluded, died from multiple causes. Among them were bad mortgage holdings and, less directly, demands by rivals like JPMorgan Chase and Citigroup, that the foundering bank post collateral against loans it desperately needed.

But the examiner, Anton R. Valukas, also for the first time, laid out what the report characterized as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances. The bank’s bankruptcy, the largest in American history, shook the financial world. Fears that other banks might topple in a cascade of failures eventually led Washington to arrange a sweeping rescue for the nation’s financial system.

According to the report, Lehman used what amounted to financial engineering to temporarily shuffle $50 billion of assets off its books in the months before its collapse in September 2008 to conceal its dependence on leverage, or borrowed money. Senior Lehman executives, as well as the bank’s accountants at Ernst & Young, were aware of the moves, according to Mr. Valukas, the chairman of the law firm Jenner & Block and a former federal prosecutor, who filed the report in connection with Lehman’s bankruptcy case.

Naked Capitalism:

Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.

We need to demand an immediate release of the e-mails, phone records, and meeting notes from the NY Fed and key Lehman principals regarding the NY Fed’s review of Lehman’s solvency. If, as things appear now, Lehman was allowed by the Fed’s inaction to remain in business, when the Fed should have insisted on a wind-down (and the failed Barclay’s said this was not infeasible: even an orderly bankruptcy would have been preferrable, as Harvey Miller, who handled the Lehman BK filing has made clear; a good bank/bad bank structure, with a Fed backstop of the bad bank, would have been an option if the Fed’s justification for inaction was systemic risk), the NY Fed at a minimum helped perpetuate a fraud on investors and counterparties.

This pattern further suggests the Fed, which by its charter is tasked to promote the safety and soundness of the banking system, instead, via its collusion with Lehman management, operated to protect particular actors to the detriment of the public at large.

And most important, it says that the NY Fed, and likely Geithner himself, undermined, perhaps even violated, laws designed to protect investors and markets. If so, he is not fit to be Treasury secretary or hold any office related to financial supervision and should resign immediately.

I am reading the report, and will provide an update later, but here are the key bits (hat tip reader John M). As much as Karl Denninger has done some terrific initial reporting, he does not go far enough as far as the wider implications are concerned.

Tim Cavanaugh in Reason:

But in his brief appearances in the 336-page report, Geithner’s main concern seems to be with preventing a panic over the diseased state of Lehman. Geithner not only acknowledges his efforts at concealment, but seems to believe they were the right thing to do:

In addition to the losses Lehman would incur by selling “sticky” assets at firesale prices, deleveraging also raised the additional problems of market perception and valuation.3187 As Secretary Timothy Geithner explained to the Examiner, selling “sticky” assets at discounts could hurt Lehman by revealing to the market that Lehman “had a lot of air in [its] marks” and thereby further draining confidence in the valuation of the assets that remained on Lehman’s balance sheet.3188

The first sentence is drawn from a November interview between Geithner and Valukas, the second from “Reducing Systemic Risk In A Dynamic Financial System,” a speech Geithner delivered in June 2008. To say dressing up Lehman’s bleeding sores was wrong, you need to acknowledge that a central bank should not engage in the suppression of information, and I’m pretty sure we lost that argument a long time ago.

Smith suspects (not without reason) that this mission to regulate the market’s feelings toward Lehman led Geithner to connive at what certainly looks to have been a fraud: the erroneous counting of “501 Repos” — assets Lehman sold with an agreement to repurchase — as straightforward sales. That is, the outside world thought these toxic assets were gone from Lehman’s books, when in fact they were merely festering. Smith has some interesting words about whether, and why, Lehman counterparties went along with this charade. (Likeliest answer: They were all betting on the come like the rest of America.)

Tyler Durden at Zero Hedge:

That this scam was going unsupervised (just who the hell were the counterparties?) for many years, and that many banks are likely using it right now to fool investors, regulators, rating agencies, and the idiots at the FRBNY (who certainly also know about this), is beyond criminal. Yet that nobody will go to jail for this is as certain as the market going up another 10% tomorrow. A full investigation has to be conducted immediately into whether existing Wall Street firms, and in particular those who use Ernst & Young as auditors, are currently abusing public confidence via such transactions.

