June 29, 2009
Now, Some Nasty Words about Lord Keynes
I found myself in the peculiar position if defending the Keynes multiplier last week. On this very blog. It was not any fun but I felt that it needed to be done.
To get my mojo back, I pass along a Mankiw post and a recommendation that you click through and read Scott Sumner's original post. Sumner details an incident when a young JMK was caught in a quick currency flip and leaned on friends and family.
Translation, without help from his rich daddy and rich friends, this cocky, arrogant, smart-aleck would have fallen on his face, ended up digging ditches somewhere and we would never have heard of him. But he did have a rich daddy, who bailed him out...
Interstin'... While on topic, click over to scrivener.net to read "An odd thing about Keynesian deficit spending:"
"Despite the fact that the economics of deficit finance began with the Keynesian Revolution, it has been conclusively established by Kregel (1985) that Keynes himself did not ever directly recommend government deficits as a tool of stabilization policy. Keynes played a conservative political hand and viewed budget deficits with a 'clearly enunciated lack of enthusiasm'."
That's true. He was a "fiscally responsible" liberal, after all, in the same way that Bill and Hillary, and Robert Rubin, are. Government can borrow and spend if it needs to, but preferably it'll just tax the hell out of people and control all the spending.
Posted by: Perry Eidelbus at June 29, 2009 4:08 PMJune 23, 2009
See you in the funny papers!
I can't possibly excerpt or link. Don Luskin has discovered, read, scanned, and commented on a circa-2000 comic book put out by the FOMC to describe its structure and operations.
Such is the sad state of affairs in our public education system; after teething children on Sesame Street and raising them on a steady diet of MTV, the best we can muster up for students with the attention span of a ferret on crack cocaine is textbooks in the format of comics. I guess textbooks are more palatable when there are lots of pictures.
Maybe the only way to get our message out to the next generation of economists is to have Pixar produce Atlas Shrugged, or find an anime version of The Road to Serfdom.
Wait, what?
Posted by: Keith at June 23, 2009 12:47 PMAs an earlier post suggested, we'd have the best results with a 20-something Infobabe spokesperson with big hooties.
Posted by: Boulder Refugee at June 23, 2009 4:11 PMI stand corrected; hooties trump cartoons every time.
...
Great. Now all I can think of is Jessica Rabbit teaching economics and civics.
Posted by: Keith at June 23, 2009 4:28 PMI'm not a strict constructionist, I'm just drawn that way.
Posted by: jk at June 23, 2009 4:38 PMDammit, Keith, you did it again - spluttered coffee all over the keyboard...
Posted by: Boulder Refugee at June 23, 2009 4:46 PMYou're not alone, Refugee - jk did it to me with the "just drawn that way" reference, so I guess my karma just caught up with me.
'Scuze me while I go for paper towels and Windex.
Posted by: Keith at June 23, 2009 6:30 PMJune 14, 2009
Animal Spirits
This is a good story. Myopic political hacks like me need to remember there are other plays outside of regulation. Until, of course, the government hears about it.
James Hamilton at Econbrowser explains the trade, which is handy if you do not have a subscription to the original WSJ story.
The short story is that a small investment firm in Texas sold Credit Default Swaps to large firms against some shaky real estate holdings. When they got more revenue than the asset they were guaranteeing, they bought the underlying debt and made it good. The big guys who bought the swaps are not amused:
It appears from the WSJ account as if little Amherst Holdings of Austin, Texas was happy to sell the big guys like J.P. Morgan Chase, Royal Bank of Scotland, and Bank of America something like $130 million notional CDS on a $27 million credit event, used the proceeds to buy off and make good the underlying subprime loans, and pocketed $70 million or so for their troubles. The big guys, on the other hand, paid perhaps a hundred million and got back zip.
One might speculate that that is why the big guys took TARP funds and Amherst did not.
Hat-tip: a good friend's tweet.
June 4, 2009
Staying Rich In The New Normal
PIMCO Managing Director William Gross offers some historica;l perspective, sound investment advice, and a bit of political punditry in a web address that is well worth a read.
I remember as a child my parents telling me, perhaps resentfully, that only a doctor, airline pilot, or a car dealer could afford to join a country club. My how things have changed. Now, as I write this overlooking the 16th hole on the Vintage Club near Palm Springs, the only golfers who shank seven irons into the lake are real estate developers, investment bankers, or heads of investment management companies. The rich are different, not only in the manner intoned by F. Scott Fitzgerald, but also in who they are and what they do for a living. Whether some or all of them are filthy is a judgment for society and history to make. Of one thing you can be sure however: over the next several decades, the ability to make a fortune by using other people’s money will be a lot harder. Deleveraging, reregulation, increased taxation, and compensation limits will allow only the most skillful – or the shadiest – into the Balzac or Forbes 400.
Hat-tip: a good friend via Twitter.
His Batting is Poor, But He's Also a Bad Fielder...
Francis Cianfrocca has a devastating column in Commentary. Where Larry Kudlow and James Pethokoukis see green shoots and mustard seeds. Cianfrocca sees high taxes, inflation and slow growth.
Since we must scale back fiscal borrowing as we move into the future, there are only two alternatives: to accept far higher levels of taxation, or to accept a U.S. economy that is significantly smaller and slower-growing than it would otherwise have been. (The consequences of the latter, of course,are high unemployment and less material well-being for individuals.)What would be a logical way to navigate between those alternatives? Adopt a high-tax policy that does as little as possible to burden highly-productive individuals, businesses and capital, thus lessening the impact on the size and dynamism of the economy.
But we already know that the President wants to do exactly the opposite. Faced with an evil choice between much higher taxes and a smaller economy, Obama is on track to give us both.
Hat-tip: Jimmy P
May 13, 2009
Great Post on Monetary Policy
Blog friend The Everyday Economist has a great post up yesterday that I would highly recommend.
It's a serious look at monetary stability and the plusses and minuses of different targets for Central Bankers. It is certainly accessible to any bright person irrespective of economics training and gets nicely to the heart of an under-discussed topic: what are the goals of central bankers?
EE got me hooked up with Bernanke's textbook, and I remain very comfortable with the idea of inflation targeting. I think the problem with the FOMC is the so called "dual-mandate" to target price stability and employment. I think a firm commitment to inflation would be sufficient. EE makes some good points for income targeting and I wouldn't object. But I think the problem is more the dual mandate which contains an intrinsic acceptance of the Phillips Curve rather than any difference between a price and income target.
Do yourself a favor and read the whole thing.
Whew. I'm not sure that word "accessible" means what you think it means.
But consider this: "Scott Sumner believes that we could have avoided the recession and simply experienced a burst of the housing bubble had we followed a nominal income target. I actually think that we might not have even had a housing bubble if we had a nominal income target (that allows for falling prices)." Alternately, could we have avoided both the recession AND the housing bubble with JK's October 1, 2008 'first, do no harm' prescription of government anti-meddling? [Like anti-matter, we can imagine it but can't seem to find it.]
"If you get the time machine and can go back, Terminator style, to fix our current problems, I would suggest:1. Rein in Fannie Mae and Freddie Mac. Set the way-back machine far enough to prevent their birth if you can, but at the very least pass the reforms that President Bush and (some) GOP legislators proposed in 2004 and 2005. Cut their leverage in half and you cut the current mess to a fourth.
2. Get Andrea Mitchell to dope Greenspan's tea and get him to raise rates to at least 2% before handing the reins over to Princeton Boy.
3. Strangle mark-to-market accounting in the crib. Bank regulation makes accounting a legal endeavor. These rules are too harsh and give short sellers too powerful a tool to take a bank down.
4. Laugh the Community Reinvestment Act out of Congress. Do not require banks to make bad loans, they seem to do pretty well on their own.
Get halfway there on all of those and there's no panic."
jk,
Thanks for the link. Also, it is somewhat ironic that I got you hooked on Bernanke's inflation targeting book when I am now unconvinced with that approach. However, there are elements of inflation targeting that I like. For example, the explicit goal allows the market to understand what the central bank is going to do as well as giving it the ability to evaluate whether or not they are successful.
The reason that I favor the nominal income target is because an exclusive focus on inflation can be misleading (perhaps I should write a post on that). What's more the nominal income target also serves to satisfy the dual mandate -- and without the inflationary bias.
JG,
Sorry.
In all seriousness, Sumner's point is basically that we could have avoided the recession in spite of the bursting of the housing bubble. I am not convinced that this is the case.
I will echo your point that government policy has not been anywhere close to ideal (see here, here, here, here, and here).
[Shameless plugging!]
Posted by: EE at May 13, 2009 2:46 PMI'm a serious skeptic on that one too, EE. Not only is housing a high value segment of the economy, it was (necessarily) tightly coupled with financial markets and institutions.
I'll leave serious critique of inflation vs. income targeting to Perry but what irks me about inflation targeting - as I understand it, the Fed manipulates the money supply to maintain a small positive rate of inflation in order to promote stability and prevent recession - is that the rate of inflation acts as a fee for the priviledge of using the currency. The collector of the fee is the issuer of the currency (the Federal Reserve Banks) and it amounts to a profit at the expense of the entire dollar based economy.
Am I off base here?
I'm not opposed to private business making a profit, except when it is a government protected monopoly. How about "Federal Reserve Dollars" competing with "Halliburton Dollars" and "General Electric Dollars" and "Uncle Eric's Gold and Silver Backed Dollars" none carrying the backing of the United States government?
Posted by: johngalt at May 13, 2009 3:15 PMjg,
You are correct in your critique of central bank-issued currency in that it generates revenue for the monopolist issuer. However, I don't know whether that fee is substantial enough to be my primary concern. I would prefer zero inflation, or more appropriately falling prices in a growing economy. For an accessible, yet thorough discussion of this view, see here:
http://www.cato.org/pubs/journal/cj28n3/cj28n3-1.pdf
This type of outcome can be accomplished using a nominal income target or through the method that you proposed -- free banking. I think that there is much to like about free banking. If you have a keen interest in this topic, I would recommend George Selgin's text, The Theory of Free Banking, and also his recent interview with the Richmond Fed.
Posted by: EE at May 13, 2009 3:29 PMI feel a bit hoist on my own petard with JG's quote. I'll stand behind it as a way to avoid the panic. But I'd have to swap #2 with #1 and admit that Inflation Targeting generally allowed the Greenspan Fed to provide easy money without setting the trip wires.
On free banking: I'm sorry gents, but Mister Hamilton's train left the station a couple hundred years ago. Perry and Josh will laugh that I root for Taney and Jackson against Nicholas Biddle when I read history, yet I get less excited about "fiat money" than any other guy in the land with a subscription to Reason.
I'll have to read more on income targeting, but I am concerned that it would have squeezed the life out of the 1990s expansion. Near and dear to my geeky, technological heart is the belief that the Internet bubble was an unalloyed good. I'll trade a brief and shallow 2001 contraction for the fruits of the dot-com days any day of the week.
Posted by: jk at May 13, 2009 4:04 PMjk,
Jackson is the hero in that story.
I'm am not sure why you think that a nominal income target would have restrained the 1990s boom. If real GDP is growing because of changes in productivity as it was during the 1990s (which I know will come as a shock to those on this blog who think that it was the Clinton tax policy), prices would fall. Thus, suppose that the nominal target is 3%. If rising productivity causes output to rise and prices to fall, you could have real GDP growing above the nominal target rate.
Again, Selgin's work is excellent on this point. This monograph specifically.
Posted by: EE at May 14, 2009 3:01 PMMay 4, 2009
New Protectionism
Hey, that tax revenue ain't gonna raise itself! President Obama is going to "take away the tax breaks that reward companies for moving jobs overseas." 'Bout damn time, huh? Who could possibly be against that?
When the President is speaking, hang on to what is left of your wallets and liberties. Professor Mankiw links to a Mahir Desai paper that exposes it as the "New Protectionism" that it is:
Tax policy toward American multinational firms would appear to be approaching a crossroads. The presumed linkages between domestic employment conditions and the growth of foreign operations by American firms have led to calls for increased taxation on foreign operations - the so-called end to tax breaks for companies that ship our jobs overseas. At the same time, the current tax regime employed by the U.S. is being abandoned by the two remaining large capital exporters - the UK and Japan - that had maintained similar regimes.
[...]
Similarly, the weight of the empirical evidence is that foreign activity is a complement, rather than a substitute, for domestic activity. Much as the formulation of trade policy requires resisting the tempting logic of protectionism, the appropriate taxation of multinational firms requires a similar fortitude.
April 30, 2009
Capital Tea
Some posts ago, The Refugee made a point that conservatism in the '80s was diminished by the MSM through non-reporting and condescension. He postulated that the tea parties were getting the same treatment.
This opinion piece by Arthur Brooks in today's WSJ would seem to bear that out. It contains some encouraging statistics.
Still, the tea parties are not based on the cold wonkery of budget data. They are based on an "ethical populism." The protesters are homeowners who didn't walk away from their mortgages, small business owners who don't want corporate welfare and bankers who kept their heads during the frenzy and don't need bailouts. They were the people who were doing the important things right -- and who are now watching elected politicians reward those who did the important things wrong.Voices in the media, academia, and the government will dismiss this ethical populism as a fringe movement -- maybe even dangerous extremism. In truth, free markets, limited government, and entrepreneurship are still a majoritarian taste. In March 2009, the Pew Research Center asked people if we are better off "in a free market economy even though there may be severe ups and downs from time to time." Fully 70% agreed, versus 20% who disagreed.
Blog Brother PE has often made the case against redistribution on moral grounds. According to Brooks, that's exactly the case that must be made.
I was just starting to post a link to the Brooks piece -- it is a compelling read. Allow me to tag along and provide the section a little farther down that I was going to excerpt:
To put a modern twist on the old axiom, a man who is not a socialist at 20 has no heart; a man who is still a socialist at 40 either has no head, or pays no taxes. Social Democrats are working to create a society where the majority are net recipients of the "sharing economy." They are fighting a culture war of attrition with economic tools. Defenders of capitalism risk getting caught flat-footed with increasingly antiquated arguments that free enterprise is a Main Street pocketbook issue. Progressives are working relentlessly to see that it is not.
Advocates of free enterprise must learn from the growing grass-roots protests, and make the moral case for freedom and entrepreneurship. They have to declare that it is a moral issue to confiscate more income from the minority simply because the government can. It's also a moral issue to lower the rewards for entrepreneurial success, and to spend what we don't have without regard for our children's future.
Enterprise defenders also have to define "fairness" as protecting merit and freedom. This is more intuitively appealing to Americans than anything involving forced redistribution. Take public attitudes toward the estate tax, which only a few (who leave estates in the millions of dollars) will ever pay, but which two-thirds of Americans believe is "not fair at all," according to a 2009 Harris poll. Millions of ordinary citizens believe it is unfair for the government to be predatory -- even if the prey are wealthy.
Posted by: jk at April 30, 2009 11:48 AM
It is very encouraging to see these kinds of ideas being discussed in mainstream publications by people who can influence GOP positions. (Almost as encouraging as seeng a British Petroleum TV commercial that advocates not only for wind, solar and biofuels, but oil and gas too!)
Dagny pointed out that the ideas expressed in the Brooks piece have appeared on these pages before. In the comments to a 2006 post dagny wrote:
"The second problem is philosophical (surprise). You are trying to defend individual freedoms on a collectivist basis. The reason we, “have the argument every time,” is that the majority of people including even you apparently have accepted the premise that the good or evil of a system is to be judged on a COLLECTIVE basis. This assumption allows any moonbat with an agenda to defend his policies on the, “my ideas are better for SOCIETY,” platform. Aka this time my Marxism will work. Your first paragraphs say that the classical liberal ideas result in better societies. This is true, but it is a by-product and not the reason why the ideas of Mises and Hayek are better.
Classical liberalism promotes individual freedom and that is the only standard of good that should be applied to governmental decisions."
AND ...
"As soon as you use the, “class improvement,” argument, especially as a primary argument, you are cutting out your own philosophical underpinnings. You have conceded the argument that governments should do some things because they are best for society. If idea X is best because it makes society better then I can suggest any idea X and insist that it hasn’t been tried exactly my way and it will make society better. This devolves into a he said/she said debate about how much curtailment of freedom is justified in order to make society “better”. THIS is why we keep having the argument “every time.” Because EVERY Marxist really does believe that HIS idea will make society “better.”
Freedom must be defended on an individual basis because then the latest Marxist idea X can be specifically, rationally, consistently and objectively refuted in terms of the freedoms it removes from specific individuals. Indeed, only individuals can possess freedom. (A “free society” is mere shorthand for a group of free individuals. Society is not an entity, it is an abstraction!) Individualism cannot be defended on a collective basis. To attempt to do so is philosophical suicide.
One cannot defeat an opponent’s argument by adopting it himself."
Go dagny!
April 23, 2009
TARP As A Second Budget
One of many good points in this clip from Kudlow & Co.:
Hat-tip: Don Luskin
April 22, 2009
Exploit-the-Earth Day
In 1970 a US Senator created 'Earth Day' to "inspire awareness and appreciation for the earth's environment." But this movement has since metastasized from "appreciating" the earth's environment to deifying it. As a result, any productive human activity can be villified as "pollution."
In contrast, Objectivist philosopher and publisher Craig Biddle wrote that the correct moral path is to celebrate "Exploit-the-Earth Day" instead. [email article - Click 'continue reading' for the full text.]
Environmentalism rejects the basic moral premise of capitalism—the idea that people should be free to act on their judgment—because it rejects a more fundamental idea on which capitalism rests: the idea that the requirements of human life constitute the standard of moral value. While the standard of value underlying capitalism is human life (meaning, that which is necessary for human beings to live and prosper), the standard of value underlying environmentalism is nature untouched by man.
For at least 45,000 years human beings have been exploiting the resources of earth and nature for their survival and prosperity. There is certainly no rational reason to quit now. In celebration of exploiting the earth I have created two original prints and I publish them here now for free public use.
There is no middle ground here. Either human life is the standard of moral value, or it is not. Either nature has intrinsic value, or it does not.On April 22, make clear where you stand. Don’t celebrate Earth Day; celebrate Exploit-the-Earth Day—and let your friends, family, and associates know why.
Hat tip: jg's friend, henceforth (and long overdue) to be known as 'brother' Russ.
{Hint: Right-click on 'save target as' not 'save picture as' below so that you'll get the high resolution versions.}
________________________________________________________________________
Op-ed from The Objective Standard
On April 22, Celebrate Exploit-the-Earth Day
by Craig Biddle
Because Earth Day is intended to further the cause of environmentalism—and because environmentalism is an anti-human ideology—on April 22, those who care about human life should not celebrate Earth Day; they should celebrate Exploit-the-Earth Day.
Exploiting the Earth—using the raw materials of nature for one’s life-serving purposes—is a basic requirement of human life. Either man takes the Earth’s raw materials—such as trees, petroleum, aluminum, and atoms—and transforms them into the requirements of his life, or he dies. To live, man must produce the goods on which his life depends; he must produce homes, automobiles, computers, electricity, and the like; he must seize nature and use it to his advantage. There is no escaping this fact. Even the allegedly “noble” savage must pick or perish. Indeed, even if a person produces nothing, insofar as he remains alive he indirectly exploits the Earth by parasitically surviving off the exploitative efforts of others.