Stephen Gandel at Curious Capitalist at Time:

This seems like fraud to me. The examiner calls it “actionable” and he says the moves open Lehman and its executives up to suits from shareholders who could claim, it appears rightly so, that they were mislead. Still I am not convinced accounting played as big a role in this crisis as past ones. Here’s why:

Yes, Lehman does seem to have hid some of its loans. And that means other banks were probably using this trick as well. But how much did the trick distort Lehman’s books. Not much. In fact, even if Lehman had made all of its loans available for everyone to see it’s not clear that any investors would have cared, or the NY Fed would have spent one more minute thinking about the firm’s solvency.

That’s because the vast majority of its loans and illiquid investments were out there for all to see. In fact, if you add back in the $50 billion the firm was hiding the firm’s net leverage ratio moves from 12.1 to a whopping 13.8. Merrill Lynch had a leverage ration of more than three times that.

What the moves did do was to shield the firm from criticism from the likes of short-sellers like David Einhorn who claimed the situation at Lehman was getting worse, but couldn’t prove it. On the margin, Lehman’s accounting trick made it look like its leverage ratio was either stable or improving. Nonetheless, people like Einhorn didn’t need another reason to short Lehman Brothers. They already knew something smelled at Lehman. They just didn’t know what they were smelling was slightly worse than they thought.

Perhaps the biggest takeaway from this is that Sarbanes-Oxley has again proven useless in preventing corporate fraud. Accounting fraud is exactly the type of thing Sarbox was supposed to stop by beefing up corporate boards and imposing new accounting oversight all the way up to the board level. But the Lehman examiner’s report says the investment bank’s executives were able to keep its board in the dark. The examiner says board members appear to have had no knowledge of the “Repo 105” accounting trick. Just another sign that the true failing that caused the financial crisis was at its heart a regulatory one.

Larry Doyle at Wall Street Pit:

Reports that Lehman was effectively ‘cooking its books’ prior to its ultimate demise are not a surprise.

Reports that Dick Fuld, then CEO of Lehman, was not aware of the nature of this cooking are both ridiculous and pathetic.

The lifeblood of every financial institution on Wall Street is access to financing for its operations. That financing very often comes in the form of repurchase agreements (repo financing), in which the institution borrows funds while pledging assets. These short term loans, often overnight loans, are unwound at a preset date and preset prices. The rates borrowers have to pay for funds borrowed depend on the credit quality of the borrower itself and the quality of the assets pledged.

UPDATE: Mike Konczal at Rortybomb

James Kwak at Baseline Scenario

Naked Capitalism

Kevin Drum

Felix Salmon

Jon Stewart


Filed under Economics, Political Figures, The Crisis

Bruuuce! Bruuuce!

Bruce Bartlett has a new book out. Book here. Blog here.

Bartlett reprinted a National Review review by Kevin A. Hassett:

It is indeed ironic that this book should arrive at almost precisely the same moment as former Reagan administration economist Bruce Bartlett’s new book, The New American Economy. Bartlett is the author of a bestselling book about George W. Bush with the inflammatory title Impostor, a book he claims cost him his job at a conservative think tank. There is perhaps no man so praiseworthy in “elite” circles as the prodigal conservative who has “seen the light.” Bartlett has been practically blinded by it, and has, accordingly, become a media darling.
In his new book, Bartlett argues that “just as Keynesian economics went off on the wrong track and became discredited, I think supply-side economics has also reached the end of its useful life.” Bartlett goes on to make a depressingly convincing argument that, in the U.S. at least, this is the case.
The problem is that the supply-side formula requires lower taxes and smaller government. You cannot, Bartlett correctly argues, have one without the other. In the U.S., government spending has advanced steadily under both Democratic and Republican administrations. The difference between Republicans and Democrats appears to be that Republicans, who oppose higher taxes in almost every form, pursue policies that end up being unsustainable.
As bad as it is today, when one looks ahead to an America that shortly will have the same age distribution that Florida has now, one can only conclude that it is going to get much worse. The health bills of our senior citizens alone may well exceed the current size of government in a few decades. Bartlett starts a difficult conversation. If we cannot constrain the growth of government, are we going to try to run a Ponzi scheme, or are we going to pay for it? If we choose the latter, how are we going to raise the money? Bartlett’s answers are well researched, drawing on a massive literature.
An intransigent conservative will be disappointed that Bartlett does not address the facts that are most at odds with his assertion that supply-side economics is dead. Even as Samuelson’s equally political nephew, Larry Summers, and the rest of President Obama’s team appear to be engineering the final triumph of academic quasi-socialism, many countries around the world, from Sweden to China, have embraced supply-side views and seen positive results. Low tax rates have achieved a cachet in Europe that Laffer never would have dreamed of. So why is supply-side economics dead for the U.S.?
In correspondence with me, Bartlett has argued that our form of democracy is incapable of reducing spending efficiently because the ruling party in America has much less power than the ruling party in a parliamentary democracy. We are, he concludes, going to spend more, and we might as well face it and raise taxes to pay for it. He may be right, but the battle is certainly not over.
After reading both books, a conservative cannot help but be troubled by the parallels between the lives of Bartlett and Laffer. Laffer spoke truths that were unpopular with liberals, and they sent out Hercules to slay him. Bartlett challenged sacred tenets of Laffer’s teachings, and similarly was ridiculed and cast out.
Ezra Klein on this review:

Kevin Hassett‘s review of Bruce Bartlett‘s new book critiquing the relevance of supply-side economics is an extraordinary document. The review appears in the National Review, and Hassett is a well-known conservative economist. Somewhat predictably, his review starts out straining to attack Bartlett. After quickly recapping Bartlett’s journey as a harsh conservative critic of George W. Bush, Hassett puts him swiftly in place. “There is perhaps no man so praiseworthy in ‘elite’ circles as the prodigal conservative who has ‘seen the light,’ ” writes Hassett, leaning heavily on scare quotes. “Bartlett has been practically blinded by it, and has, accordingly, become a media darling.” Oh, snap!

But Hassett’s effort at a takedown crashes quickly on the shoals of Bartlett’s actual argument, which Hassett finds himself unable to reject quite so flippantly:

The problem is that the supply-side formula requires lower taxes and smaller government. You cannot, Bartlett correctly argues, have one without the other. In the U.S., government spending has advanced steadily under both Democratic and Republican administrations. The difference between Republicans and Democrats appears to be that Republicans, who oppose higher taxes in almost every form, pursue policies that end up being unsustainable.

As bad as it is today, when one looks ahead to an America that shortly will have the same age distribution that Florida has now, one can only conclude that it is going to get much worse. The health bills of our senior citizens alone may well exceed the current size of government in a few decades. Bartlett starts a difficult conversation. If we cannot constrain the growth of government, are we going to try to run a Ponzi scheme, or are we going to pay for it? If we choose the latter, how are we going to raise the money? Bartlett’s answers are well researched, drawing on a massive literature.

On this, Hassett and I agree. And I’ll take the opportunity to say Democrats have been little better than Republicans. President Obama‘s most damaging campaign promise was his inane pledge to preserve tax rates on people making under $250,000 a year. His attacks on John McCain‘s effort to tax health-care benefits limited his options when he became president and realized that that was exactly what needed to be done, leaving Democrats proposing a roundabout excise tax on expensive insurance plans, which is, at base, a less progressive policy. (Taxing health benefits allows the tax to vary with the worker’s income, while the excise tax is a flat rate.)

James K. Galbraith at Firedoglake, where there’s a salon on this book:

Bruce is a first-hand witness, and quite a good one – though not disinterested. In particular he makes a persuasive case (to me) that the leading supply-siders were not charlatans. They were, rather, for the most part idealists, who took their cues from what was then reputable thought in mainstream economics. (This, of course, raises a question as to whether the mainstream economists were charlatans, but let’s leave that one alone here.)

Still, there was an interesting practical convergence between supply-side and Keynesian perspectives. In public the supply-siders reviled the “discredited Keynesians,” and insisted that their tax cuts were all about “incentives to work save and invest.” But in private even Reagan’s own top economic adviser, Murray Weidenbaum, admitted in 1981 that the tax cuts would provide a powerful economic stimulus, Keynes-style, once the recession was past and the president was gearing up for re-election.

Given that the (Galbraithian) alternative of public investment and a stronger welfare state was not a political possibility, the choice then was between a tax cut-fueled boom and prolonged stagnation. One can argue — I do argue — that by reconciling Keynes with the interests of the rich, the supply-siders made the country more prosperous than it would otherwise have been. They also kept the Republican Party in business. It is true therefore that Reagan’s tax cuts replicated Kennedy’s success in 1964.

When Bruce turns his eye to the present crisis, he confronts a Republican Party in a near-vegetative state, able at best to blink and mutter “tax cut” in the face of any and all problems. He suggests, sensibly, that the lesson of the debacle of Bush’s Social Security privatization scheme be accepted: the welfare state is here to stay. He argues (again as my father once did) in favor of a Value-Added Tax to provide a stable, admittedly regressive, pro-saving funding source. Thus Bruce Bartlett becomes an advocate of the European-style tax-and-welfare state!

Here, we again part company on the merits. For Bruce, our key economic problem going forward is an insufficiency of saving and the supposed burden of public debt. For me, it’s a lack of investment, and of jobs, brought on by the debacle of private debt and a disastrously deregulated and corrupted financial sector. I’m not a fan of the European solution — among other things it leaves savings idle, unemployment high and education (in particular) underfunded. I like the progressive income tax and even more the estate tax, which spur philanthropy and fuel our vast non-profit sector. I think Social Security is the best part of the American welfare state – and one of the most successful public pension programs in the world.

Back to the trenches, Bruce?

Matthew Yglesias

Philip Klein at The American Spectator:

MANY OF BARLETT’S points are valid. The fiscal recklessness of the Bush administration is undeniable, and conservatives will have to come up with better solutions to address the looming entitlement crisis. It’s also true that many conservatives have misconstrued supply-side theory. The “Laffer Curve,” for instance, posits that there’s some optimal tax rate, and if taxes are above that point, they actually stifle economic activity and lead to lower revenue. But when Reagan took office, the top tax rate stood at 70 percent — given that it’s now down to 35 percent, it’s harder to make the argument that additional tax cuts will boost revenue. At some point, cutting taxes decreases revenue, even under supply-side theory.

But Bartlett’s thinking is also schizophrenic, as he vacillates between admiring supply-side theory and relishing his role as a conservative provocateur. He argues for a Keynesian approach to severe economic crises such as the Great Depression and the current economic predicament (he viewed President Obama’s economic stimulus package as necessary). But he is also sympathetic to the supply-side critique that lag times inhibit lawmakers from responding to signals in the economy immediately and delay for years the point at which government spending is actually injected into the economy. He says the sooner the government acts, the better. But in the early stages, how can policy makers determine if a recession is severe enough to warrant a Keynesian response? How do they know that they aren’t mis-applying Keynes the way policy makers did in the decades after World War II, and thus setting us up for the same inflationary problems of the 1970s?

Lane Kenworthy at Wall Street Pit:

The chief economic problem we now face, in Bartlett’s view, is not high marginal tax rates. It is the aging of baby boomers to whom we have made Medicare and Social Security commitments. Absent “massive and politically impossible cuts,” this will cause federal government expenditures to rise from 20% of GDP to around 30% over the coming generation. Supply-side dogma leaves Republicans ill-prepared for this challenge. “When the crunch comes and the need for a major increase in revenue becomes overwhelming,” says Bartlett, “I expect that Republicans will refuse to participate in the process. If Democrats have to raise taxes with no bipartisan support, then they will have no choice but to cater to the demands of their party’s most liberal wing. This will mean higher rates on businesses and entrepreneurs, and soak-the-rich policies that would make Franklin D. Roosevelt blush.”

A better result, according to Bartlett, would be to bring government revenues into line with projected expenditures via a value-added tax (VAT), a type of consumption tax. Heavy use of VATs is a key reason, he says, why “many European countries have tax/GDP ratios far higher than here without suffering particularly ill effects. They may not be growing as fast as they would if taxes and spending were lower, but neither are their standards of living significantly below those of the United States. Even strenuous efforts to show that Europeans are poorer than Americans show that the differences are merely trivial.”

I agree with a good bit of what Bartlett says in the book, and I’m particularly sympathetic to this diagnosis and prescription (see here and here). It’s a long way from Barry Goldwater, Milton Friedman, and Ronald Reagan.

I wish Bartlett had gone further. If modern conservatism is by necessity “big-government” conservatism, what principles should guide it? If conservatives must give up the goal of rolling back the welfare state, if they must acquiesce to government provision of generous cushions and supports, what should they aim for in economic and social policy? David Brooks, Ross Douthat and Reihan Salam, Will Wilkinson, Ron Haskins and Isabell Sawhill, and others have weighed in on this question.