According to environmentalism, however, man should not use nature for his needs; he should keep his hands off “the goods”; he should leave nature alone, come what may. Environmentalism is not concerned with human health and wellbeing—neither ours nor that of generations to come. If it were, it would advocate the one social system that ensures that the Earth and its elements are used in the most productive, life-serving manner possible: capitalism.
Capitalism is the only social system that recognizes and protects each individual’s right to act in accordance with his basic means of living: the judgment of his mind. Environmentalism, of course, does not and cannot advocate capitalism, because if people are free to act on their judgment, they will strive to produce and prosper; they will transform the raw materials of nature into the requirements of human life; they will exploit the Earth and live.
Environmentalism rejects the basic moral premise of capitalism—the idea that people should be free to act on their judgment—because it rejects a more fundamental idea on which capitalism rests: the idea that the requirements of human life constitute the standard of moral value. While the standard of value underlying capitalism is human life (meaning, that which is necessary for human beings to live and prosper), the standard of value underlying environmentalism is nature untouched by man.
The basic principle of environmentalism is that nature (i.e., “the environment”) has intrinsic value—value in and of itself, value apart from and irrespective of the requirements of human life—and that this value must be protected from its only adversary: man. Rivers must be left free to flow unimpeded by human dams, which divert natural flows, alter natural landscapes, and disrupt wildlife habitats. Glaciers must be left free to grow or shrink according to natural causes, but any human activity that might affect their size must be prohibited. Naturally generated carbon dioxide (such as that emitted by oceans and volcanoes) and naturally generated methane (such as that emitted by swamps and termites) may contribute to the greenhouse effect, but such gasses must not be produced by man. The globe may warm or cool naturally (e.g., via increases or decreases in sunspot activity), but man must not do anything to affect its temperature. And so on.
In short, according to environmentalism, if nature affects nature, the effect is good; if man affects nature, the effect is evil.
Stating the essence of environmentalism in such stark terms raises some illuminating questions: If the good is nature untouched by man, how is man to live? What is he to eat? What is he to wear? Where is he to reside? How can man do anything his life requires without altering, harming, or destroying some aspect of nature? In order to nourish himself, man must consume meats, fruits, and vegetables. In order to make clothing, he must skin animals, pick cotton, manufacture polyester, and the like. In order to build a house—or even a hut—he must cut down trees, dig up clay, make fires, bake bricks, and so forth. Each and every action man takes to support or sustain his life entails the exploitation of nature. Thus, on the premise of environmentalism, man has no right to exist.
It comes down to this: Each of us has a choice to make. Will I recognize that man’s life is the standard of moral value—that the good is that which sustains and furthers human life—and thus that people have a moral right to use the Earth and its elements for their life-serving needs? Or will I accept that nature has “intrinsic” value—value in and of itself, value apart from and irrespective of human needs—and thus that people have no right to exist?
There is no middle ground here. Either human life is the standard of moral value, or it is not. Either nature has intrinsic value, or it does not.
On April 22, make clear where you stand. Don’t celebrate Earth Day; celebrate Exploit-the-Earth Day—and let your friends, family, and associates know why.
***
In honor of Earth Day, I suppose we should remind everyone of the awesome power of green energy:
http://www.youtube.com/watch?v=OKcD_aLZ9EI
Well, okay, it's more of a bluish-green.
Posted by: Keith at April 22, 2009 8:20 PMHA! The people waiting with breathless anticipation remind me of the ones on the train in the 'Atlas Shrugged' tunnel scene.
Posted by: johngalt at April 23, 2009 12:33 PMApril 13, 2009
How Red the Sunrise is Getting
Don Luskin posts a political cartoon from 1934.
President Obama does fancy himself as FDR...
“Young pinkies from Columbia and Harvard?” Obama went to BOTH!
Posted by: johngalt at April 14, 2009 12:48 PMGreat Column on Fair Taxation
Former Press Secretary Ari Fleischer has a superb guest editorial today in the WSJ. (My brother-in-law always suggested that I looked like Mr. Fleischer -- maybe he can play me in the ThreeSources Movie). Fleischer says that as bad as Madoff's pyramid scheme was, the tax code is worse:
Picture an upside-down pyramid with its narrow tip at the bottom and its base on top. The only way the pyramid can stand is by spinning fast enough or by having a wide enough tip so it won't fall down. The federal version of this spinning top is the tax code; the government collects its money almost entirely from the people at the narrow tip and then gives it to the people at the wider side. So long as the pyramid spins, the system can work. If it slows down enough, it falls.
The piece recites the litany of what percentage of the payers pay what percent of the taxes. These figures can never see print too many times. But the important part is his contention that every worker needs to pay to remove the incentive for the poor to vote for bread and circuses funded by the rich. President Obama seeks to free the bottom 50% of tax obligations from 40% now.
Mr. Obama is adding to this trend with his "Make Work Pay" tax cut that means almost 50% of the country will no longer pay any income taxes, up from a little over 40% today. A certain amount of income redistribution in a capitalistic society is healthy, but this goes too far. The economic and moral problem is that when 50% of the country gets benefits without paying for them and an increasingly smaller number of taxpayers foot the bill, the spinning triangle will no longer be able to support itself. Eventually, it will spin so slowly that it falls down, especially when the economy is contracting and the number of wealthy taxpayers is in sharp decline.
Whole read thing the for sure. He has some good suggestions at the end (though they don't all pass Constitutional muster). It's clear, concise and comprehensive intellectual ammunition as we fight a more collectivist world.
Hallelujah. My t-shirt slogan for this one is:
NO REPRESENTATION WITHOUT TAXATION
although it leaves a bit to be desired. I'm trying to improve it along the lines of equitable, non-progressive taxation. Maybe:
EQUALITY NOW!
(In Taxation)
April 8, 2009
johngalt's 3 minutes of fame
On Monday I found it appropriate to share my popular March 9 post on "One Reason Governments Spend So Much Money" with Denver talk show host Mike Rosen. I suggested it was worthy of reading on air. On Tuesday he did so.
This link is to an audio recording of the entire 3rd hour of his show. The segment I'm in starts at 25:10 (it only takes a minute or two to download to that point) with my specific content starting at 27:50 (about 3.5 minutes long). No, he doesn't mention my name or the name of the blog but he did put the idea out on 50,000 AM watts from Denver.
UPDATE: Just the clip.
Excellent! Congratulations.
Posted by: Terri at April 8, 2009 12:22 PMDo I not have the secret talk show decoder ring? At 25 past on mine, some monotone caller earnestly suggests that Rosen should pour through the 29-page budget summary and maybe do a whole show on it... Right link? it opens in QuickTime in Chrome so it has no time display (I could pull it into my new video studio software)
Posted by: jk at April 8, 2009 4:45 PMThe full length is 39 minutes so your slider should be just under 2/3 of the way over.
I managed to make a 96 bps mp3 out of the important 3:30 but it is 2.5 mb and I get a "too large" message when I try to upload it. Suggestions?
Posted by: johngalt at April 9, 2009 12:59 PMPhilistines! Email it to me and I will FTP it. (And thanks for the tip -- nice.)
Posted by: jk at April 9, 2009 1:12 PMApril 7, 2009
Dubai Crash
A beloved (but rhymes with "tunecat") relative sends a link to a very interesting story in the Telegraph on the effects of the economic downturn on Dubai.
"The Dark Side of Dubai" really is good and well worth a read.
Dubai was meant to be a Middle-Eastern Shangri-La, a glittering monument to Arab enterprise and western capitalism. But as hard times arrive in the city state that rose from the desert sands, an uglier story is emerging. Johann Hari reports
Glad it's the Telegraph and not the Guardian, but the piece still suffers from rampant anti-capitalism and anti-consumerism. Hari says “Dubai is a living metal metaphor for the neo-liberal globalised world that may be crashing – at last – into history.” I would say that the ills he describes are not a failure of liberalism but a failure of despotism. For the MidEast, Dubai is a hotbed of freedom. And I would suggest that that accounts for much its economic rise. But the lack of real personal liberty as documented in the article prevents a solid foundation of prosperity from being created.
Even at best, it is going to be a marginal economy and likely to suffer great drops in a global downturn. He paints it as pretty dismal today, but I’d inquire whether he’d rather live in Iran, Syria or Saudi Arabia. At the bottom of the bust is it not one of the best countries in the area (excepting Isreal)?
I also have to take some exception to his overwrought examples. The first woman, Ms. Andrews is a pretty sad story. Over invested, lost it all and her husband died with a brain tumor. She admits they made foolish decisions. It is a sad story but she is living in her Range Rover and her designer clothes are creased. There are kids in Chicago whose designer clothes have never rubbed the leather seats of a Range Rover – talk about sad!
She lived the high life few on this planet has known, circumstances changed and she is in the soup. Sorry for her loss but can you remind me how this is allegorical of the fall of an international liberal economic order?
Mr. Hari seems more bothered by affluence than poverty. The lifestyle and all those *#%^@! malls receive more disapprobation than does the de facto slavery he describes. Ah yes, the workers have no rights whatsoever – but what really bugs me is the bored salesgirl at the Harvey Nichols.
Again, Dubai is Amsterdam in its neighborhood, but there is no concept of minority rights, equality, or structured government. Because the current sheik is content to let Dutch girls wear pink shorts and enforce general property rights, it is “game on” especially for a large amount of petrodollars from its neighbors with few choices. I don’t see a Dubai crash as a judgment on liberalism.
Definitely worth the read. Thanks JK.
Posted by: Terri at April 8, 2009 12:20 PMI got a thoughtful response from said relative, admitting agreement with most of my views. We both agreed it is an interesting mixture of freedom and repression.
Posted by: jk at April 8, 2009 5:22 PMApril 2, 2009
Mark to Market relaxed
Today President Obama hailed agreements at the emergency meeting of world powers Thursday as a "turning point in our pursuit of global economic recovery."
Balderdash! Here is the turning point in American, and therefore global economic recovery:
The changes to so-called mark-to-market accounting allow companies to use “significant” judgment when gauging the price of some investments on their books, including mortgage-backed securities. Analysts say the measure may reduce banks’ writedowns and boost their first-quarter net income by 20 percent or more. FASB voted 3-2 to approve the rules at a meeting today in Norwalk, Connecticut.(...)
Companies weighed down by mortgage-backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent, said Richard Dietrich, an accounting professor at Ohio State University in Columbus.
So there you have it. A 20 percent boost in first-quarter net income and losses cut by more than half with the stroke of a pen! (By a 3-2 margin, mind you.) But every silver lining has a cloud. The geniuses at FASB are letting companies back date the new rule for first quarter reporting, but not for 2008 year-end.
FASB rejected requests from banks to let them apply the fair-value change to their year-end financial statements for 2008. While the new standard takes effect for earnings reports filed at the end of June, FASB said companies could apply it to their first-quarter financial statements.
Can't have too much of a good thing, I suppose. Or perhaps they just want the 2008 "Bush era" data to look as bad as possible going forward.
JG: your final sentence hits the truth square in the ten-ring.
I've come up with the perfect economic recovery plan. Obama leaves the country for 48 hours, mark-to-market is relaxed, and the Dow shoots above 8,000. I say a trend has to be respected. Let's have Obama take an extended vacation overseas to practice his bowling while we start deregulating stuff. It could be economic paradise.
Posted by: Keith at April 2, 2009 3:53 PMApril 1, 2009
Phosphate Ban Spurs Rise in Smuggling
Spokane County, Washington banned the sale of dishwashing detergent that contains phosphates last July. Predictably, this ban has caused residents to resort to smuggling contraband Cascade and Electrosol from across the border in nearby Idaho.
As a result, there has been a quiet rush of Spokane-area shoppers heading east on Interstate 90 into Idaho in search of old-school suds.Real estate agent Patti Marcotte of Spokane stocks up on detergent at a Costco in Coeur d'Alene, Idaho, and doesn't care who knows it.
"Yes, I am a smuggler," she said. "I'm taking my chances because dirty dishes I cannot live with."
The Refugee has been unable to substantiate rumors of an emerging "phosphate cartel" and increased violence on the Idaho side of the border. When they outlaw phospates, only outlaws will have phosphates.
I was going to post this with the question "Do I own my dishwasher or not?" I think we both need to get out more.
Posted by: jk at April 1, 2009 4:12 PMa friend of mine living in Spokane says the cops have been ticketting people for years bringing back liquor and cheap cigarettes from Idaho....
He didn't speak up because he didn't smoke.
He didn't speak up because he didn't drink (much).
Now he's speaking up, because he likes clean dishes.
Me? I'd switch to styrofoam plates... damn the landfills!
March 26, 2009
Twice as many now believe 'U.S. evolving into socialist state'
Before Obama was elected president a good friend disputed our impassioned arguments that America is becoming a socialist country. "I've been to Europe many times and I know what socialism looks like. We're not there and we're not going there anytime soon." Every time I see him I resist the urge to ask him about this again. But TechnoMetrica Market Intelligence has been asking, and compared the answers now to those from last August.
A thumbnail summary of the results is that among Republicans and independents, the group who believes America is becoming a socialist country has doubled (from 1/3 to 2/3 of Republicans and from 1/4 to 1/2 of independents). Democrats, more eager to support the ideology than speak its name, were more likely to see socialism in our future under Bush than Obama.
The link is a brief essay and explains the results of the larger poll as representing three groups: Undeclared Socialists, Passionate Capitalists, and Hybrid Deniers. (Worth reading just to see those in the squishy middle called "deniers.")
JK & JG- You have taken everything I was going to say about the liberty/centralized power scale out of my mouth. Darn.
For the record, I am also a fan of those nice quandrant political scales. The one used by the Republican Liberty Caucus is my favorite of such sorts.
Posted by: T. Greer at March 27, 2009 1:42 PM
Yes, I found it ironic myself that I found so much common ground with the Ozark preacher. (Preachers ain't all bad, right Keith? :) The best parts of Christianity really are just Perry and the founder's 'Natural Law' and Uncle Eric's 'Juris Naturalis.' This is very similar to Rand's "true nature of man as a rational animal" development for an objective morality. As such, I'm on board.
If the "social conservatives" like Huckabee would just "get out of our bedrooms" they would find much less resistance to the balance of their values.
Posted by: johngalt at March 27, 2009 3:29 PMjg: The best parts of Christianity really are just Perry and the founder's 'Natural Law' and Uncle Eric's 'Juris Naturalis.' Ummmm... not sure I'll go that road; somehow I'm more comfortable saying the best part of Christianity is that it's objectively true in its claims, thereby appealing to the rational animal in me. On the other hand, I'm totally satisfied with Rand's "man as a rational animal" parallel, but as Christianity is not a blind leap of faith into the unknown so much as a well-informed, evidence-based faith.
jg, I find as ironic as you do the fact that you find more common ground with Huckabee than I do! What's clear is that you and I are running on some parallel tracks; the task of sorting people into Conservatives/Non-Conservatives can be as problematic as that of sorting them into Christians/Non-Christians. We've dealt with that more than once on my side; for a teaser, see this:
http://alhbible.wordpress.com/2009/03/15/what-is-a-christian/
One thing that's clear in both discussions is that neither self-identification nor media judgments are definitive. Complicating matters on my side, of course, is that the ultimate decider on who falls into which category have some longer-lasting consequences...
I don't have any children, but I'm going to have to check out the Uncle Eric books.
Posted by: Keith at March 28, 2009 3:19 PMI realize that this post is almost off the page and this is straying from the topic but I can't let it go. Keith states that Christianity is based on, "a well-informed, evidence-based faith." Please, Keith, can you explain what that means? My understanding is that the main definition of faith in religious terms is, belief WITHOUT evidence. I was raised Catholic BTW. I therefore have an overwhelming philosophical problem with this concept. If I am supposed to believe in God without evidence, who gets to decide what God says and wants? Unless God is speaking directly to me (and he hasn't) do I believe my priest? My Rabbbi? My Mullah? The Bible, which was written by men and re-translated many times?
Now we have a new can of worms. If I take what religion teaches without evidence, what else can I be talked into believing? Global warming? Keynesian economics? Multi-culturalism? Subjectivism in general?
So please tell me, what EVIDENCE am I supposed to base my faith on? This is not a rhetorical or sarcastic question, but one I have been asking for years to a chorus of ridiculous answers.
Finally, and on yet another subject, there has been a lot of traffic lately on the subject of, "Mark to Market," accounting rules not the least of which comes from my beloved. And as Keith says above, "Once again, I'm late to the table on a subject where I'm actually qualified to weigh in." I'm looking forward to a detailed "weigh-in" on this subject from an accounting perspective in the next month or so. But I claim that no one can expect such from someone in public accounting in the last 2 weeks of MARCH. So you can all look forward to a boring, expository filled with TLA's in the future.
Excellent comments, all. I'll be directing my personal contacts to this discussion. Huckster vs. McCain? C’mon, old news, let’s move along. The Preacher is good at what he is; let him reside there. I'd like to take up the discussion of political classifications, even hoping it gets its own post. I see there’s a Wiki article started on this.
1. I think classifications are useful, as people do want a 'team' to be on, to root for, and feel like they are in the game.
2. The way to get classifications into widespread use, is to get people to adopt them. Labels are assigned from the top down, a social model that nearly never works but that’s so easy, and feeds the egos of those from Rush 2 Obama; thus, their frequency. The easy part, btw, is what makes popularity in the media world, not the real world.
3. To get widespread use, they need to be simple and understandable.
So, I think two-axis (Lib/Cons. R/D, Socialist/Capitalist, etc….) approach is too divisive to get broad appeal. Even the very simple, 4-quadrant approach now adopted by RLC, as noted by TG (for more, see the end) I think is too complex.
I propose a three-axis model.
Economic Freedom
Personal Liberty
Moral(ity) Index
The first two are well known, hopefully well understood, and useful, powerful, pertinent, and rooted in our constitution. The third is where I’m moving into new ground, inspired by JK’s comments on morality and the need for force to back up the rule of law, even to create the peace necessary for it to develop, at times. I used a vague term for the third leg intentionally. I want those who participate to paint their own portrait of just what this implies. The overall thrust must once again be, as The Founders struggled with, how much power over these items must government be granted?
I think I need help from TS’ers. Probably first is how this is described: labels are bad as we all agree. “Classifications”, “categories”, etc. are all too pedantic and scream “top down” with all the divide&conquer implications they deserve. “Parties” has been used and abused. I want a new word that evokes the concept of â€teams’, much like Tiger Teams in the working world. It implies voluntary association, as well as a direction and progress in a way the term â€focus group’ does not. Hmm, caucus is reasonable. What say you?
I grant TS the right to share my eMail address to any who wish to contribute off line.
As an aside, let me take a moment to proselytize on the 4-axis from Nolan’s ideas, and now adopted by the Rep. Liberty Caucus. It looks identical to the 4-quandrant scale used by the AfSG folks who picked up on Nolan’s ideas to start the 10-question, “World’s Smallest Political Quiz.” I was once vastly enamored of the idea, and the implementation. If this had some lasting affect, I missed it. Pity, since I think our 100-year experiment with the current party system has run its course.
Dagny and All: My apologies - as you can probably imagine, Sunday is a a busy workday for me, and I didn't have the opportunity to come back and participate in the conversation.
Out of respect for you, my gracious hosts, I'm going to not postjack ThreeSources and turn this into a theology blog. Instead, I'm going to invite you all to let me shift the venue for the faith part on this topic over to my turf here:
I hope y'all will forgive me the presumption, but I have taken the liberty of dedicating the thread to Dagny and JohnGalt, owing to it being their comments on this post and the "Virtue of Selfishness" post that prompted mine. The red carpet has been rolled out...
Posted by: Keith at March 30, 2009 5:35 PMMarch 25, 2009
Pitts: Elections Have Consequences
Congressman Joe Pitts has an interesting set of graphs showing party control of government vs the markets and jobs.
This one struck me as rather interesting.
The biggest upticks where when GOP control of the House and Senate occurred. I leave to the readers to decide if it's because of the luck (dot-com boom & housing boom) or mad skillz.
(tip to Lesa C)
The Unregulated Bailing out the Regulated
Michael Barone has a great column today in US News and World Report. He notes a little flaw in the current narrative of the need for more regulation. "[Geithner] is asking the most unregulated parts of the financial system—hedge funds, private equity firms—to bail out the most regulated part of the financial system—the banks."
Democrats like Barack Obama and Barney Frank, at least on the campaign trail or in sound bites, have portrayed the financial crisis as the product of deregulation. The solution, they say, is more regulation. In that vein Frank, one of the brainiest members of Congress, is proposing that the Federal Reserve become a regulator of systemic risk, with the power to regulate firms that because of their size or strategic position are of systemic importance.
As always for Barone, great stuff, plenty germane the day after the President told us the problem with AIG was that the governmnet didn't have enough authority.
Hat-tip: Instapundit
March 24, 2009
A Public-Private Partnership
A good friend of this blog sends a link. Arnold Kling explains the latest Treasury plan, in March terms:
Suppose that a week ago I had entered a March Madness pool, paid $10, and filled out a bracket.Suppose that right now my bracket is looking weak, with only about half the teams I picked to make the sweet 16 still in the tournament. I have not been mathematically eliminated from winning the pool, but I need extremely good luck the rest of the way. (Incidentally, this example is hypothetical. I don't follow college basketball, and I don't enter any pools.)
At this point, my entry is no longer worth $10. If I were to sell it, I might get fifteen cents for it. If I were a bank, my bracket would be a toxic asset.
Now, along comes Tim Geithner with a fistful of taxpayer dollars..."
You've read half of it, click through and finish.
jk: theoretically, it's kind of like putting these "toxic assets" in InTrade and seeing what people would be willing to risk against the odds of the asset paying off.
I think Mr. Kling is onto something - a creative, free-market way of selling off the assets to whatever willing buyers there might be out in the investing public. Could we put them into shiny aluminum briefcases and have Howie Mandel broker them off a la "Deal or No Deal"? Could we just peddle them on eBay? Seems to me eBay might be a good market for them; we could see what people will bid. Some buyers will get a bargain, and some will get worthless paper - but at least they're freely assuming the risk.
Picture this: Monty Hall says to you: "you're holding a March Madness bracket of questionable value. Do you want to keep it, or do you want to trade it for the check behind Door Number Two, where Timmy Geithner is standing?"
Posted by: Keith at March 24, 2009 6:51 PM
Another great one from Dr. Kling; his analyses are getting more and more lucid (and readable!) every year.
A great one from Kudlow was on TCS Daily last week (where I first found Dr. Kling) noting how the FASB rules changes to allow cash-flow accounting to prevail over the silly distressed last-trade mark-to-market will do as much to rescue the financial markets than anything Geithner is likely to propose, probably more.
Here's Kudlow's article, but it's still heavy on the heat and deft with the light: http://www.tcsdaily.com/article.aspx?id=031809A
Posted by: nanobrewer at March 26, 2009 7:43 AMThat won't work, nanobrewer, at least not for the government. That would be negating what government did to help fuel the crisis, when what government wants is to create new regulations to fix something it screwed up in the first place.
As I recently wrote on my own blog, the feds instituted mark-to-market accounting at the worst possible time. It was not a coincidence. I directly accuse the feds of doing it deliberately to blow things up, thus preventing banks from lending. Then the feds step in: "Say, you need capital so you can lend again? No problem, take some of ours -- but we want an equity stake in youse."
Posted by: Perry Eidelbus at March 26, 2009 10:05 AMOoooh, Perry, I try to stay away from the conspiracy-mindedness of the deliberacy of gummint actions. I prefer, in general, to lean towards the Heinlein premise: "Never attribute to malice that which can be adequately explained by stupidity."
Sure, there are elected officials who are Socialists, and others who are but don't realize or accept it. More specifically, I believer bureaucrats act to enlarge their own serving tray. One of the most important components of enlarging a bureaucracy is increasing its public image. M2M has been pushed around for a long time, I've been hearing about from Libertarian econoblogs for quite a while (and think it was active in some areas, previously). I think with the elevation of The One, all the liberal kooks are out of the woodshed at no time since Pandora opened that damned box.
So, no, I don't think the people who enacted M2M rules were out to destroy US Capitalism; if they were, then the rules would not have been reversed so quickly (hmmm, was it a quick reversal?)
Now, I do share you concern about those in the the ranks of the unelected; but usually they have to march to the speed of whomever is pounding the drums; the time of the Obamacons is quickly fading, I think.
Still, this is why those concerned with public liberty need to get out and preach the gospel of hard work and personal responsibility. I've been doing it for over 20 years, and got damn near hoarse by last September.
These current fiascoes were urgently needed to strip that many more megaphones away from the FraDodd's, and give them back to those that can speak to, and thereby expand the American experience.
I'll try to keep up here, as there's more to say and much, much more to do.
Posted by: nanobrewer at March 28, 2009 12:33 PMMarch 22, 2009
Quote of the Day
"In the United States calling someone a socialist is often an insult, striking at the heart of American individualism and raising the fear of government fingers in everyone's business." -- Reuters
But, but, where Joe Biden comes from, it's not called socialism, it's called "fairness"!
Theft is theft, no matter what euphemism is used.
Posted by: Perry Eidelbus at March 22, 2009 8:43 PMScranton, PA?
Posted by: jk at March 23, 2009 10:11 AMYes. You don't remember when he made that comment?
Posted by: Perry Eidelbus at March 23, 2009 12:23 PM"Socialism is for ants." -johngalt
Posted by: johngalt at March 23, 2009 2:40 PMJohn Galt,
This is actually not so:
http://www.nature.com/nature/journal/v446/n7132/full/446143a.html
March 18, 2009
"Subsidy Footprint"
Here's a new topic for Mankiw to ponder: Screw the "carbon footprint" nonsense (on the basis of Global Warming cum Climate Change being no more than a massive swindle - sorry TG, I'm still not convinced) and focus on the principle of subsidy inflows and outflows, for individuals and corporations.
A Bangladeshi blogger talked about it last July as 'Subsidy-neutral lifestyles and businesses.' He's got a good start but some of his underlying ideas are crap. (Such as "... some part of that fuel price is being paid by those poor kids ...") But he captures the essential idea in his closing paragraphs:
There is also another dimension. In many capital markets of the world, there are separate indexes that include only companies that fulfill certain kind of benchmark. For example, an investor who is looking for Sharia complaint investment, there is an index in NYSE that helps you do that. If you are looking for companies who are environmentally responsible (i.e. green), there are many services available to help with that.In line with this, in Bangladesh, some civil society or NGO organiation should offer a service to identify the amount of money that different business houses are getting as government subsidy, they get it through different generalized subsidy mechanisms of the government (e.g. fuel subsidy, electricity subsidy, water subsidy, etc) even though the business might not need it. Once that information is public, the individual companies can try to become subsidy-neutral. Once they become subsidy-neutral, only the amounts above that should be treated as tax-deductible CSR expense, if government wants to go that route.
Any takers for this initiative, to offer services to the individuals and to the businesses, so that they can become subsidy-neutral if they want to?
But this omits the other half of the subsidy-balance equation: How much did each business/individual pay in taxes, fees, regulatory compliance costs, etcetera, etcetera?
Let all the peoples of the world see an objective calculation of this balance - for individuals, for corporations, for governments. Then and only then can we engage in a conversation about "fairness."
I just fear that there is no one left worthy of fund inclusion. Probably for the best, as Milton Friedman reminds us, a Corporation's goal is to maximize value for its shareholders. Lobbyin' and subsidizin' is going on and you have to play with the rules as they are and not how you'd like them to be.
Posted by: jk at March 18, 2009 1:43 PMI don't think you're feelin' me, bro. If there were "no one left worthy of fund inclusion" then where do subsidies come from?
An objective assessment should find that the aggregate "subsidy footprint" of the planet is necessarily ... zero.
Posted by: johngalt at March 18, 2009 4:02 PMMarch 9, 2009
Why politicized economic development is dangerous
I recently wrote on the danger of politics driving scientific research. The obvious case of this now is all of the government "investments" being proposed in the name of "saving the planet from irreversible damage due to climate change."
But even if man-made climate change was real (sorry tg, is real) and even if "renewable" energy sources were beneficial to counter it, the least effective entity to make them a reality is - wait for it - government.
Consider the following essay on "One Reason Governments Spend So Much" from the 'Uncle Eric' book: Whatever Happened to Penny Candy?
Industries generally develop in three stages. First is scientific feasibility, second is engineering feasibility, and third is economic feasibility.Using the airline industry as an example, the question in the 1800s was: "Is long-distance air travel possible?"
In the 1800s, balloons were already in use but were not practical. The problem to solve was the heavier-than-air machine.
The Wright Brothers in 1903 proved scientific feasibility. They risked their time, money and lives to show that a heavier-than-air machine could fly.
Lindbergh, in 1927, proved engineering feasibility. He risked time, money and his life to show that long-distance air travel was possible.
This gave investors enough confidence to risk their money in the aircraft industry. In 1935 the Douglas Company came out with the DC-3, which was the beginning of economic feasibility.
The modern airline industry resulted from all this risk-taking. Today, a middle-class American can go anywhere in the world much faster, and in much greater comfort, than a Roman emperor could. Travelers fly because the benefits are greater than the costs. This is economic feasibility.
This three-step model explains why governments are terrible at economic development. The "experts" who comprise the government gamble with other people's money, so they tend to confuse scientific and engineering feasibility with economic feasibility.
Once science and engineering prove something can be done, those who comprise the government will do it - even if the costs are greater than the benefits. [emphasis mine]
This economic development of the economically unfeasible is precisely the modern story of:
Wind power
Solar photovoltaic power
Ethanol (both glucosic AND celluosic)
Biodiesel
Hydrogen fuel cells
Dual-mode hybrid cars
The list goes on...
Just to add to the entertainment value: "But even if man-made climate change were real..." is the grammatically accurate construction. Heh.
JohnGalt: great post, and the model of three-stage development makes plain, even to a poor, dumb country boy like me, why government-run economic development doesn't work. And to boot, it's much more elegant than me just saying "a government that can't even balance its own checkbook has no business fiddling with the economy."
I'd only propose one small change to the quote rfrom the essay. Where the author wrote "Once science and engineering prove something can be done, those who comprise the government will do it - even if the costs are greater than the benefits" in the last paragraph, it seems to me that the last phrase should omit the word "even" and the hyphen, thusly: "... those who comprise the government will do it if the costs are greater than the benefits." If the benefits are greater than the costs, entrepreneurs and private industry will do it, without the necessity of government meddling. Profit motive being what it is, and all that.
Ergo, government will ONLY do it if its benefits do not justify its costs, and that applies to every item in your list. QED, yes?
Posted by: Keith at March 9, 2009 3:18 PMAhh, the punchline from a great old gag can be trotted out:
I congratulate Keith on his use of the subjunctive.Posted by: jk at March 9, 2009 4:32 PM
Thanks, jk...
Say, on the subject of government and the economy, I've been reading in the news today that Warren Buffett has been quoted as saying the U.S. economy "fell off a cliff." I've read that three times today, and every time, all that comes to mind is...
"It was pushed."
Posted by: Keith at March 9, 2009 5:11 PMWellll, I was trying to have some fun with TG, saying "was" as in "past tense" ... before it was largely discredited, then replacing it with "is" as a sop to him since he's not yet comfortable with the "denier" badge of courage.
I admit - sometimes my jokes trip over their shoelaces.
Oh, and yes, I do fully agree with your improvement of the closing paragraph. Well done!
Posted by: johngalt at March 10, 2009 12:25 AMTough room, jg, you know that as well as anyone.
Posted by: jk at March 10, 2009 1:34 PMEh, I though the post was funny. I also think you have highlighted one of the biggest problems with the Eco-stimulus crowd. What they call progress is in actuality a retardation (word?) of Western civilization.
Posted by: T. Greer at March 11, 2009 12:19 PMMarch 6, 2009
Worse Than The Great Depression
Did we need more bad news right before the weekend? Don Luskin has got it.
Over the last couple years I loved to ridicule all the scaremongers who always said this, that or the other thing is “the worst since the Great Depression.” I stand by my ridicule, for the most part -- those prophets of doom were mostly broken clocks who look right now just by sheer luck. But there's no question now that things have gotten quite bad in the economy and the markets.So let me do the preachers of Armageddon one better. Today's stock market isn't just the “worst since the Great Depression,” like they're so fond of saying. No, it's even worse than the Great Depression.
[...]In other words, to be no worse than the catastrophe that happened to stocks in the Great Depression, the S&P 500 today would have to rally 17%.Which it ain't doin' (S&P500 up 0.83). Read the whole thing.
UPDATE; Original post said "DJIA down 97 and change." I needed a browser refresh. ThreeSources apologizes for the error.
Fascinating graph. But I think there are some errors.
I read "-56.4% loss to date" and "-49.0% loss in the Depression, to this day." The index is then only 7.4% below the Depression pace, not 17%. right?
And how can the loss "since stimulus enacted" be larger than the loss "since Obama inauguration" since it didn't go up in the interim? I think those two numbers may be reversed.
Again though, fascinating perspective. Democrats will tell you it was down 50% before Obama had a chance to start "fixing" it. And 40% before he was even elected. But save the banking crisis in Sept-Oct the loss is a series of steep declines every time Obama got his way with something. Perhaps it would be good for America if he failed once in a while.
Posted by: johngalt at March 7, 2009 11:37 AMMark-to-Market Accounting (and other Arcania)
Steve Forbes was on Fox's 'America's Newsroom' with Megyn Kelly this morning advocating the repeal of the "mark-to-market" accounting rule. He said it was rescinded in 1938 by FDR and led to economic recovery at the time - doing so now to reverse the Bush administration's return to it would have a similar benefit, he claimed.
I'm sympathetic to this cause based only on what I've learned from watching news stories over the last many months, so Forbes' plea to "call your congressman" because the president can change the rule by executive order got me back on the 'net to learn more.
According to Wikipedia, "Mark-to-market" was instituted by FASB's FAS 157 effective for fiscal years starting after November 15, 2007. It required assets to be valued on balance sheets for what they could be sold for, not their maturity value. [This is my non-financial professional interpretation of a bunch of technical jargon.]
In last year's TARP bill responding to the banking crisis was the authority (section 132) to suspend mark-to-market. Section 133 also directed SEC, Federal Reserve and Treasury to conduct a study on the policy and report back to congress within 90 days. SEC issued a report on December 10, 2008 concluding that mark-to-market would remain.
In the interim FASB issued new guidance that attempted to show how mark-to-market should be applied to determine the fair value of an asset "when the market for that financial asset is not active." Essentially, although the valuation should be made based on market value at the time it should reflect "the price that would be received by the holder of the financial asset in an orderly transaction (an exit price notion) that is not a forced liquidation or distressed sale at the measurement date."
Even in times of market dislocation, it is not appropriate to conclude that all market activity represents forced liquidations or distressed sales. However, it is also not appropriate to automatically conclude that any transaction price is determinative of fair value. Determining fair value in a dislocated market depends on the facts and circumstances and may require the use of significant judgment about whether individual transactions are forced liquidations or distressed sales.
To my untrained eye there appears to be much hocum, wet-finger gauging and other assorted subjectivities inherent in the rule. By way of example:
In determining fair value for a financial asset, the use of a reporting entity’s own assumptions about future cash flows and appropriately risk-adjusted discount rates is acceptable when relevant observable inputs are not available.
and
Broker (or pricing service) quotes may be an appropriate input when measuring fair value, but they are not necessarily determinative if an active market does not exist for the financial asset.
So the question is, "Is this any way to run a transparent free-market?" Seems more like job security for accountants and auditors to me. What was so bad about mark-to-value in the first place that we had to employ this inanity? There's some intelligent-looking discussion of it here.
Help us Perry! You're our only hope!
UPDATE: Hate to but in another's post, but Forbes has a guest editorial in the WSJ today which collects a lot of this.
Search your feelings, young padawan. You know what I say to be true.
The dark side surrounds us. Ever-vigilant we must be, if we are to overcome.
"He said it was rescinded in 1938 by FDR and led to economic recovery at the time"
This is nonsense. Forbes can't even get his facts straight, unless he's talking about the "recovery" that was (a) only statistical and (b) was as good as a physical therapist helping someone to walk again after the therapist hit him with a car. Real recovery didn't occur for nearly another full decade, and not just because one accounting rule was repealed. We don't need the government to stop making rules for businesses: we need to STOP the government from making rules for businesses.
However, repealing it is a start, though don't hold your breath. Those of you familiar with me and my writings know that I've called this a crisis perfectly engineered by government. Purposely caused and well-planned. The institution of mark-to-market was timed to make everything blow up at once, so we won't see it reversed until the damage is truly catastrophic.
I'm not an accountant, but I take a simple Austrian view: let buyers and sellers agree on whichever method works best for them. I personally view the clash over accounting methods as a red herring. It's coming down again to government setting rules that could very well be wrong. Both have strengths and weaknesses.
Mark-to-market realizes that we may not know something's true future value, so at the time we can only value it based on a current market price. Mutual funds' NAV, and margin account values, necessarily go by MTM. Part of my job is approving employees' personal investments based on being low enough that they won't negatively impact our clients' trades, and when they're trading options or futures, we go by what's effectively MTM. The problem is when you bought something for $1 million, and if it declines in value, mark-to-market means your books will show a loss. But in fact, you won't experience a loss unless you're actually trying to sell the whatever at that moment. If I buy a $500K house that in a year is worth less, even if it's down to zero, that doesn't necessarily mean I'll go bankrupt.
Now when you're dealing with something illiquid and/or uncertain in value, mark-to-model is useful. But even so, it inherently leaves people free to value changing/uncertain prices pretty much at whatever they want. Warren Buffett's been to correct to call it "mark-to-myth," although not to the extent he'd like us to think. But a lot of investing companies have used it to hide losses in their investments, and if they had had to report things based on mark-to-market.