Leave a comment

Filed under Books, Economics, The Crisis

A Tale Of Baby-sitters, Ketchup, And Economists


Paul Krugman’s article in this past weekend’s NYT Magazine:

The theoretical model that finance economists developed by assuming that every investor rationally balances risk against reward — the so-called Capital Asset Pricing Model, or CAPM (pronounced cap-em) — is wonderfully elegant. And if you accept its premises it’s also extremely useful. CAPM not only tells you how to choose your portfolio — even more important from the financial industry’s point of view, it tells you how to put a price on financial derivatives, claims on claims. The elegance and apparent usefulness of the new theory led to a string of Nobel prizes for its creators, and many of the theory’s adepts also received more mundane rewards: Armed with their new models and formidable math skills — the more arcane uses of CAPM require physicist-level computations — mild-mannered business-school professors could and did become Wall Street rocket scientists, earning Wall Street paychecks.

To be fair, finance theorists didn’t accept the efficient-market hypothesis merely because it was elegant, convenient and lucrative. They also produced a great deal of statistical evidence, which at first seemed strongly supportive. But this evidence was of an oddly limited form. Finance economists rarely asked the seemingly obvious (though not easily answered) question of whether asset prices made sense given real-world fundamentals like earnings. Instead, they asked only whether asset prices made sense given other asset prices. Larry Summers, now the top economic adviser in the Obama administration, once mocked finance professors with a parable about “ketchup economists” who “have shown that two-quart bottles of ketchup invariably sell for exactly twice as much as one-quart bottles of ketchup,” and conclude from this that the ketchup market is perfectly efficient.

But neither this mockery nor more polite critiques from economists like Robert Shiller of Yale had much effect. Finance theorists continued to believe that their models were essentially right, and so did many people making real-world decisions. Not least among these was Alan Greenspan, who was then the Fed chairman and a long-time supporter of financial deregulation whose rejection of calls to rein in subprime lending or address the ever-inflating housing bubble rested in large part on the belief that modern financial economics had everything under control. There was a telling moment in 2005, at a conference held to honor Greenspan’s tenure at the Fed. One brave attendee, Raghuram Rajan (of the University of Chicago, surprisingly), presented a paper warning that the financial system was taking on potentially dangerous levels of risk. He was mocked by almost all present — including, by the way, Larry Summers, who dismissed his warnings as “misguided.”



I like to explain the essence of Keynesian economics with a true story that also serves as a parable, a small-scale version of the messes that can afflict entire economies. Consider the travails of the Capitol Hill Baby-Sitting Co-op.

This co-op, whose problems were recounted in a 1977 article in The Journal of Money, Credit and Banking, was an association of about 150 young couples who agreed to help one another by baby-sitting for one another’s children when parents wanted a night out. To ensure that every couple did its fair share of baby-sitting, the co-op introduced a form of scrip: coupons made out of heavy pieces of paper, each entitling the bearer to one half-hour of sitting time. Initially, members received 20 coupons on joining and were required to return the same amount on departing the group.

Unfortunately, it turned out that the co-op’s members, on average, wanted to hold a reserve of more than 20 coupons, perhaps, in case they should want to go out several times in a row. As a result, relatively few people wanted to spend their scrip and go out, while many wanted to baby-sit so they could add to their hoard. But since baby-sitting opportunities arise only when someone goes out for the night, this meant that baby-sitting jobs were hard to find, which made members of the co-op even more reluctant to go out, making baby-sitting jobs even scarcer. . . .

In short, the co-op fell into a recession.

O.K., what do you think of this story? Don’t dismiss it as silly and trivial: economists have used small-scale examples to shed light on big questions ever since Adam Smith saw the roots of economic progress in a pin factory, and they’re right to do so. The question is whether this particular example, in which a recession is a problem of inadequate demand — there isn’t enough demand for baby-sitting to provide jobs for everyone who wants one — gets at the essence of what happens in a recession.

Forty years ago most economists would have agreed with this interpretation. But since then macroeconomics has divided into two great factions: “saltwater” economists (mainly in coastal U.S. universities), who have a more or less Keynesian vision of what recessions are all about; and “freshwater” economists (mainly at inland schools), who consider that vision nonsense.

Freshwater economists are, essentially, neoclassical purists. They believe that all worthwhile economic analysis starts from the premise that people are rational and markets work, a premise violated by the story of the baby-sitting co-op. As they see it, a general lack of sufficient demand isn’t possible, because prices always move to match supply with demand. If people want more baby-sitting coupons, the value of those coupons will rise, so that they’re worth, say, 40 minutes of baby-sitting rather than half an hour — or, equivalently, the cost of an hours’ baby-sitting would fall from 2 coupons to 1.5. And that would solve the problem: the purchasing power of the coupons in circulation would have risen, so that people would feel no need to hoard more, and there would be no recession.