In the end, we need not complicate things with accounting methods. We need only to let buyers and sellers be free to agree on a price, and for each side to accept the consequences of the decision without using government to coerce others into bailing out one or both sides. Putting this into an example, if you're going by mark-to-model in what you're offering to sell me, but I insist on mark-to-market, we of course won't agree. But it's not the accounting method that's important, it's the *price*. Value is subjective, however you calculated it.Do you see how well this works? If you sell me a widget that the market says is worth $1, but I think it will be worth $10, I might offer you $2. You can value it at $2 or $3 on your ledgers, and call it "mark-to-model" or whatever you want. All it matters is that I can buy it, and you can sell it to me, at a price we agree on.
If I run a bank, and certain assets are worth zero on the current market, taking my bottom line negative, but I have a billion in cash, why shouldn't I be able to make loans? Our financial officers need only record the assets properly in our books, with two sets of values. If there's fraud, e.g. a willful misrepresentation of material facts, there were plenty of laws prior to SarbOx that punish such wrongdoing.
If a bank's owners don't like what management is doing, if they feel that money is being lent out imprudently when the assets are unlikely to recover, then they can fire the management. There is always some way for the free market to hold people accountable, without the government having to step in with its absurd rules.
Posted by: Perry Eidelbus at March 6, 2009 1:20 PMThe answer is no, as in no way to run a free market.
However, once you have let the gub'mint in (insuring deposits, enforcing leverage ratios, &c.), you are stuck with their regulatory arm. Unlike the stimulus, it is not some evil scheme foisted on us to kill capitalism. If the government is responsible for margin requirements and leverage ratios, they make the rules about how assets are valued.
Put me down with Forbes for rescinding it, however, just another unintended consequence of government intrusion. Once the feeding frenzy begins, mark-to-market certainly amplifies it.
Posted by: jk at March 6, 2009 2:33 PMCase in point: Enron. While I completely agree with Perry's sentiments, it does no good for investors who "lost their entire life savings" to see the fraudsters frog-marched off to jail. Even if the punishment DID fit the crime (which it doesn't) those people have still "lost everything."
Qwest's Joe Naccio just lost his legal appeal for insider trading which netted him (and his wife) many millions of dollars so what's his punishment? 6 years in a country club prison. How many of us wouldn't take that deal if it weren't illegal? (Hell, I spent that long in a bad marriage!)
All told the solution appears to be, make the punishment for fraud more severe (longer terms in dirtier jails) and DIVERSIFY YOUR GORAM PORTFOLIO!!
Posted by: johngalt at March 7, 2009 11:49 AMFebruary 26, 2009
Escher Economics
Awesome, click to see more:
Hat-tip: Mankiw who titles it "Ricardian Equivalence." I'd call it "Deadweight Loss."
February 24, 2009
Don't Sully That Reputation
No one will dispute the piloting skill and heroics of Chesley "Sully" Sullenberger. However, The Refugee respectfully encourages him stick to flying and forget economics.
During recent testimony before the House Transportation and Infrastructure Committee, Capt. Sullenberger bemoaned the payroll plight of pilots.
US Airways pilot Chesley "Sully" Sullenberger told the House aviation subcommittee that his pay has been cut 40 percent in recent years and his pension has been terminated and replaced with a promise "worth pennies on the dollar" from the federally created Pension Benefit Guaranty Corp.
...
The reduced compensation has placed "pilots and their families in an untenable financial situation," Sullenberger said. "I do not know a single, professional airline pilot who wants his or her children to follow in their footsteps."
The Good Captain traced the problem back to airline deregulation in the 1970's. Ah. There we have it: if we could just bring back some old time government, he could still be benefiting from the artificial market created by bureaucrats - at the expense of the millions of consumers, of course.
Before we pass the hat through coach, however, let's look at his assertions objectively. First of all, there's no doubt that pilot incomes have fallen as airlines have tried to find a sustainable business model. However, 2008 data indicates that salaries for captains of A320/737 class aircraft ranges from $123,000 to about $200,000 depending upon airline. 747/777 jockeys make substantially more. US Airways is on the lower end of the scale. But even so, these individuals are well within the top 10% of all wage earners.
Untennable financial situation, sir? If you're in the top 10% of wage earners and can barely scrape by, then you either don't have any concept of true poverty or need to hire a money manager. Moreover, why not change to a higher-paying airline on a higher-paying ride? A top pilot with 19,000+ hours surely has some job mobility.
Secondly, his testimony implies that flight safety is at risk. Facts speak differently. Commercial flight fatalities have declined since deregulation despite a huge increase in the number of flights. Air travel has never been safer.
Capt. Sullenberger does not often mention that he was educated entirely on taxpayer money at the U.S. Air Force Academy, a $400,000 value in present dollars. He also learned to fly in taxpayer-paid planes costing thousands of dollars per hour all while receiving a pretty decent officer's salary and benefits, again at taxpayer's expense. The Refugee begrudges none of this, but this is a ride available to only 1 in 100,000 students with no residual student loans.
Again, with respect, the taxpayer has already done his part to support Capt. Sullenberger. Yes, his flying skills are magnificent and actions on the Hudson heroic. It was also the job that he was trained and paid to do.
Ahem, here's an economics lesson for Sullenberger, and because he's so stretched on a meager income, I won't charge him a dime.
Richard Branson, yes that one, offered to hire Sullenberger for Virgin Atlantic. Not at whatever salary Sullenberger demands, but at double what anybody else offers -- and a pilot position on Branson's spaceships. Apparently Branson made the offer in public, not directly, and Sullenberger was unaware of it. I take it that the offer has not yet been accepted.
Prices are ultimately determined by competition, and at the margin. It isn't only what you're willing to pay for something, but what the next person is willing to pay. Conversely, it doesn't matter what someone is willing to pay you, but what the next person is willing to accept for providing substitute goods or services.
This means for airline pilots that there are enough of them who are willing to accept the pay cuts. Otherwise, by definition, airlines would have to keep offering higher salaries and benefits until the market cleared (when the number of bought items equals the number of items offered for sale, i.e. the number of hired airline pilots equals the number of desired pilots). Prices will not necessarily be the same for every unit sold over any given period of time: prices can fluctuate based on current demand for a limited or ample supply, as we see with oil prices. So if a particular airline needs just one more pilot and wants one really, really badly, they might offer $200K to someone who will start right away (as opposed to cancelling several flights because of a manpower scarcity).
But in fact with airline pilots it's been the reverse: there is sufficient supply that airlines have been able to cut their salaries, as part of broader cost-cutting measures, yet retain sufficient manpower. As remarkable and downright heroic as Sullenberger was, there just isn't that much demand for his particular expertise compared to the available substitutes of competent pilots who can do ordinary flying. Yes, it would be nice if all pilots had his skill, but that's just not going to happen. The increase in salaries would make airfare too expensive: fewer passengers lead to half-empty planes, leading to schedule reductions, leading to layoffs of these super-qualified pilots.
Sullenberger's complaint isn't that his pay isn't what he'd like it to be, but that his pay isn't what he'd like it to be while staying at his employer. At the end of last year, I turned down an opportunity at another firm for double what I'm making now. It would have been a more senior position with considerably greater responsibilities, and my particular area of compliance is also very high in demand right now. I wasn't afraid of the "big chair," but rather that I'd be working for a bank. First, I can't stay true to my principles when working for a bank receiving TARP money. Second, being at a major asset manager is a lot more stable in bear markets; I didn't want to risk getting laid off after 6 months because the bank had a couple of bad quarters. Third, it was too much of a risk to leave my current environment, where I get along great with my boss and team and implicitly trust them, for a boss I might hate like none other (or even if I like the person who hired me, I might get a new boss I hate).
So I voluntarily accepted an effective pay cut to stay where I am. Sullenberger did too, and he has no cause for complaint.
Posted by: Perry Eidelbus at February 25, 2009 10:17 AM"It will be a great day when AIRLINE PILOTS get all the money they need and the air force has to hold a bake sale to buy a ... oh, wait a minute."
Posted by: johngalt at February 25, 2009 12:38 PMShort the U S of A?
Financial markets shuddered Monday with the Dow Jones Industrial Average falling 3.4% to 7114.78 -- or nearly half the peak it hit just 16 months ago -- even as the Obama administration tried to quell fears about the viability of major U.S. banks.The decline in the stock market was unusually broad and went well beyond the jittery financial sector, with technology and other economically sensitive categories driving major indexes to their lowest closing levels in more than 11 years.
Much as I love to study sophisticated investment vehicles and absorb wisdom from Kudlow guests, I have to admit to being the dullest, old-lady, dollar-averaging, broad-index investor on the planet. My 401K choices are a bit limited, so I do ETFs for S&P500, S&P600, and a non-aggressive international fund. For my wife's IRA, we invest lump sum once per year and can choose any investment except rare guitars (there's probably an ETF, I shouldn't jest.) So I get a little more colorful there. My big idea last year was to go heavy on Financials -- how much worse could they go? Oh. That much.
On one hand, I am a Kudlowite optimist. The dynamic free market engine of world prosperity will win in the end and a long term bet against America is not historically wise. The other hand sees protectionism, überregulation, preternaturally progressive taxes on income, investment and capital -- all in the midst of a downturn that cries for the exact opposite.
I'm thinking of going short with half this year's contribution and putting half in Taleb's Black Swan fund. A little hedge against a further downturn that seems quite possible. I would love to hear what ThreeSourcers think. How bad is it gonna get and what to do?
UPDATE: The editorial page is a little less kind, invoking Casey Stengel's "Can't anybody play this game?"
The latest example came yesterday, when equity markets showed early strength after a dreadful week when they had fallen nearly 6%. Then investors started to absorb a three-paragraph morning statement from five branches of the Obama financial regulatory team asserting that the government "stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses." Stocks headed south around 10 a.m. and didn't stop until they'd lost another 3.4% or so. The nearby chart of the Dow since Election Day is a running tally of ebbing confidence in the new Administration.
February 22, 2009
"Where's their answer to this?"
A number of ideas over the past weeks have come together for me this morning-
In response to the letter I sent to my Senators opposing H.R. 1 a beloved cousin emailed me, "I’m not saying I disagree or agree with you when I ask this question…. But what would you suggest? I don’t really know what the right answer is at this point…"
The first line of my reply to her was, "Well, on numerous occasions in the past we've cut tax rates in an attempt to spur economic growth and every time that's been done the economy improved and net tax receipts increased, despite the lower rate of taxation."
Then the shamulus bill passed and a number of Republican governors, upon seeing the fine print, began suggesting they'd refuse the federal handouts. "Republican governors, as the last bastion of capitalist political power in this country, should implement a capitalist plan for job creation - eliminate the corporate income tax" I thought. By doing this in one or more states there would be a side-by-side comparison of capitalism versus government bailouts that would be difficult to ignore on the key statistics of job growth and state GDP growth.
But I wondered which states have a Republican governor AND a corporate income tax that could be axed?
This morning Tim Pawlenty and Mark Sanford appeared on Fox News Sunday with Ed Rendell and Jennifer Granholm to discuss the "stimulus" bill. Among other things, Sanford called The Big O's foreclosure plan "a horrible idea." Last week Sanford suggested that his state might "turn down stimulus money" from the feds. In that L.A. Times story real estate agent Joyce Rivas claimed to have voted for Sanford twice but was angered by his "threat." Rivas asked, "For starters, where's their answer to this?"
In a quick search I found that Governor Sanford proposed, last December, elimination of the 5% South Carolina corporate income tax.
Lawmakers and observers said eliminating corporate income tax is an interesting idea, but want to hear more details.(...)
South Carolina could join four other states, Nevada, South Dakota, Washington and Wyoming, with no corporate income tax, Sanford said. South Carolina collects about $300 million in corporate income taxes annually, far less than sales and individual income tax collections.
“We’ve got to get away from this piecemeal approach to jobs incentives,” Sanford said in a written statement. “We believe a better approach would be to simply lower the overall tax rate for corporations, so that we’re not only giving companies a good deal when they decide to locate here but we’re giving them a reason to stay and expand.”
There you are, Ms. Rivas. That is our answer.
For reference: Tax Foundation's 'State Business Tax Climate Index Rankings' Maryland... ouch!
I watched that show as well. Let me just say "Sanford for God!!!"
I have heard for years about how impressive (and telegenic) Governor Granholm is. "Don't amend the Constitution for President Aahnold," they said, "it will backfire and you'll get Democratic President Granholm." Watching her today, I don't think either of them should start measuring drapes. (For the record, I would support an amendment allowing a naturalized citizen to be President and for the record my naturalized-citizen wife would not. There you go.)
You can see where these former industrial giants of states get the "former" though I confess to liking Gov. Rendell's style. Gov. Granholm will gladly take her money and South Carolina's and yours and yours and yours and yours.
...and another thing!
This humble little blog has mentioned several things that would be wildly more effective and far more conducive to liberty. Holidays on cap-gains taxes, elimination of the corporate cap gains tax, increased immigration and the payroll tax holiday would all be wildly stimulative. None would grow government's size and influence.
Posted by: jk at February 22, 2009 7:19 PM...but whadda WE know. We're just "the people."
Posted by: johngalt at February 22, 2009 11:31 PMFebruary 20, 2009
Oh Canada!
A light snack for the weekend.
Awe. Some.
Born in Canada, eh? Can't be president? Amendment time.
Posted by: jk at February 20, 2009 4:33 PM21st Century Paul Revere
I'm dubbing CNBC's Rick Santelli the Paul Revere of the 21st Century, and his clarion call is "The looters are coming! The looters are coming!"
Video here (You gotta see this!)
"Cuba used to have mansions and a relatively decent economy. They moved from the individual to the collective. Now they're drivin' '54 Chevys. Maybe the last great car to come out of Detroit."(...)
"They're [floor traders on the Chicago Mercantile Exchange] pretty much of the notion that you can't buy your way to prosperity. And if the multiplier that all of these Washington economists are selling us is over one then we never have to worry about the economy again. The government should spend a trillion dollars an hour because we'll get 1.5 trillion back.
(...)
"If you read our founding fathers, people like Benjamin Franklin and Jefferson, what we're doing in this country now are just making them roll over in their graves."
The division is not over race, as AG Holder claimed, but over productivity. The "racism" charge is now merely a distraction. The new administration has contempt for anyone who can earn his own living through industriousness and productive effort. Instead they confiscate wealth from producers and lavish handouts upon the lazy and the corrupt. They are, in the truest sense of the term, looters. And they control the levers of power in the administrative branch of our government. We're about to see if the "separation of powers" model can withstand their assault on the Constitution.
Here's another smackdown worth looking at.
Posted by: T. Greer at February 21, 2009 12:52 AMGood one, tg. And by good I mean, of course, very bad. I love the line "...the Ebenezer Scrooge - Rick Santelli plan where we just let these people rot."
I think Chris Matthews is proof that the media rots your mind far worse than politics. He worked with Tip O'Neill and the leading lights of the Democratic party his whole life and came out well-reasoned, polite and practical. Ten years on MSNBC and he became a raving, frothing, hyper-partisan lunatic.
Sorry for the strong words but I'll stand by the comparison. A politician or advisor has to deal with opposition. Once you get your own show you are the law.
Posted by: jk at February 21, 2009 11:48 AMI love this guy. I have spent the last hour viewing youtube clips of the man, and I really think somone needs to make a Sentelli youtube channel.
Here are my favorites:
*Santelli Reams Liesman for Defending Bernake
*Rick Santelli on Market Intervension
*Santelli pissed off about the bailout
And yes, Chris Matthews is ridiculous. But honestly speaking, I think Santelli was the one who came off better there. For one, he never had to resort to asking who the other guy voted for.
Posted by: T. Greer at February 21, 2009 8:29 PMFebruary 3, 2009
Jockstrap
January 27, 2009
It's a Harvard-Yale Smackdown!
Words failed me when I read Yale's Robert Schiller's guest editorial in the WSJ this morning. Schiller is taking the Bidenesque position that the most important thing about the stimulus is its ginormousness.
So what must we do to revive our animal spirits and economic growth? We must be certain that programs to solve the current financial and economic crisis are large enough, and targeted broadly enough, to impact public confidence. Not only do we need a fiscal stimulus significantly greater than the proposal that is currently on the table, government action is also needed to take the place of the credit markets that seemingly worked so well when animal spirits were high.
I bristle at the notion of encouraging our illustrious legislative branch to make sure they spend enough. And I was going to write a serious, witty and trenchant reply. Thankfully for all concerned, Professor N. Gregory Mankiw (from Team Hahvaad) did it for me:
I think a lot of economists would agree with that. The question is what it would take to make people more confident. Bob thinks that confidence would rise if the government borrowed more and spent more. Other economists think that confidence would rise if the government committed itself to, say, lower taxes on capital income. The sad truth is that we economists don't know very much about what drives the animal spirits of economic participants. Until we figure it out, it is best to be suspicious of any policy whose benefits are supposed to work through the amorphous channel of "confidence."
This is where Ayn Rand trumps all these morons, particularly Keynes. If you want to call it confidence, fine, call it that. But don't call it anything related to "animals."
"You keep using that word. I do not think it means what you think it does." People throw out nice-sounding words but rarely stop to think about what they're really saying.
Keynes' term is a complete misnomer because "animals" use instinct and similar non-thinking passions as the basis for their actions. Man is not an animal. Man is a thinking, reasoning being that weighs decisions on the basis of trade-offs (i.e. what is to be gained). A decision may be made quickly or "spontaneously," but that hardly means the decision was not rational. (Side note: here I speak of "man" in a general sense. There are plenty of people who act little better than animals.)
I don't want people's "animal instincts" to come out or otherwise encouraged in any way. Animals' instincts are to do whatever seems right at the time, with no rational judgement, even if it means killing their own young. Do lions worry about being confident about pursuing prey? Do deer similarly worry about finding vegetation? Hardly. Animals merely do, so using the term "animal spirits" to mean confidence is completely absurd.
Contrary to what Shiller asserts, to "trust" isn't to act like an animal -- in fact, it's exactly the opposite. Animals have no sense of "trust" because their nature has no doubt to suspend. On the other hand, when humans "trust," it actually is not dismissing any fear or hesitation, but in fact making a rational judgment based on information.
What happened with the current crisis, and I'll get to this in a subsequent paragraph, is that the government created an artificial sense of "trust" in housing and other markets. People were not suspending any doubt, because government made things look better than they actually were. Shiller is correct to point out specific things like the collateralization of mortgage-backed securities, but he misses the big picture that government was the problem in everything that happened. It wasn't the case that "confidence was blind," but that people believed they saw more than they actually was. This is not mere semantics; the logical distinction is important. People were led to believe there was more reason to be confident than not confident when the former didn't really exist, not that they turned a blind eye.
Furthermore, these economists who want to promote "confidence" typically don't understand a simple point: why do we want people to have confidence when it's not necessarily warranted? Note that politicians, and most economists too, aren't even talking about making certain people more confident in a certain industry. They're talking about increasing confidence in general, but confidence for its own sake is a bad idea. Just one of many examples: I don't want banks loaning out tons of money just because, just one of many reasons TARP is a bad idea. There are plenty of would-be borrowers who don't deserve the least bit of confidence insofar as repaying the debt. It was home ownership for home ownership's sake that helped fuel the housing bubble, followed by the Fed injecting hundreds of billions of new dollars into the global economy -- liquidity for liquidity's sake.
Now, I'm on record as saying the crisis is one of confidence, not liquidity (there's plenty of the latter). But that doesn't mean we should do things to make people more confident, which is to effect confidence for its own sake. We should let market processes work on their own, unfettered by government, so that people can compete and be worthy of confidence. If people are generally not confident about something, there's a damn good reason: their information tells them not to be. There may have proper information showing its a bad company, they may not yet have enough information to be confident (but could in the future), or government skews information so that people can't make rational decisions. The third happens all the time, but so badly today that it's the direct cause of this crisis.
The one thing few people point out is that government has a monopoly on confidence. You can mistrust it, but in most cases it ultimately gets its way.
Posted by: Perry Eidelbus at January 27, 2009 3:59 PMWell said. Just because risk is a valuable part of wealth creation doesn't mean it should be subsidized. A free market should deliver plenty of opportunity for every risk appetite.
Posted by: jk at January 27, 2009 4:08 PMJanuary 23, 2009
Review Corner
Dusted off an oldie-but-goodie thanks to Netflix: Commanding Heights.
I watched the first (Keynes vs. Hayek) disc last night and one is astonished to realize this was broadcast on PBS and funded in part by the Pew Trusts and CPB. I bet several thought police lost their jobs over that. (FedEx is listed first, I think Fred Smith may have ponied some dough.)
As enjoyable as it is, it is bittersweet to watch it and think "freedom was winning -- just a few years ago." We seem poised to give all the gains away and return to government controlled economy.
Great, great stuff. If you missed it drop everything and watch it (I think it's available free on pbs.org). If you have, it is a very good time to watch it again. Right before we give the Commanding Heights back to the planners.
Two notes: Firstly, the evil collectivists at Google include Keynes in the spellchecker but not Hayek. Need I say more? Secondly, like reading The Everyday Economist, it reminds that Lord Keynes was not a devil. He was a brilliant figure who gave us much of the science of Economics. He was on the correct side of concern with the Versailles Pact and did not live long enough to really grasp the post-war economies. I'll still take Friedrich August any day of the week, mind you, but Keynes deserves his props.
We watched parts 1 and 3 in our World Affairs class last year. Colored me impressed- it certainly is the best introduction to international economics I have seen on the screen. (Apparently it is based off a book? Anybody read it?)
~T. Greer
January 20, 2009
That 70's Show
Yet another bad idea from the past gets dusted off as the economy contracts. A good friend of the blog sends a link to an article discussing the return of the"Buy American" movement in Michigan.
"If people continue to buy foreign cars, this won't be America for long."'Out of a Job Yet? Keep buying foreign!' Ford production workers Tony Saputo, left, of Macomb Township and Brian Pannebecker of Shelby Township hold bumper-sticker magnets that Saputo created to discourage foreign car purchases. They sell for $3 at labor rallies.
The Free Press article makes a valiant (I once owned a Valiant...) effort to at least address the complexity of globalization, noting that Toyota and Nissan operate design centers and battery plants in Detroit. Author John Gallagher is balanced and concludes that most people are fixed in their buying habits and preferences.
But it is disturbing that these ideas are gaining currency. The big three made some money between '78 and '08 by building what people wanted (even though they were often evil SUVs) these appeals are economically stupid and are bound to have less appeal today after successful integration of global products, US manufactured Toyotas Hondas and Subarus, and the unpopularity of the automotive bailout.
If people keep buying Belgian chocolate, this won't be America for very long.
If people keep buying Swiss watches, this won't be America for very long.
If people keep buying Austrialian beef, this won't be America for very long.
If people keep buying Philippine pineapples, this won't be America for very long.
If people keep buying Latin American textile goods, this won't be America for very long.
This isn't reductio ad absurdum. It's applying a very basic principle -- namely that any trade, within or beyond borders, allows an economy to specialize and flourish, while protectionism is in fact what destroys economy -- to a specious argument. American automakers are as competitive as horse breeders and buggy makers became a century ago, and they want "help" like certain French industries a century and a half ago:
"You must give me work, and, what is more, lucrative work. I have foolishly chosen an industry that leaves me with a loss of ten per cent. If you slap a tax of twenty francs on my fellow citizens and excuse me from paying it, my loss will be converted into a profit. Now, profit is a right; you owe it to me."
The society that listens to this sophist, that will levy taxes on itself to satisfy him, that does not perceive that the loss wiped out in one industry is no less a loss because others are forced to shoulder it—this society, I say, deserves the burden placed upon it.
Posted by: Perry Eidelbus at January 20, 2009 12:58 PMJanuary 16, 2009
Sweatshops
An unexpectedly keen view from Nicholas Kristof in the NYTimes. He suggests if you are raising a child in a Cambodian garbage dump, a job in a "sweatshop" does not look so bad.
I’m glad that many Americans are repulsed by the idea of importing products made by barely paid, barely legal workers in dangerous factories. Yet sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade.When I defend sweatshops, people always ask me: But would you want to work in a sweatshop? No, of course not. But I would want even less to pull a rickshaw. In the hierarchy of jobs in poor countries, sweltering at a sewing machine isn’t the bottom.
Well said. The whole piece is superb.
Hat-tip: Terri
Who stole Nicholas' computer and what did they do with him??
Posted by: Boulder Refugee at January 16, 2009 7:54 PMNo kidding. I checked the name a couple of times.
Posted by: jk at January 16, 2009 8:21 PMJanuary 15, 2009
Other Than Avoiding Armageddon
Blog friend Josh Hendrickson at the Everyday Economist links to "The Terrible Lessons of TARP" by Barry Ritholtz. Ritholtz is a bright guy and frequent Kudlow & Co. guest. I always considered him the anti-Kudlow. It's surprising they can be on the same show and not disturb the space-time continuum.
Though I tend to fall on the Kudlow side of things, Ritholtz is a serious and smart guy. To provide both sides on CNBC, they always pull up cartoonish bears and leftist political hacks to balance Larry's optimism and general support of the GOP. Ritholtz is neither, but he trends a little bear-ish and has a healthy distrust of politicians of any stripe.
Props complete, but I must disagree with his reasonable and eloquent arguments against TARP. I'll agree with each of his points but he betrays himself in the intro:
What I can say without reservation is that the TARP spending prevented large brokers and banks from going to zero. Since the legislation was passed in the Fall, there has not been a major disruptive bankruptcy.Sure, the FDIC had to take over a few institutions that were overdue for the long dirt nap anyway, but the sort of market roiling Bear Steans collapse, and the subsequent Q3 Lehman/AIG/CitiGroup disasters have at least stopped.
This is not, to be clear, any declaration that the TARP has been a success. We have avoided financial armageddon, but other than that, it has been an abject failure.
Other than that? Other than doing exactly what it was supposed to do, it was an abject failure.
I certainly suggest you read the whole thing. Again, all his points are correct -- it was ad hoc, capricious and wasteful. Fair cop, guv! Other than avoiding financial Armageddon...
jk,
The fact that we haven't had any banks fail is not evidence that this has been a success. As Perry loves to say, correlation is not causation.
In order to prove that the TARP is the reason for the lack of failures, you must be able to answer the following:
1. Where did the money go?
2. How has it been used?
3. What would have happened had it not been used?
Admittedly, number 3 is a counter-factual and therefore an answer would only be mere speculation. Nonetheless, I think that you would find it particularly difficult to answer numbers 1 and 2 and without which it is hard to make a case that it has been successful.
Posted by: Everyday Economist at January 15, 2009 10:28 PMI love the ThreeSources commentariat and respect their right as free thinkers in a free market to comment or demur whenever they choose.
But I got zero responses to my post (four south of this one) with a graph of the TED spread. I have made the same case since TARP (using LIBOR, which has the same shape). The point of TARP was to keep credit markets from freezing up like our friend T. Greer in Minnesota.
I cannot (like the old software joke) roll back time and see what would have happened if Secretary Paulson had decided to get a massage and eat some high-fiber cereal instead of intervene. But LIBOR went to an acceptable level and my credit card works in the local ATM. I suspect Alexander Hamilton is smiling down on us even if Jackson and Taney are cursing.
Posted by: jk at January 16, 2009 11:19 AMjk: as my friend Billy Beck says, principles are all that matters. Not blind clinging to an opinion or ideology, but a position borne of reason and care.
Throw out everything else and ask the moral question: why should anyone be coerced, via taxation, to support these companies that should properly be allowed to fail? The ends do not justify the means -- rather, the ends are justified by the means. How you proceed along the journey is at least as important as the destination.
EE is exactly right on the three questions. And to show how ludicrous TARP has become, we don't even know the answers to #1 and #2. So much for government transparency and accountability!
Do you realize that your ATM card would very probably would have anyway, in a parallel universe where TARP didn't pass? You've swallowed the same sort of rubbish that people still accept about FDR's New Deal: "Yes things were still bad, but they'd have been worse if he hadn't acted!" Remember that whatever the government is "injecting," that's our money. The government isn't rescuing us: it's making you rescue yourself. And when it can't tap us for the money now, it borrows it, so we'll probably have paid double the principal amount by the time the debt is retired, because of interest.
You're asking and trusting the arsonist to put out the fire he started. No thanks! The arsonist is hardly "all we've got" -- we have the free market to carry us through.
Posted by: Perry Eidelbus at January 16, 2009 11:47 AMjk,
2. As I have said before, this was never a problem of liquidity, but rather counter-party risk (see here and here). This suggests that the best form of action is to let/facilitate the bankruptcies of the failing firms. What we have done with the TARP is exactly the opposite. We are continually funneling money to the failing companies to keep them afloat.
3. What is the evidence that the TARP is what caused the TED spread and the LIBOR to come down? They are, by the way, still at historically high levels.
Posted by: Everyday Economist at January 16, 2009 9:45 PMI was actually going to use that to my advantage. The original TARP proposal (we call it Tarp Classic® now) was more about counter-party risk than liquidity.
I suggest that LIBOR and TED spreads measure counter-party risk and that the realization that the US Treasury was "backstopping" some of the toxic assets mattered more than the exact vehicle or procedures. I would not have changed TARP Classic® to New TARP with extra liquidity. But then, they don't let me be SecTreas.
Yes they're still high but North of 800 bps is untenable -- that's ATM and credit card doesn't work territory.
jk,
I am trying to follow you here, but you are losing me. You are correct that the particular credit spreads measure counter-party risk. You are also correct that the TARP classic was aimed at reducing such risk. Finally, you correctly assert that the actual TARP just injected capital directly into the banks and was thus aimed at adding extra liquidity.
So how is it that a TARP aimed at increasing liquidity lowered credit spreads?
I assume that your comment amount backstopping is your evidence. However, if you look at the LIBOR-OIS spread, you will notice that after hovering between 50 and 100 basis points, it rose to nearly 400 basis points shortly after the announcement of the TARP.
Posted by: Everyday Economist at January 19, 2009 11:09 PMJanuary 14, 2009
TED's Excellent Adventure
That headline is so lame and obvious, I apologize. But I surprisingly have not seen it.
As I am the last guy left defending President Bush (I'll shut off the lights when I leave...) I am also the last guy with a nice word for TARP, or as it is known around here, "the unconscionable bailout of greedy wall street bastards." You can talk about moral hazard and find me sympathetic, you can go all Senator Durban on me and complain about lack of oversight -- it's a fair cop.
I have but one defense:
Hat-tip: Professor Mankiw who adds "Bloomberg reports that the Ted spread is now below 100 basis points. The Ted spread, the difference between the interest rates on interbank loans and T-bills, is one gauge of how much fear is gripping the financial system. Its decline suggests that the TARP is working and is certainly good news."
January 13, 2009
Freedom Still Works
The Wall Street Journal's annual "Index of Economic Freedom," compiled with the Heritage Foundation is out this week. It provides a stark reminder -- contra Arianna Huffington -- that free market capitalism is not dead.
The positive correlation between economic freedom and national income is confirmed yet again by this year's data. The freest countries enjoy per capita incomes over 10 times higher than those in countries ranked as "repressed." This year, for the first time, the Index also correlates economic freedom with important societal values like poverty reduction, human development, political freedom and environmental protection. The linkages are robust, with economically freer countries performing significantly better on every indicator of well-being.
Click through to see the whole list, but the top 10: Hong Kong, Singapore, Ireland, Australia, New Zealand, United States, Canada, Denmark, Switzerland, and the United Kingdom are rewarded pretty handsomely with per-capita GDP in exchange for the freedom they offer.
The bottom of the list is at least as illustrative: North Korea, Zimbabwe, Cuba, Burma. Eritrea, Venezuela, Congo, Comoros, Libya. In the write up, Terry Miller wonders if we want to trade our principles for Cuba's after a couple of bad quarters, or if we should "dance with the one that brung ya:"
[former Texas Longhorn coach Darrell] Royal meant that even when faced with daunting new challenges, one would be well advised not to abandon a winning formula that had already brought success. That is good advice as the United States and other economies face the daunting task of restoring economic growth.The "party" in this case is the six decades of increasing prosperity that the world has enjoyed since the end of World War II. U.S. Gross Domestic Product was about $1.6 trillion in 1947 (valued in 2000 dollars), a little over $11,000 for every man, woman and child. In 2007, it was $11.5 trillion, or about $38,000 per capita. That's almost a doubling of average incomes each generation, made possible by the free market's efficiency in allocating capital and labor.
January 10, 2009
Economic Stimulus Plan
I have a dream - that America's political economy will return to something akin to the late 19th century. Referring to the causes of the latest economic crisis, Yaron Brook and Don Watkins of the Ayn Rand Institute write in their editorial 'Stop Blaming Capitalism for Government Failures:'
None of this is consistent with capitalism. As the economic system that fully recognizes and protects individual rights, including the right to private property, capitalism means, in Ayn Rand’s words, “the abolition of any and all forms of government intervention in production and trade, the separation of State and Economics, in the same way and for the same reasons as the separation of Church and State.” Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy. The government’s job under capitalism is single but crucial: to protect individual rights from violation by force or fraud.America came closest to this system in the latter half of the nineteenth century. The result was an unprecedented explosion of wealth creation and consequent rise in the standard of living.
JK, like the respected Denver radio host Mike Rosen, constantly reminds us to practice the "politics of the possible." But why should it be impossible for a majority of voters to recognize that the big government policies Obama and company may enact just made the problem worse - and they will - and abandon him in droves for the 2012 GOP candidate? This is the "new Reagan" scenario that many have written about. But for this to happen there needs to be a GOP candidate who understands the capitalist ideal before he jumps into the hog wallow to compromise with collectivists. John McCain and George Bush (both of them) despite all their admirable traits, were not that candidate.
Wow, this Rosen fellow sounds very intelligent...
I share your enthusiasm for the economic policies between the Civil War and the Progressive Era. It was certainly tainted by Jim Crow but I find it easy to call them unrelated. Hayes was the right pick in 1876 and if Tilden had not forced the Compromise of '77 we could have had economic liberty and continued the Reconstruction.
Gene Healy points out that while we had the string of non-descript, "non-heroic" presidencies between Grant & McKinley, we surpassed Great Britain as an economic power.
On the Pragmatism side, jg, put me in with Rosen (I have not heard his show but I've read some of his newspaper columns and heard great reviews from my brother-in-law). I challenge you to look at a group with minimal selection bias and tell me that a majority would agree that welfare and social security should be terminated. I think you'll find it more matches Pew's famous nine-percent. (Again, no fair polling at the Objectivists of Weld County quarterly bake sale and skeet tourney.)
I could not disabuse a right-leaning relative yesterday of the belief that the USDA is only reason the big grocery stores don't sell rancid meat. I can't think of a group of workmates, family, musicians, or friends in which a majority prefers less government "safety-net" security.
I enjoyed the Brook-Watkins piece very much, and I'd be inclined to support a candidate who voiced such beliefs. But I'd be among the few. Rep Ron Paul was able to augment his libertarian followers with a good number of the rabid anti-war left. And he still lost. By a lot.
It's hard for you and me to believe and accept that our zeal for liberty does not enjoy an electoral majority, but it does not. You can write editorials for the Ayn Rand Institute and link and discuss them on ThreeSources. But you'll be a spectator at the next contest between the next McCain and the next Obama.
... welfare and Social Security TERMINATED? JK, you are such a tease. Even I don't dream such things are possible in a single bound.
The idea I tried to explain, perhaps too obliquely, is that the 'ideal' of pure capitalism leads to unprecedented prosperity. Any baby steps in the direction toward more capitalism will make things better for all Americans.
As for the popularity of such market oriented changes to welfare and Social Security, even President Clinton had to sign the GOP bill that reformed the former ... and reforming the latter could be equally popular with the right plan. Perhaps as government operated private accounts with gains earned in private equity markets yet federally guaranteed never to decline in value?
If we're going to talk about bailouts anyway then lets consider one that actually provides some real personal financial security. (Tomorrow I'll deny I ever wrote this.)
Posted by: johngalt at January 13, 2009 3:11 PMBut-but-but-but-but-but-but-- you are making the pragmatists' case. I want to fight at the margins and get "as close as we can" to capitalism. For this I seem to be frequently derided as lesser-of-two-evilsism.
I was pulling my absolutism from your excerpt "Laissez-faire means laissez-faire: no welfare state entitlements, no Federal Reserve monetary manipulation, no regulatory bullying, no controls, no government interference in the economy" and from your reference to 19th Century pre-progressive, pre-New Deal policies.
A government risk subsidy is not a bad idea if you could make the right kind of trade. Who is this guy and what has he done to Brother Johngalt?
Posted by: jk at January 13, 2009 4:32 PMJanuary 5, 2009
Protectionism Works Great in a Downturn
The idea that we learned any lessons from the 1930s shows zero empirical proof. I guess tight money is not too likely, but the new administration is ready to bring back the WPA and Smoot-Hawley. Reuters:
WASHINGTON, Jan 2 (Reuters) - Both President-elect Barack Obama and Vice President-elect Joe Biden will huddle with Democratic and Republican congressional leaders on Monday to try to advance a huge economic stimulus bill that Obama hopes can be enacted quickly, despite Republican reservations.Obama's transition team said it is mulling "buy American" provisions for the stimulus package that could favor U.S. companies over foreign competitors.
Bottled water and ammunition, kids. Bottled water and ammunition.
Hat-tip: Professor Makiw
Einstein's reputed definition of insanity...
Posted by: Perry Eidelbus at January 5, 2009 1:44 PMI think it was actually Benjamin Franklin who said, "The definition of insanity is doing the same thing over and over and expecting different results."