Krugman offers a few notes on the article on his blog:

First, to anyone who wishes I’d given credit — yes, I was helped by reading many sources (especially Justin Fox), but it’s a magazine article, not a book with room for an acknowledgments page; I couldn’t even acknowledge the editing work done by my wife, Robin Wells, which played a big role. Some fairly extensive sections had to be taken out — for example, I wanted to include material about Paul Samuelson’s 1948 textbook, which reads very well in the current crisis, but had to cut it. Hyman Minsky also got crowded out. Sorry.

Second, on whether the pretty good response of policy-oriented economists in the crisis undercuts the thesis — I don’t think so. I mean, yes, my colleagues are smart people, and some of them are highly flexible and quick on their feet. But the fact remains that many of these responses have been completely ad hoc; there just wasn’t the theoretical development in advance there would have been if the profession hadn’t been chasing the neoclassical dream.

Third, on an interesting point raised by Discover (via Mark Thoma): won’t we eventually have a true theory that’s as beautiful as the full neoclassical version? Well, one thing’s for sure: we don’t have that beautiful final theory now, so the current choice is between ideas that are beautiful but wrong and a much messier hodgepodge. But my guess is that even in the long run it won’t be all that neat. Discover suggests general relativity versus Newtonian physics; but a better model may be meteorology, which as I understand it starts from some simple basic principles but is fiendishly complex in practice.


A couple posts from Matthew Yglesias, here and here. Yglesias:

Since I alluded to Larry Summers’ paper on “ketchup economics” from the mid-eighties earlier today, I may as well quote the funny part:

“Ketchup economists reject out of hand much of this research on the ketchup market. They believe that the data used is based on almost meaningless accounting information and are quick to point out that concepts such as costs of production vary across firms and are not accurately measurable in any event. they believe that ketchup transactions prices are the only hard data worth studying. Nonetheless ketchup economists have an impressive research program, focusing on the scope for excess opportunities in the ketchup market. They have shown that two quart bottles of ketchup invariably sell for twice as much as one quart bottles of ketchup except for deviations traceable to transaction costs, and that one cannot get a bargain on ketchup by buying and combining ingredients once one takes account of transaction costs. Nor are there gains to be had from storing ketchup, or mixing together different quality ketchups and selling the resulting product. Indeed, most ketchup economists regard the efficiency of the ketchup market as the best established fact in empirical economics.”

I was actually inspired to do some research into the ketchup market and discovered that at my local Safeway, a 20 ounce bottle of Heinz sells for $0.13 an ounce. If you go up to a 32 ounce bottle, the price falls to $0.11 an ounce; meaning in effect your extra 12 ounces cost only $0.77 cents per ounce. Thus, we can use the Efficient Ketchup Markets Hypothesis to back-calculated the exact nature of the transaction costs and so forth that justify these prices volume discounts.

A couple of posts at The Motley Fool. Anti-Krugman throwerw:

First of all, you would have to be an idiot or an academic to believe that the market is efficient.  I’m 22 years old, and I’ve been actively investing for about a year.  From the moment I started , I’ve understood that the market is irrational.  It’s not hard to see, and it’s very easy to prove.

The funny thing is, we have a school of economics, the Austrian school, that works very well and that has done a much better job of explaining what is happening than all of this other used dogfood economic theory.  Krugman has never admitted in any of his columns that this school of thought even exists.  That’s how he can continue to ignore the real problem, a lack of savings and excessive debt, and continue to champion increased deficits and wasteful government spending.  How about instead of trying to create a new theory of everything that will ultimately fall apart again, we just use some common sense?

Pro-Krugman (at least on this) TMFMmbop:

I’ll man up and compliment his lucid, well-written short history of modern economics — How Did Economists Get It So Wrong? — in this week’s NYT Magazine (hat tip to Otto kid). The first part of that ultimate conclusion, specifically that “[economists] have to face up to the inconvenient reality that financial markets fall far short of perfection, that they are subject to extraordinary delusions and the madness of crowds” is exactly right.

But I will defend the reality of reverse incentives — those provided by the government that spur consumers to make choices that shouldn’t be in their best interest.