Posted by: Boulder Refugee at January 5, 2009 2:36 PMMany modern sayings are falsely attributed to various historical figures, hence why I said "reputed" when invoking Einstein. I've never heard this quote attributed to Franklin, who's credited with but didn't actually say or write, "Democracy is two wolves and a lamb deciding on lunch. Liberty is a well-armed lamb contesting the vote!" That particular one always pisses me off, and I've even called onto the carpet a certain Pepperdine prof who should have known better. In the end, he admitted he didn't really know where it came from.
Posted by: Perry Eidelbus at January 7, 2009 4:01 PMWhen in doubt, always attribute Mark Twain or Samuel Johnson.
My favorite on this is "If you're not a liberal when you;re 20, you have no heart; if you're not a conservative when you're 50 you have no brain." I've seen that attributed to several, as early as William Blake.
Posted by: jk at January 7, 2009 5:44 PMDecember 29, 2008
The Spirit of Bailouts Past
Tyler Cohen makes a good case that the 1998 "Bailout" of Long-Term Capital was both a bad precedent and sowed seeds of moral hazard in the very companies we had to bail out a decade later.
At the time, it may have seemed that regulators did the right thing. The bailout did not require upfront money from the government, and the world avoided an even bigger financial crisis. Today, however, that ad hoc intervention by the government no longer looks so wise. With the Long-Term Capital bailout as a precedent, creditors came to believe that their loans to unsound financial institutions would be made good by the Fed — as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed.
I don't know that I am completely convinced, but it is a solid case and a solid cause for concern. If that blossomed into this, than shall this become -- ooh, I don't like to think of it!
Hat-tip: Professor Mankiw, who is gaining converts to his bleedin' Pigou Club all the time...
December 24, 2008
Economic Theory and Bailouts
ThreeSources friend Josh Hendrickson (the Everyday Economist) has an excellent column in TCSDaily on "What macroenomic theory has to say about the financial crisis."
The work of Robert Barro, Charles Plosser and John Long as well as Nobel laureates such as Milton Friedman, Franco Modigliani, Finn Kydland, and Ed Prescott have much to say about the impact of macroeconomic policy.Unfortunately, with a few notable exceptions, the work of these economists has received scant attention during the current crisis. Nonetheless, their work remains important in explaining the futility of much of the current policy prescriptions. Equally disturbing is the return of self-professed Keynesians with policy prescriptions that are wholly inconsistent with both Keynes and modern macroeconomic theory.
He explains several theories that speak to expected efficacy of stimulus plans. If there's a common thread, it's that none of them predicts much success for the proposals under consideration.
Oh well, Merry Christmas!
December 20, 2008
Automotive History
Megan McArdle offers a comprehensive description of TheBigThree's troubles, and some dark predictions for their future outlook. In addition to the familiar oligopoly story, there are quite a few new details that I had not considered: the function of the dealers, the incentive structure during the oligopoly days, and the double-edged sword of profitable financing divisions:
But perhaps more importantly, Detroit turned from making money on cars to making money on financing. Detroit didn't make a big profit by selling you a Ford Taurus. It made money on financing your Ford Taurus; often, the car was sold at a loss in order to get the finance business. The Big Three were banks manufacturing cars as a loss leader.That's why they could afford to pay their workers above market wages. They were not trying to make a profit on the manufacturing process. The UAW wages and benefits were not compatible with profitability in the auto business five years ago. Or ten years ago. Or fifteen years ago. The UAW is not being asked to bear the pain of returning the company to profitability in a tough market. The UAW is being asked to get their wages back to where they would have been in the first place if they hadn't been subsidized by the now-unprofitable financing arms. Detroit has spent decades buying labor peace with increasingly desperate ploys that have finally run aground.
Good stuff! Hat-tip: Instapundit
December 19, 2008
Can We Call Him a Denier?
All Hail Professor Mankiw! He links to an AP report claiming "Only one outside economist contacted by Obama aides, Harvard's Greg Mankiw, who served on President Bush's Council of Economic Advisers, voiced skepticism about the need for an economic stimulus, transition officials said."
Clearly the Economics is settled and Mankiw is just some flat-earther from the Bush administration! They probably just asked the old man to be nice. Mankiw points out:
Skepticism, rather than unequivocal opposition, is the right word. When contacted, I said the same things I have been saying on this blog: that monetary policy is not out of ammunition, and that tax cuts are potentially more potent than spending increases. I could have added that a spending-based stimulus to address the current short-term crisis might lead to a long-term increase in the size of government, but I doubted that concern would sway Team Obama. In general, I think economists need a large dose of humility when evaluating alternative proposals to deal with the current downturn, as there is still a lot we do not understand.I am sure I am not the only person in the economics profession skeptical of spending increases to stimulate the economy. See, for example, GMU economist Tyler Cowen. If the new administration wanted to find more skeptics of stimulus spending among professional economists, I could have come up with some possible candidates for them, but the Obama economists probably already know who those likely skeptics would be.
Nixon was wrong. We're not all Keynesians now. He should have said "We're all Keynesians except for N. Gregory Mankiw." Thank all that is good and decent in the world that there is one.
December 17, 2008
Bernanke-san?
I have split with my mentors at the WSJ Ed Page twice this week -- and it's only Wednesday!
The hard money crowd is understandably not happy with a Fed Funds rate less than 25 bps. The title of the lead editorial this morning is "Bernanke Goes All In."
If the current Fed believes there are limits to monetary policy, you can't tell from yesterday's Open Market Committee statement. The 10 members voted unanimously to take its target fed funds rate down to between 0% to 0.25%, from 1%. With Treasury bills already trading at close to zero as the world flees toward safe investments, the practical impact of this rate cut is negligible.
Many have recalled 1990s Japan with its Zero interest rate and government infrastructure projects, and this is certainly worth fearing. Nor is comforting that the Obama Team is reading books about FDR's first 100 days (and none, I expect, will read Amity Shlaes's The Forgotten Man).
But I'm onboard with the FOMC based on something Don Luskin said the other day. (YouTube on his site). By having a 1% rate, the Fed basically offers a safe overnight rate on cash that banks cannot get anywhere else. What planet have I landed on that considers a 1% riskless rate as being market-distortingly high? But there it is.
So the lower rate won't necessarily create liquidity but it will keep the Fed from mopping up the liquidity that is out there. Sounds right to me, and I can hardly see the inflation ramifications of 1% vs. 0 - .25%
Crazy days, kids. Crazy days.
December 15, 2008
We're Way Beyond Moral Hazard, Boys
We've had a rare, united front against the automotive bailout around here. Imagine my surprise to see Don Luskin (video at the link) on Kudlow saying to let it roll.
I don't think the ghost of Senator Stabenow visited him and changed his mind, but he makes a few reasonable points. First that the amount of money is "a rounding error in a Farm bill;" next that the continuation of "an orderly unwinding of manufacturing jobs" would be well received by the equities markets who would find it difficult to weather another shock; and the line I stole for the title "we're way beyond moral hazard, boys." whether we will commit an additional $16 Billion after AIG, Citi, and TARP is not worth the distraction.
You don't have to like any of those points, but they are all hard to refute.
December 14, 2008
Opposing Auto Bailouts == Slavery
A very good friend of this blog trolls the fever swamps of the mad Internet left so you and I don't have to. He feeds me a good stream but I must agree that this one is top drawer. Ron Dzwonkowski of the Detroit Free Press editorial page sees the last battle of the War Between the States -- in the US Senate:
It just grinds you, doesn't it?I mean that a handful of senators from former Confederate states could so summarily sign a death warrant for the Michigan economy. A bunch of self-serving Republicans who will now go around blaming the United Auto Workers for killing the auto industry rescue plan.
[...]
Certainly this defeat was payback for the UAW's traditional support of Democratic candidates. But maybe it ran even deeper, back to 1861 when President Abraham Lincoln exclaimed "Thank God for Michigan!" as 798 men from this state arrived in Washington to defend it against advancing southern troops early in the Civil War.Thursday's Senate session gave this southern cabal a chance at long last to say, "To hell with Michigan!"
Dzwonkowski closes by quoting of the Senate's leading economic and intellectual lights (cough, cough!) Sen. Debbie Stabenow. She compares the financial rescue to the auto bailout and decides: "They always focus on the supply side. We're on the demand side. They say help the people at the top, and it will trickle down. But it never does."
And I didn't even excerpt how it is "sort of, you know, un-American" to decide "wages paid by the imports ought to be the industry standard." And how the UAW wages are just the last issue they can cling to after Congress has worked everything else out.
UPDATE: Megan McArdle, whom, out of deference to Perry, I will present with no adjectives, has a better take. If the UAW thinks they have fixed the problems by agreeing to reductions in 2011 "Fine, let them have the money in 2011."
This seems so elementary to me that I cannot even believe we are arguing about it: the reason Gettlefinger needs to take a haircut along with everyone else, is that if he doesn't take a haircut, GM will be back in 6 months asking for more money. There is absolutely no way whatsoever that GM has any hope of profitably making a car with labor costs higher than their competitors. Their labor costs should be lower than their competitors, because they have to sell their cars at a steep discount. Even if we somehow magically revolutionize the management tomorrow and get them steep discounts on their debt, it is going to take them years to rebuild their brand to the point where they can charge comparable prices to Japanese cars. GM cannot afford to pay its workers more than the competition in that situation.
UPDATE II: The Everyday Economist finds -- and refutes -- another overwrought column, this time from Mitch Album.
December 8, 2008
Dude, Where's My Recession?
The Everyday Economist links to a solution to the "recession conundrum." We are told by politicians, news media, and now the NBER that we are in a recession. Yet the GDP numbers don't seem to want to cooperate. Casey Mulligan posits a credible explanation:
You may have noted the contrast between this year’s employment performance and GDP performance. When productivity grows, output can grow even while employment falls. We are in a recession (and have been since late 2007) by the employment definition (NBER uses this) but not yet by the GDP growth definition. We likely will finish 2008 with more GDP than in any year in history, yet less employment than in 2007. The GDP and productivity performance is quite different from “severe recessions.” What is severe about the 2008 economy is the news coverage, and the assault on the taxpayer!
So, it's one of those expanding-contracting economies izzit? I don't make light of 500K+ of job losses, and I am emotionally incapable of laughing at my 401(k) balance. Yet, like several bloggers, I cannot help but notice huge crowds at stores and mall parking lots. I read how disappointed they were with 3% YoY sales growth. There seems a huge line between disappointing growth and contraction. Bad times, yeah, but the mall really doesn't look like Depression 2.0.
The Democrats and their media enablers have a vested interest in making sure that people believe this is the worst economy since 1929. This sets the bar so low, they hope, that even Obama can't trip on it.
Posted by: Boulder Refugee at December 8, 2008 12:20 PMMy father lived overseas for the better part of the 1960s, all of the 1970s and the early 1980s. He missed the anti-war violence, the stagflation, the high gas lines, and most of all, Jimmy Carter. He didn't repatriate until after the necessary '81-'82 recession as monetary policy stabilized, but he was still quite aware of the economic woes back home. He missed some of the worst economic years this country ever saw. To put it in perspective, we think it's bad now, but it was worse in the 1970s in NON-recessionary years, in terms of inflation and unemployment.
What he didn't miss was the Great Depression. As I've mentioned on my blog and maybe in comments here, he was 11 when the Crash of '29 occurred. Were he still alive today, he could personally assure all of you that this is nothing, NOTHING like the 1930s. When there are children who are selling fruit on street corners just to survive (not so they can buy the latest Wii game or a new PSP), when there are parents making moonshine (as my grandmother did) -- and because they can't do anything else, not because it's profitable -- then maybe we can say things are bad.
Last night I saw a commercial by those "Feed the Children" scammers, showing children who were saying their stomachs hurt, they feel sick, etc. They looked more scared than hungry, probably because they were threatened unless they looked suitably wretched. Now, you show me a child in that situation, and I'll show you a lazy parent. There are jobs out there, but a lot of these single mothers expect us to foot the bill for their teenage promiscuity, and because they expect to raise a family on a 40-hour work week.
We may have "the worst financial crisis since the Great Depression," but how well are our lives going on? Pretty goddamn good.
Posted by: Perry Eidelbus at December 9, 2008 2:51 PMDecember 2, 2008
I Thought It
I thought it, but Blog Friend Perry Eidlebus says it: "NBER are a bunch of lampshades who inhale air conditioners through their anuses."
If NBER can define a recession to mean whatever the hell they want, then I can also use words to mean whatever the hell I want. Remember that this is the same group that finally admitted in December 1992 that the recession had ended...in March 1991. They deliberately waited until after the election so Bubba could win on a "bad economy" platform, when the truth was that the economy was already recovering.There haven't been the two consecutive quarters of decreased GDP (the traditional definition of recession), but we might find out that the 4th quarter will fulfill that. NBER can't risk that, though. They need a recession under a Republican president, so that an incoming Democrat can take credit for "fixing the economy." So they're just changing the rules to fit their agenda.
Actually, my thought did not include air-conditioners...but it did seem somehow convenient to call the recession during Bush's term.
November 25, 2008
Like, Say, Shaq?
Blog friend Josh Hendrickson at Everyday Economist has an interesting post with a very smart take on the TARP program, which he has consistently opposed. I'd love to read the book by Roger Koppl which inspired the piece but 66 pounds is a little rich (at current exchange rates anyway).
The idea is that big players such as the US Treasury acting in a market without rational market goals will distort the markets and preclude clearance and price discovery.
The effect of this discretionary power is to increase uncertainty within the financial markets. Firms that receive capital infusions refuse to increase lending precisely because the rules are changing on a daily basis. The same goes for investors who must not only predict what the market is going to do, but also the behavior of the Big Players. Of course, the ability to predict what the Treasury and the Fed are going to do next is substantially difficult. The result is the herd-like behavior that has been prevalent in the stock market for the last few months. When there is a high level of uncertainty in markets, participants start relying more on what they believe that others believe than the prospective yield of a particular investment. The empirical evidence presented by Koppl and his colleagues confirms these claims. Uncertainty breeds uncertainty.
I've been the lonely voice around here for TARP. While I am not ready to capitulate and attack Paulson, this argument is pretty hard to contradict.
"Firms that receive capital infusions refuse to increase lending precisely because the rules are changing on a daily basis."
I'm glad to see someone else say it. Austrians like me have been saying this since the Bear Stearns fiasco -- after all, Austrian Business Cycle Theory is predicated on the idea that government intervention in markets introduces errors. Systematic errors, in fact, not just occasional misjudgments that free markets experience.
And ever since TARP was introduced, I and other Austrians have pointed out that it's not a crisis of liquidity (there's plenty of that), but a crisis of confidence. And TARP prevents credit markets from correcting themselves by further discouraging lending. It's bad enough when lenders are afraid a borrower will go under, but now there's a risk the feds will take over a borrower. Or, why lend your own money to someone, when you can wait for the feds to give you taxpayers' money to lend?
Posted by: Perry Eidelbus at November 25, 2008 12:58 PMNovember 19, 2008
Correcting The Refugee
The Refugee has ranted on these web pages to slam the gold-plated labor agreements as the root of Detroit's financial ills. However, in today's WSJ Louis Woodhill of the Club for Growth points to Congress's CAFE standards as the culprit:
It is difficult to overstate the damage that CAFE has done to GM over the years. The entire purpose of CAFE is to force companies like GM to do something other than build and sell the vehicles that would earn them the greatest profit . . . CAFE has bled GM of tens of billions of dollars in profits over the years. If they had all of those dollars in the bank today, they would not be on the brink of bankruptcy. CAFE forced GM to build millions of small cars and sell them at a loss. To make matters worse, CAFE made it illegal for GM to exploit its single most profitable brand, Cadillac.
While not backing off of his position regarding the untenable labor agreements, The Refugee stipulates that Mr. Woodhill's analysis is spot on. Don't expect to see any hearings on Congress's role in the whole episode, however.
The lead editorial today suggests that merely dropping the CAFE standards would keep them afloat. Allowing Chrysler to average foreign cars into its fleet ratings. But the Democrats will not trade their green bona fides for union jobs. Y'know if it weren't going to cost so much, this would be fun to watch!
Posted by: jk at November 19, 2008 12:59 PMAlso ignored are the insane dealer contracts. GM has three times the brands and five times the dealers of Toyota. All of these are state regulated and none will be broken without a Chapter 11 reorg.
Posted by: jk at November 19, 2008 1:01 PMYou bring up a very interesting point, JK: a trade-off between the green lobby and the union lobby. The only way the Democrats can satisfy both is using taxpayer dollars to subsized a broken business model. Oy, vay!
Posted by: Boulder Refugee at November 19, 2008 1:25 PMI don't see this as an either/or situation. To Hell with CAFE, and to Hell with the UAW. They both violate sound free-market capitalism principles. Scrap 'em both.
Unchain the ingenuity and the wealth-building capacity of America, and the world will see what we can do.
Posted by: Keith at November 19, 2008 4:02 PMUnion excesses - yes.
CAFE coercion of Big 3 fiduciary decisions - yes.
But while we're enumerating the real causes for supposed "market failure" in the auto industry let's not forget the artificial causes of inflated oil prices that compounded the car makers' troubles.
Whether or not environmentalist self-destruction is a communist plot to bring down the United States in a way that the USSR could not, it may well do so.
Posted by: johngalt at November 19, 2008 4:24 PMjohngalt: you're absolutely right, and we could talk for days about the causes of the oil prices. Thank you for boldly stating they are artificial.
I hope you'll agree the much-touted "credit crisis" is not so great a factor; the Big Three were in trouble long before the present "credit crisis."
As for your last line, I can't say for certain that the environmental movement is deliberately intending to destroy America (as we can now say the Vietnam-era "peace movement" was), but it is inarguably anti-Western, anti-market forces, and anti-rational. Accidentally or intentionally, as I love to say, the greens are all reds.
Posted by: Keith at November 19, 2008 8:59 PMNovember 17, 2008
Pigouvian Swine!
Professor Mankiw provides the best reason to oppose his beloved Pigou Club.
Each time the state of Alaska raised its alcoholic beverage tax, fewer deaths were caused by or related to alcohol, according to the study that examined 28 years of data.When Alaska raised its alcohol tax in 1983, deaths caused by or related to alcohol dropped 29 percent. A 2002 tax increase was followed by an 11 percent reduction, according to the study published in the American Journal of Public Health.
"Increasing alcohol taxes saves lives; that's the bottom line," said the study's lead author, Dr. Alexander Wagenaar, a professor at the University of Florida's Department of Epidemiology and Health Policy Research....
Give our illustrious legislators the green light for a carbon tax to enact public good, and then click on your stopwatches. It will be seconds before the tax code will be adjusted to punish liquor, trans fats, video games, with no end in sight.
Here in New York (in the city proper), trans fats were simply banned. But cigarette taxes have been massively hiked since Bloomberg took over from Giuliani.
Posted by: Perry Eidelbus at November 17, 2008 2:44 PMYes, so-called "sin" taxes are a bad idea. But a "carbon" tax isn't just a bad idea, it's the 21st century version of soviet-style economic planning. And depending on the size of the tax, it could reverse the prosperity gains of the industrial revolution.
Posted by: johngalt at November 18, 2008 10:58 AMNovember 15, 2008
Worldwide Economic Collapse
That's what the press and politicians are warning of, is it not? Johngalt's dad reassures that "as soon as Obama is inaugurated the press will emphasize positive news instead of negative and congress can then back away from the cliff and allow the market, as regulated and jerry-rigged as it is, to naturally adjust to conditions.
Meanwhile, in the pre-Obama interlude, world politicians still can't help themselves but try to "solve" the situation. Reports out of Washington this morning had me considering a "Brown 2012!" blog headline after Britain PM Gordon Brown's reported call for "a co-ordinated global tax cut to rescue the world economy from a devastating recession." Bully, said I. Then I read another description of his plan:
Britain Gordon Brown has a long list. To start with, he wants “co-ordinated fiscal stimulus packages” — which means getting countries to increase public spending to create new jobs and offer tax rebates to families. He wants the IMF to create a council of experts to monitor the markets for danger signs — his much-vaunted early-warning system — and the IMF’s coffers to be boosted by cash-rich states such as Saudi Arabia and China. He is also calling for a clean-up of the banking system, including a network of regulators to scrutinise the world’s biggest banks. [all emphases mine]
I'm not quite sure whether it's the press, PM Brown, or both who believes tax rebates = tax cuts. Probably both.
Well at least he said a few words against the auto bailout:
Mr Brown was already risking confrontation with the President-elect in barely coded criticism of a planned measure to bail out America’s ailing carmakers, a plan Mr Obama supports. “I do think it is really important that we send out a signal today that protectionism would be the road to ruin,” the Prime Minister said, in a speech to the Council of Foreign Relations in New York.“If we get into a situation where countries made decisions irrespective of what happened anywhere else, then we will see the same problems of other times. The dividing line here is between an open society capable of trading round the world, against a protectionist response that happened in the 1930s and is totally unacceptable.”
The EU said that it was ready to take action against the US at the World Trade Organisation if aid for the stricken US car industry was judged by the European Commission as illegal under international rules.
Thank NED that self-interest still rears its head somewhere in the world. John McCain apathy hasn't completely destroyed it.
As I've mentioned, I think the rescue plan was needed. I hear a lot of complaining about the AIG spa retreat, and I cannot excuse stupid and bad behavior from company executives. Like Adam Smith, I find it easy to love business and hate businesspeople.
But the decreases in LIBOR and TED spreads have borne it out. I suggested to someone yesterday that the risk spreads the week of the bailout were the equivalent of a 300/200 blood pressure -- you know the patient is going to die if you don't do something. The Paulson Plan will certainly be shown in time to be inefficient. Graft will be discovered and a large part of the effort (and largesse) will be proven to have been wasted. It is gub'mint.
But the BP is now 150/100. Give the economy some pills and come see Doctor Paulson in three months.
Remembering the second presidential debate, where TITANIC ignorance was displayed by both candidates, I will miss having a Prez who generally understands how the economy works.
Actually, LIBOR spreads are no more indicative of a "credit crunch" than the inverted yield indicated a recession when we weren't in one. As related as the two events may be, one may not trigger or indicate the other. If event A often happens with event B, that doesn't mean we can assume event A is happening just because we're currently observing event B.
The LIBOR-Treasury spreads show tremendous flight to safe U.S. government paper, and that lenders were demanding higher rates. It's likely that some lenders are the same who are putting the money into Treasury securities, but we cannot assume they're always the same people. We cannot and should not assume anything: we can only conclude the obvious, that there's less lending to the private sector and greater lending to government.
The problem, as I explained before, isn't a lack of liquidity. There was plenty of money to lend even before the Fed started pumping it in. It's confidence, and that's something government cannot inspire. It can only divert energies and resources, but not create. Paulson announcing the bailout may have decreased LIBOR-Treasury spreads, but he effectively made a single economic indicator the yardstick while stock indexes simultaneously tanked. They tanked because, as we Austrians put it, government action prevented rational decision-making. If there ever were, now is THE time for government to get the hell out and defer decisions to those with the knowledge.
You claim to be a Hayekian. So surely you understand that Paulson and his bureaucracy do not have all the information? Remember, they don't even know how much it will take, which is far simpler compared to how to spend it. They pulled the $700 billion figure out of the air, not because of estimation but because they wanted "a really big number," and now it's not enough.
Posted by: Perry Eidelbus at November 17, 2008 3:21 PMBut LIBOR spreads accurately measure perceived counter-party risk. I use them as a proxy for "the abyss" as in "Secretary Paulson stared into the abyss." The Everyday Economist says that the crisis was counter-party risk and not liquidity. I'll accept that but suggest it was ameliorated by increased liquidity and the suggestion of Treasury buying toxic paper.
I'd agree with you and Hayek that the actions are not going to be efficient but I ceded that in my comment. If half the money is wasted, I suggest that the other half can be considered a good buy if we avoid a global panic.
I'll also concede that I may be wrong here, unlike immigration where I am right and everyone else around here is dead wrong. Paulson took his shot with incomplete information and the early results show promise. To extend a true bailout to auto makers or retail or buggy whip manufacturers cannot be condoned. But the reflexive "no bailouts" issued from a high moral perch misses an actual government role as lender of last resort.
But LIBOR spreads accurately measure perceived counter-party risk.
Historically, yes, but not in the present time. As I said, inverted yields usually meant a recession, but ours was humming along. You can have an external factor that significantly moves one indicator but not the other: in this case, it was investors buying up an awful lot of Treasury securities, and massively depressing yields. This didn't affect LIBOR rates, because those investors were not always mortgage lenders.
I use them as a proxy for "the abyss" as in "Secretary Paulson stared into the abyss." The Everyday Economist says that the crisis was counter-party risk and not liquidity. I'll accept that but suggest it was ameliorated by increased liquidity and the suggestion of Treasury buying toxic paper.
Josh is talking about the same thing. I just happen to call it "confidence," and that's not something government can make better. What's $10 billion to a bank if it's afraid to lend it? And you can't blame a bank in this environment, when any bank might go under. It would be different if a lender were given the money, because then it wouldn't care if it got a return, but banks received the latest injections in exchange for a partial federal takeover.
I'd agree with you and Hayek that the actions are not going to be efficient but I ceded that in my comment. If half the money is wasted, I suggest that the other half can be considered a good buy if we avoid a global panic.
But most of the panic was in fact government-created. If things were simply left to sort themselves out, if banks were allowed to fail and be bought out, the Street would consider it regular business. However, here comes the federal government, with both parties calling this "the worst financial crisis since the Great Depression," MAKING it the crisis. Things wouldn't have been this bad if it weren't for federal meddling, from creating Fannie to legislatively blackmailing mortgage lenders to keeping interest rates too low.
Look what happened when Lehman's credit default swaps were auctioned: it all happened with no glitches, no panics. People sat down, made bids and accepted offers, and there was no reason for government to supervise or step in.
How do you know if 50% waste is a good buy? I wouldn't consider it so. Morally, why should I be forced to come along for the ride? Practically, you'd have to show me that if not for the bailout, I'll be part of a big loss that exceeds half of the bailout's value. You simply don't have that information. Nobody does. My firm is not being bailed out (nor are we asking), so the bailout wouldn't help me even if I were being laid off (knock on wood I haven't been yet). How about the 53,000 at Citi who are being laid off despite this bailout?
an actual government role as lender of last resort.
And how does the government accomplish this? By using force to take my money and give it to others against my consent. If I wanted Goldman Sachs, JP Morgan, Citi, et al, to have a portion of my money, I'm perfectly capable of buying their new stock issues myself.
Failure in free markets is not a bad thing. John Stossel recently quoted Walter Williams as saying that, because it's an important lesson in what didn't work -- a lesson just as important as successes. Check out what Boudreaux and Roberts have been saying on Cafe Hayek: the bigger a firm, in fact the more important it is to let it fail.
It's time to let a lot of banks and automakers go under, so that they'll reorganize or completely go under. Others can then pick up the pieces and use them more efficiently.
Posted by: Perry Eidelbus at November 18, 2008 2:08 PMYou've landed some solid blows, my friend; some of them will leave scars. But on my central point I remain unconvinced.
Yup, firms have to fail. I'm a Schumpeterian before I'm a Hayekian. No company is too big to fail and the government has zero role in keeping a private enterprise afloat against market forces. But the Paulson Plan was about keeping the markets afloat. Most of the individual firms fared very poorly. Okay, some guys from AIG had a grand day out. But the Wall Street that Rush Limbaugh worries was "bailed out" is gone. The funds were used -- correctly -- to keep the system working not individual firms. Paulson took on the role of JP Morgan in 1907.
I don't agree that "this time LIBOR didn't measure risk." It measures how much money a lender is willing to give up to avoid risk. If it's up 700 bps, I don't care if the lender is afraid of little green men, there is a problem if the financial market in aggregate is unwilling to trust other institutions.
I agree that government sowed the seeds of the panic with easy money, forced loans, goofy regulations and the like, but aside from Senator Schumer talking down IndyMac, I don't hold them responsible for the velocity of the unwind. It was a good ol' global panic.
We can argue whether the Fed or Treasury should have a role as lender of last resort, and I am pretty sympathetic to your case that they do not. Again, in this very real context, that role is expected and it would be foolhardy to discover antiHamiltonianism suddenly and unexpectedly.
Efficacy? Again, I cite the renormalization of LIBOR and TED spreads. Banks are confident enough of worldwide liquidity and (gasp!) government intrusion to feel they can make loans.
Fifty percent a good buy? The two days when the $700B package first did not pass, we lost $1.4T in market capitalization -- 50% of the rescue package is 25% of two days' losses. That does not "prove" my point, but it puts a scale on the discussion.
I cannot contradict your moral arguments, as I said, those will leave scars. Thoughtful opposition to interdiction on this scale is certainly to be respected. The less thoughtful cry of "No Bailouts" doesn't wow me. The original post said that I am comfortable supporting the Paulson Plan and opposing, vociferously, any bailout of the big three. You don't have to join me on both sides -- but there is a difference.
Posted by: jk at November 18, 2008 3:42 PMI'm a Schumpeterian before I'm a Hayekian.
There's no reason the two are mutually exclusive. They exist just fine in parallel and are often complementary.
No company is too big to fail and the government has zero role in keeping a private enterprise afloat against market forces. But the Paulson Plan was about keeping the markets afloat.
Actually, as I'll be be blogging about soon, it was more sinister than that.
But even if we take the "keeping markets afloat" at face value, what was it about? Forcing banks to lend, when market conditions dictated that they should hold on to their capital. It's certainly possible that a market of any size (from a person buying a Pepsi to an investment bank underwriting billions) will stagnate and even freeze when participants don't have enough information. Waiting for the dust to settle is particularly necessary after government meddling has introduced errors by encouraging one person beyond what was otherwise prudent, and discouraging another from what was otherwise innovative.
The bailout is no more than simple interference with normal market processes. As I've said, government cannot inspire confidence nor create goods and services. Its only power is in force, and the plain term for economic force is "redistribution." If government pushes one person, it does so only by pulling someone else -- hence the phrase "robbing Peter to pay Paul."
Most of the individual firms fared very poorly. Okay, some guys from AIG had a grand day out. But the Wall Street that Rush Limbaugh worries was "bailed out" is gone. The funds were used -- correctly -- to keep the system working not individual firms. Paulson took on the role of JP Morgan in 1907.
What JP Morgan the company did, spreading rumors and having friends at the New York Fed mention a lifeline to hammer Bear Stearns' share price, was worthy of the man. JP Morgan and his cronies used rumors about the Knickerbocker Group to incite a panic, thus justifying the creation of the Federal Reserve...which happened to have a lot of their financier friends as the initial governors.
So if you're comparing Paulson to JP Morgan, you're more correct than you realize. This wasn't a bailout. It's a takeover.
I don't agree that "this time LIBOR didn't measure risk." It measures how much money a lender is willing to give up to avoid risk.
I never said it didn't measure risk. Look again. What I have been saying all along is that the LIBOR-Treasury spreads don't mean a liquidity problem.
Interest rates don't really show what lenders are willing to give up, but rather how much they demand for the use of the loaned assets. There are different interpretations of interest rates. Keynesians view it as compensation for not having your money, which is valid if not simplistic. Austrians view it as an indication of time preference. In both cases, a higher interest rate shows that the lender believes there's an increased risk.
If it's up 700 bps, I don't care if the lender is afraid of little green men, there is a problem if the financial market in aggregate is unwilling to trust other institutions.
In a free market, there's nothing wrong with lenders being afraid. Would you rather have them imprudently lend out money just for the sake of lending? That's what the bailout is all about. The major banks are being told to lend the money "or else," haven't you heard? And that's whether or not they sought bailout money in the first place. Paulson's tactic of summoning the banking heads, not letting them leave the room unless they agreed, makes Vito Corleone ("an offer you can't refuse") look as libertarian as Murray Rothbard.
I agree that government sowed the seeds of the panic with easy money, forced loans, goofy regulations and the like, but aside from Senator Schumer talking down IndyMac, I don't hold them responsible for the velocity of the unwind. It was a good ol' global panic.
I certainly hold them responsible. They both planted and cultivated this disaster. Read again what I wrote: from both parties came the absurd talk of "the worst financial crisis since the Great Depression." Every time that idiot Paulson opened his mouth, decision-makers couldn't possibly do anything rationally (meaning logical decisions according to natural market conditions). They had to rethink their decisions based on what they expected the government to do. That's why, in addition to the prospects of a President Obama, markets have been unexplainably volatile.
We can argue whether the Fed or Treasury should have a role as lender of last resort, and I am pretty sympathetic to your case that they do not. Again, in this very real context, that role is expected and it would be foolhardy to discover antiHamiltonianism suddenly and unexpectedly.
It's fine if there's a lender of last resort -- a fully private lender. If it's a government agency, or one with the power of government, then it comes down to lending at my expense. If it's the Fed "injecting liquidity," then it penalizes me via inflation. If it's the Treasury, I'm penalized via taxes.
Efficacy? Again, I cite the renormalization of LIBOR and TED spreads. Banks are confident enough of worldwide liquidity and (gasp!) government intrusion to feel they can make loans.
How can it be "renormalization" when Treasury yields are at record lows? That means that the spreads are "normal" again only because LIBOR have been pushed very low:
1-month LIBOR: 1.48 this week, 3.53 one month ago, 4.78 a year ago
3-month LIBOR: 2.18 this week, 3.83 one month ago, 5.00 a year ago
6-month LIBOR: 2.55 this week, 3.70 one month ago, 4.86 a year ago
Your mistake, the same as many others, is looking at a relative indictator. But a spread doesn't necessarily mean anything, so pay attention to what's happening to the absolute indictators.
Fifty percent a good buy? The two days when the $700B package first did not pass, we lost $1.4T in market capitalization -- 50% of the rescue package is 25% of two days' losses. That does not "prove" my point, but it puts a scale on the discussion.
Do you believe that the Fed's flow of funds rate will show a sudden decrease of $1.4 trillion in the country's net worth? I hope you don't. Look here for a good discussion that unfortunately degenerated quickly, and I had to pimp-slap this guy around.
The losses are compensated by the fact that people valued other things more, so a decline in stock prices is offset by an increase in other assets' value. Look at the increase in Treasury security prices, for example. What you're talking about is saving some people from losing $X in their investments' value, via government artificially propping up their values. Simultaneously, people who in a free market could have bought the assets at a cheaper price are now harmed, because government manipulation forces them to pay more.
And Hayek would tell you that no one, whether you or government, has the information to know that the markets' true value really was the pre-drop value. What we do know is that if the drop happens in a free market, where all individuals by their individual actions help determine prices, then by definition the assets were over-valued.
I cannot contradict your moral arguments, as I said, those will leave scars.
In the end, the immorality of the bailout is the ONLY argument. If the bailout works, fine, you can reap all the benefits. Just don't coerce me into going along for the ride, no matter how profitable it may be.
Posted by: Perry Eidelbus at November 18, 2008 9:29 PMNovember 14, 2008
Looming Bailouts
Krauthammer on the real reasons.
As we have seen with the airlines, bankruptcy can allow operations to continue while helping shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations, and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It’s the ultimate in lemon socialism.
Read it all.
Loved this:
In World War II, government had the auto companies turning out tanks. Now they would be made to turn out hybrids. The difference is that, in the middle of a world war, tanks have a buyer.Posted by: jk at November 14, 2008 1:32 PM
November 10, 2008
On New Monetarism
I was pretty lonely in my support for David Roche's "New Monetarism" last December. I was intrigued by the book's suggestion that derivatives and new mechanisms for leverage had "created" currency outside of central banks and used it as an argument against inflation predictions.
The thesis of the book, however, was gloom and doom: that these securities would be difficult to unwind and that central banks would find their powers lacking when they tried to restore liquidity. Roche has something of an I-told-you-so in the Asia WSJ today. Actually it is shorter on gloating than I would have been, but Roche portends further problems for emerging markets:
Most emerging markets don't have sufficiently robust domestic demand to offset the impact of falling exports as well as an overhang of surplus capacity in the export sector. Their domestic economies are just too small. In China, for example, the consumer accounts for only 36% of demand and investment for 42%, much of it export-related. In the U.S., the figure for the consumer is 70%.Emerging-market exports were not the only beneficiary of excess credit growth. Capital flows were just as important. Excess liquidity flooded into these economies in the form of portfolio and FDI inflows. This boosted currencies and bloated domestic money supply and credit. In turn, this drove up asset prices and so created more wealth and more demand. Unsurprisingly, the private sector in these countries spotted the opportunity to borrow cheap money in weak currencies and built up massive amounts of dollar and yen debts and foreign exchange derivative liabilities.
Roche is right in that he's repeating what everyone else already said, and he's wrong for attributing it to his "New Monetarism." There was no new money created, only bad investments spurred on by government. Remember that Fannie and Freddie were THE agents responsible for recyling money, by buying up mortgages (whether or not they were securitized) from lenders. Still, there was no new money created, only new liabilities.
Posted by: Perry Eidelbus at November 10, 2008 4:06 PMOctober 26, 2008
Weather Underground: Kill the "die hard capitalists"
From LGF: Bill Ayers' Terrorist Group Discussed Genocide of Americans (includes video)
Quoting Larry Grathwohl, an FBI informant and member of the Weather Underground, in a 1982 documentary on the group:
"I want you to imagine sitting in a room with 25 people, most of which have graduate degrees, from Columbia and other well-known educational centers, and hear them figuring out the logistics for the elimination of 25 million people.And they were dead serious."
I wonder if McPalin's last week of TV ads will include anything from this list. Though I suspect it may require pictures of Obama and Ayers building pipe bombs together to get through to some people.
Hat tip: Blog brother Cyrano
Population planning, from abortion to forced sterilization, has always been part of the liberal/collectivist agenda.
"In order to stabilize world populations, we must eliminate three hundred and fifty thousand people per day. It is a horrible thing to say, but it's just as bad not to say it." No one batted an eye when Jacques Cousteau said this completely contemptuous thing.
Posted by: Perry Eidelbus at October 26, 2008 2:23 PMOctober 25, 2008
Depression 2.0?