Scott Sumner at Wall Street Pit:

What’s my point? I completely distrust an economist who talks about a promising new area of research that will soon yield all sorts of insights. In my view when a new area is discovered, most of the really useful insights are almost immediately obvious. The only exception that comes to mind is the huge gap between the development of externalities theory, and the discovery of the Coase Theorem. Perhaps others can find some other exceptions. So one implication of this line of reasoning is that I will never live to see the day when behavioral economics and behavioral finance finally revolutionize economics and finance. I probably don’t know enough about these fields to have an intelligent opinion, but my hunch is that if the standard model that we teach in our textbooks has not yet been revolutionized by behavioral economics, it will never be revolutionized. That behavior economics will always be on the fringes, providing interesting anomalies.

And I think this is the problem with Krugman’s agenda. If we knew how to “incorporate the realities of finance into macroeconomics” we would have done so already. We haven’t done so, because we don’t know how. And I think there are good reasons why we don’t know how. Almost any proposal to do so must somehow, at least implicitly, assume the policymakers are smarter than highly paid investment bankers. And even with all the bizarre bubbles we have seen in recent decades, I think that assumption is just too much for most economists to swallow.

Krugman is a very persuasive writer. I keep telling right-wingers that if we have deflationary monetary policies, policies that reduce NGDP, the free market will be blamed. I don’t see any persuasive rebuttals to Krugman from those on the right. I don’t know if my arguments are persuasive, but at least I’m trying.

James Kwak at Wall Street Pit:

His history of post-Depression macroeconomics goes through roughly three phases: Keynesianism; Milton Friedman and monetarism, which, he argues, was relatively moderate compared to the positions of some of his self-styled followers; and the period from the 1980s until 2007, which he describes as the conflict between the Saltwater (coastal, pragmatic, New Keynesian) economists and the Freshwater (inland, efficient markets, neo-classicist) economists. According to Krugman, these two schools had differences on a theoretical level, but those differences were papered over by practical agreement on government policy: namely, monetary policy was superior to fiscal policy at managing the economy.

This false peace was exploded during the financial crisis by the zero bound, something Krugman has invoked often. The agreed-upon way to stimulate the economy in a recession is to lower interest rates. When interest rates hit zero, they can’t be lowered anymore (rather than lend you money and expect to get less back in the future, I should put it under my mattress), and then the policy question is what if anything else should be done. This provoked the fallout between people who favored the stimulus as a way of propping up demand and those who thought that for theoretical reasons a stimulus could not possibly have any positive impact.

Gwen Robinson at FT Alphaville

Justin Fox at Time:

Beyond that, the one big issue I have with the piece is that, while economists certainly got lots of things wrong before the crisis (as did almost all of us), many members of the profession have acquitted themselves pretty well since things turned really ugly last year. Krugman goes on and on about the “freshwater” economists (at the Universities of Chicago, Rochester and Minnesota) and their crazy ideas about perfect markets. But what’s telling is that the hardcore freshwaterites have had almost no impact on economic policy for the past year—neither in the Bush months or the Obama ones. Sure, Nobelist Ed Prescott, a former freshwater economist who now teaches in Phoenix and thus should probably be described as a no-water economist, made the statement that:

“I don’t know why Obama said all economists agree on [the need for a stimulus bill],” Prescott said. “They don’t. If you go down to the third-tier schools, yes, but they’re not the people advancing the science.”

Unless you believe that pretty much anyplace other than Arizona State University is a third-tier school, this is patently untrue, evidence of the extreme isolation of the remaining true believers in rational expectations and real business cycles and other such elegant but profoundly unhelpful macroeconomic theories developed since the 1960s. Even some of the true believers seem far more aware than Prescott that the past year’s events have challenged their theories—as the University of Chicago’s Robert Lucas told me last fall, “everyone is a Keynesian in a foxhole.” Among economists with actual influence on policy over the past year—Philip Swagel in the Paulson Treasury, Larry Summers and Christina Romer and Austan Goolsbee and etc. in the current White House—there’s been a great willingness to experiment and accept that markets don’t always deliver optimal results. The result: an economic recovery that seems to be gaining strength. So don’t totally count the economists out.

Jane Smiley at HuffPo

Donald Marron at iStockAnalyst

UPDATE: Will Wilkinson

Rod Dreher

UPDATE #2: Steve Verdon

1 Comment

Filed under Economics, The Crisis