Hey, it's not me! I am ThreeSources's sunny optimist!
Buuuuut, I look at where we are headed politically and where we are now and I get a little concerned. So, too, is Professor N. Gregory Mankiw in the NYTimes:
[W]hen Olivier Blanchard, the I.M.F.’s chief economist, was asked about the possibility of the world sinking into another Great Depression, he reassuringly replied that the chance was “nearly nil.” He added, “We’ve learned a few things in 80 years.”Yes, we have. But have we learned what caused the Depression of the 1930s? Most important, have we learned enough to avoid doing the same thing again?
I think the FOMC is smarter, but I see an Obama Administration and 111th Congress ready to hop on the Hoover-FDR Express. Who doesn’t think this crew would double down on more taxes and regulation if their first round doesn't produce prosperity?
October 24, 2008
Must Read on the Panic of 2008
Blog friend Everyday Economist again shows why he's the academic and I am the partisan hack. The work of John Maynard Keynes has been used to justify government spending and intrusion. President Nixon famously and prematurely said "We're all Keynesians now."
FA Hayek and the Austrian School in general have been used to promote the individual over the collective and the private over the public.
EE discards politics and marries prominent economic theories from Lord Keynes and Hayek in a smart and extremely readable piece on "The Artificial Boom."
This analysis is by no means the only example of what economic theory has to say about the current financial crisis and the preceding boom. However, this analysis should serve to demonstrate that, looking back on the past six years or so, the artificial boom and subsequent bust in the United States, which is now spreading throughout the world, can be better understood in light of the pioneering work of F.A. Hayek and John Maynard Keynes. Until we begin to take uncertainty seriously and understand the limitations of price level stabilization, no amount of regulation or intervention will prevent such a crisis in the future.
October 22, 2008
American Journalism Dismantled by ... a Democrat
If John McCain is going to win this election it will be with the help of great Americans like Orson Scott Card. A science fiction writer (who's work dagny likes) he's also a Democrat and a newspaper columnist published in North Carolina. And according to Rush Limbaugh (where I first heard this) he's far enough left to be pro gun control. And yet, he takes American newspapers apart:
I remember reading All the President's Men and thinking: That's journalism. You do what it takes to get the truth and you lay it before the public, because the public has a right to know.This housing crisis didn't come out of nowhere. It was not a vague emanation of the evil Bush administration.
(...)
This was completely foreseeable and in fact many people did foresee it. One political party, in Congress and in the executive branch, tried repeatedly to tighten up the rules. The other party blocked every such attempt and tried to loosen them.
(...)
Isn't there a story here? Doesn't journalism require that you who produce our daily paper tell the truth about who brought us to a position where the only way to keep confidence in our economy was a $700 billion bailout? Aren't you supposed to follow the money and see which politicians were benefiting personally from the deregulation of mortgage lending?
I have no doubt that if these facts had pointed to the Republican Party or to John McCain as the guilty parties, you would be treating it as a vast scandal. "Housing-gate," no doubt. Or "Fannie-gate."
(...)
But right now, you are consenting to or actively promoting a big fat lie — that the housing crisis should somehow be blamed on Bush, McCain, and the Republicans. You have trained the American people to blame everything bad — even bad weather — on Bush, and they are responding as you have taught them to.
(...)
If you at our local daily newspaper continue to let Americans believe — and vote as if — President Bush and the Republicans caused the crisis, then you are joining in that lie.
If you do not tell the truth about the Democrats — including Barack Obama — and do so with the same energy you would use if the miscreants were Republicans — then you are not journalists by any standard.
You're just the public relations machine of the Democratic Party, and it's time you were all fired and real journalists brought in, so that we can actually have a news paper in our city.
Every blogger should link this column.
Every American should send it to his local newspaper.
October 20, 2008
We Must Look to Canada and France for Economic Leadership
A protectionist presidential candidate has a large polling lead, and a protectionist party is slated to increase its gains in Congress. It seems we may have to leave it to France and Canada to keep prosperity and freedom alive. WSJ Ed Page:
Prime Minister Stephen Harper and President Nicolas Sarkozy of France signed an agreement Friday to begin negotiations for a free trade pact between Canada and the European Union. A Canada-EU study released last week outlines the joint economic benefits of such a partnership, with two-way trade estimated to increase 22.9% by 2014.
We are so doomed.
Ha. I never thought I would say this, but here I go:
If they win the white house, I will move to Canada.
~T. Greer, noting that Harper is just as much a right-winger (if not more of one) as McCain is.
Posted by: T. Greer at October 20, 2008 2:11 PMDon't get sick, tg! (eh?)
Posted by: jk at October 20, 2008 2:15 PMOctober 19, 2008
Bonuses Heading to Bailed Out Firms
Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (Ł40bn), a substantial proportion of which is expected to be paid in discretionary bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed.
Alex, I can't say that you are wrong, but I am uncomfortable with your discomfort.
Before attaining full-on high dudgeon, I'd suggest a better source than The Guardian. The Guardian opposes all things capitalist. There is certainly every chance that they have this story right, but like the NYTimes blasting Cindy McCain, this story serves their running subplots too well.
Like the AIG bacchanal you linked to, many in the finance industry will hold on to the old ways all the way down.
I don't want to see frustration at Wall Street (or what used to be Wall Street) excesses promoting support for a new SarbOx or overly harsh regulations that hamstring the rescue plan. You want to hire a guy for $60,000 to manage the Gub'mint's new $700 Billion portfolio? You want to impose "golden parachute" restrictions so that bad money managers cannot be fired?
Grouse if you want, but our new Democratic Overlords are teeing up to take unprecedented control of business and finance. I don't want to help them (remember Road to Serfdom?)
Youse all can probably imagine how incensed I am that my firm, which is NOT being bailed out, is meanwhile cutting bonuses. I mean, how gratified could I possibly be that whatever I get, it will be taxed heavily (based on my *total* income for the year) to bail out these buttholes that screwed up their companies and now expect a federal bailout at others' expense.
As I recall, we were the second biggest shareholder of both Fannie and Freddie. We were also among the top five shareholders of both Lehman and AIG. And guess what, we're still profitable, paying out dividends! At least so far. Later this month we'll release our Q3 numbers, and it might be negative. It would still be our first negative quarter in several years.
Posted by: Perry Eidelbus at October 19, 2008 10:24 PMThere's merit to your argument, jk, but it's not just a matter of compensation. These firms want a rescue via tax dollars from the rest of us, because only via government force could we be on the hook for their bad decisions. And then they have the unmitigated gall to dole out bonuses when they're supposedly in trouble!
Once a year, my firm's top executives have a retreat at whatever posh hotel in Manhattan or Westchester, some nice place where they can sequester themselves and brainstorm. This year, they did everything on-site at our Manhattan HQ. Eliminating the expense isn't going to make a dent in our bottom line, but it's not just a token effort to bolster our shareholders' confidence. It demonstrates our responsibility to them that we're cutting the fat to maximize what dividends we give them. So just as our investment strategies put our clients' best interest first, our fiscal policies put our shareholders' best interest first. And as I mentioned before, my firm isn't being bailed out. We happen to have had good leadership and more sensible (i.e. not super-leveraged) portfolios for our clients, so we're still making a profit and paying out dividends. So far. Who knows what our next earnings release will say, but we've been doing better than most of the Street.
There's an easy way to make sure capitalism works: let capitalism work! That might seem redundant, but remember that by definition, that requires keeping the government the hell out of things, including determining compensation. Then Wall Street can bail itself out, with each company attracting "salvage experts" according to what salaries and benefits are offered. I must draw the line when the payouts are made possible only because of taxes the rest of us are paying.
I'm thinking back to when John Mack was criticized for (gasp) accepting $20 million annually to return to Morgan Stanley as CEO. Well, even $50 million per year would have still been a bargain, for he turned things around from the mess that Purcell left. Under anyone else, Morgan Stanley might have lost hundreds of millions, if not billions. Now his negotiating skills have kept Morgan Stanley alive during this government-created "crisis." Tonight I won't get into how the feds put a gun to his and others' heads in making them accept partial takeovers; that's for another day.
Posted by: Perry Eidelbus at October 19, 2008 10:49 PMWell said, Perry. And I appreciate the insider's perspective. And I agree with your leadership showing the way, that's a superb point.
I'm concerned about the tsunami of regulation and litigation that is headed toward the financiers the nanosecond the smoke clears. SarbOx will look like a jaywalking ordinance next year. Rep Waxman will hold hearings, Rep. Frank will draw up legislation, and President Obama will have a big Rose Garden signing ceremony.
If I may use the inflated locution popular on blogs: this will be the end of capitalism in the United States!
Financiers are the hardest folk to defend and they are not going to have any friends when they defend capitalism in the Waxman hearings. The Guardian crowd has been trying to bring them down for, well ever, and now the populist right is set to join them. The Guardianistas (as they're called on Samizdata) will never listen, but I'd like to keep ThreeSourcers firmly ready to defend capitalism -- even if it means defending some execrably bad New Yorkers (present company excluded, Perry!)
October 15, 2008
Dagny
There can be no John Galt, without a Dagny Taggart.
If the courageous Randian banker (I'll wait while you finish laughing) Kaminsky seeks exists in real life, she would have protested at the imposition of FDIC premiums, the creation or expansion of the Community Reinvestment Act, the empowerment of Fannie Mae and Freddie Mac, and (need I go on?)
Everybody who is left in the sector is complicit and comfortable with broad and undefined overlap between industry and government. The others all got other jobs long ago. Where do you think Senator John Corzine and Secretary Hank Paulson came from?
Sorry, it's more about Adam Smith than Ayn Rand -- business becomes quite comfortable with regulation and intervention, learning to use it to best advantage.
October 14, 2008
Nobel Laureate Krugman
David Henderson of the Hoover Institution is no fan of Paul Krugman's acerbic NYTimes punditry. But he does write a nice guest editorial today in the Wall Street Journal to defend Krugman's earlier work as being worthy of the Nobel Economics prize.
But Mr. Krugman's defense of free trade is not what earned him the Nobel Prize. Rather, he was honored for his work in the late 1970s explaining patterns of international trade, and for his work in the early 1990s on economic geography.In the late 1970s, Mr. Krugman noticed that the accepted model economists used to explain patterns of international trade did not fit the data. The Hecksher-Ohlin model predicted that trade would be based on such factors as the ratio of capital to labor, with "capital-rich" countries exporting capital-intensive goods and importing labor-intensive goods from "labor-rich" countries. Mr. Krugman noticed that most international trade takes place between countries with roughly the same ratio of capital to labor. The auto industry in capital-intensive Sweden, for example, exports cars to capital-intensive America, while Swedish consumers also import cars from America.
I'll admit to having zero knowledge of his earlier work. I know only the "barking mad" partisan who trades on his former academic glory. Nor do I trust the Nobel folks that his anti-Bush screeds were not powerful inducements to his selection.
But I will look for the article referenced where Krugman gives a quick explanation of Ricardo for non-economists. I have failed at that exercise a hundred times and would welcome help.
UPDATE: Don Luskin is a little less kind: Krugman’s Posthumous Nobel "This year’s prize in economics goes to an economist who died a decade ago."
October 12, 2008
Freddie & Fannie
Hi, My name is John McCain... and I told you so!
McCain's letter -- signed by nineteen other senators -- said that it was "...vitally important that Congress take the necessary steps to ensure that [Fannie Mae and Freddie Mac]...operate in a safe and sound manner.[and]..More importantly, Congress must ensure that the American taxpayer is protected in the event that either...should fail."
Letter after the jump.
Yet the McCain camp will cut another ad on Ayers.
Posted by: jk at October 12, 2008 2:51 PMOctober 11, 2008
Quote of the Day
The Crash: "Why has the market dropped so much?" everyone asks. What is it about the specter of our first socialist president and the end of capitalism as we know it that they don't understand? -- IBD Ed Page
October 9, 2008
Blame it on flippers?
Don Luskin links, approvingly, to an interesting alternative take on the Panic of '08. Of course, he has to link approvingly as in it he is called "the nation's best economist" (for the record, I’ll put Mister Luskin in the top three).
The guest post by Robert Ridgeway has a hilarious if not totally safe for work headline and suggests that home speculators were enabled by easy subprime loans, that they were excessively leveraged, and that they contributed to the crash in prices and foreclosures, compared to owner occupants, who had less leverage and more reason to pay their mortgages.
This makes a lot of sense and is doubtless a strong and underappreciated factor. But the nation's best economist responds "Absolutely right." And I find one substantive piece of his reasoning flawed. He assumes that ARMs are bought by flippers and that owner occupants bought fixed rate. He provides convincing data that show a huge discrepancy in foreclosures between the two groups.
I suggest, however, that a pile of owner occupants could not resist the immediate gratification of the Zero-down ARM. Sure, it's the perfect vehicle for a flipper, but it's equally enticing to a guy who wants to buy a new plasma TV, is it not?
I refinanced three times during the subprime glory years (starting a start-up, keeping a start-up alive, and recovering from a start-up) an each time was pushed toward an ARM by the broker. "C'mon, you're going to refinance in there years anyway!" I resisted, not realizing Rep Barney Frank would buy me out. But I was close enough to it that I cannot ascribe all the ARMs to flippers.
Flippers on ARMs? What the hell kind of blog are you running here?
jk -
Came across your site thanks to your trackback to Richard's guest post. Good stuff here - I'll be back in the future.
Sorry you had to trackback twice. For some reason my site makes me approve trackbacks manually before they show up.
Posted by: Conservatism Today at October 9, 2008 8:43 PMjk:
Thanks for the recognition on your site and your commentary regarding my post at Conservatism Today.
I did want to clarify that Don Luskin's response of "...Absolutely Right" to me was referring to the subprime and FHA subject of my last two paragraphs and the unintended consequences I outline on what will happen now to subprime and The FHA.
I apologize for not making that more clear.
Don was nice enough to link to my post and he is a truly magnanimous person.
And my weak writing skills probably led you to your conclusion that I assumed only fixed rate borrowers were owner occupants. You are quite correct that there was a boatload of ARMs written to owner occupants. What I was hoping to convey was the fact that the speculators chosen instrument in the subprime blowup could only be the ARM- and the 0 down was the most coveted.
BTW- Cool site. I'll be back to visit.
Richard
Richard & Conservatism Today:
Thanks for the kind words. We sure agree on Don Luskin; he has answered every dopey little email I ever sent him (though he hasn't gotten back to me about my uncle with the fortune tied up in Nigeria...) Both a brilliant and stand up guy.
Your post added a significant and important facet of the panic. I love speculators in free markets, but I think we can add "flippers" to the list of victims that don't deserve a lot of sympathy. Their profits were real, their losses should be as well.
Make yourself home around here, and I encourage the multitude of ThreeSources readers (three, four, five...) to check out Conservatism Today
October 7, 2008
Celebrating the Bailout
Days after federal officials agreed to an $85 billion bailout of American International Group, the insurance firm spent more than $440,000 for a corporate retreat at a swanky California resort. An invoice from the week-long getaway, a copy of which you'll find below, was obtained by the congressional panel that has been holding hearings this week about Wall Street collapses and executive excess. The late-September AIG gathering at the St. Regis Resort in Monarch Beach cost $443,343, according to the invoice.
Let them all crash and burn.
A lot of ThreeSourcers don't support executive pay caps, but The Refugee does for any company that is a recipient of bailout money (now or in the future). Not tied to ideology, his reasoning is perverse: asking the government for money should be less enticing than an appointment with a sadistic proctologist. The guy who makes the call should feel the pain right along with the taxpayer.
Posted by: Boulder Refugee at October 7, 2008 6:30 PMOctober 3, 2008
Fannie Mae Buddy
In case you were looking for conflicts of interest or appearances of impropriety.
Barney Frank's "partner" an executive at Fannie Mae.
One Admission
A new ad from the NRCC
Will somebody please show that spot to Senator McCain?
Posted by: jk at October 3, 2008 3:35 PMWhat a RACIST and HOMOPHOBIC ad! And then it quotes Artur Davis, who has now outed himself as a gay-bashing race-traitor!
It doesn't matter how true or legitimate any claims are, the ad is still RACIST and HOMOPHOBIC!
Posted by: Perry Eidelbus at October 3, 2008 4:08 PMHouse Passes Bailout
Wasn't even close this time.
Freddie and Fannie
Bring the family.
October 1, 2008
The Panic of '08 -- Blame China?
A good friend of ThreeSources sends a link to this commentary in Commentary by Gordon Chang. It's a good piece and I find much to agree with. But his central tenant is that China holds a lot of culpability for our current woes and that changes in Sino-US economic relations are required to get us past it. It's a good and very short piece worth reading in full.
American lenders have had too much money at their disposal in recent years because China has lent staggering sums to America, especially the U.S. Treasury, Fannie, and Freddie. Beijing has done that because the United States is the place where most excess cash in the world goes. The Chinese have excess cash because they have excess savings. They have excess savings because the government depresses internal consumption and creates massive trade surpluses-like last year’s US$262.2 billion (all of which but $5.9 billion related to sales to the United States). Beijing runs up massive trade surpluses because it manipulates the value of its currency to provide a cost advantage, provides below-market credit to producers, depresses the cost of labor, and subsidizes crucial manufacturing inputs like energy and water. When a country engineers excess savings, it has no choice but to lend funds abroad.
My emailer asks "Is it bunk?"
I would not call it is bunk, but I would not give some elements the same stress that he does.
Excess liquidity is a good backdrop to any bubble. ThreeSources folk bitterly cling to their Austrian Economics and the Austrian Business Cycle Theorem (ABCT) lays much of the blame for bubbles on monetary policy. I am not nearly as ready to blame China (on a few fronts) as is Mr. Chang. Excess liquidity comes from the Greenspan Fed’s “accommodative” monetary policies. The Fed Funds rate was kept at 1% for years. That is virtually daring people to borrow. So I’ll join Chang in citing excess liquidity as an important cause, but I’ll give China a free pass. How dare they buy our bonds! “Dad, if you continue to give me this extravagant allowance, you’ll be to blame if I become a slacker!”
I have a running debate with two of my economic betters about the extent to which new derivatives allow money to be created outside of Central Banks. I hold that they do to a greater extent than Perry or The Everyday Economist will allow. But even I hold the FOMC ultimately responsible if an over-abundance of dollars are printed.
Nor do I share Chang’s concern for Chinese currency valuation. What they really did was to outsource their central banking to the US with a dollar peg and I would say that it served them pretty well. As bad as their bubble was, I think the dollar peg ameliorated it. I heard a lot of protectionists worry about the “artificially low Yuan.” If you want to sell me stuff too cheap, I’m not one to complain.
Chang then gives the US Government a free pass. I’ll say plenty of nasty things about authoritarian China’s fear society, but I will not blame them for buying too many of our bonds or selling us goods too cheaply. If you get the time machine and can go back, Terminator style, to fix our current problems, I would suggest:
1. Rein in Fannie Mae and Freddie Mac. Set the way-back machine far enough to prevent their birth if you can, but at the very least pass the reforms that President Bush and (some) GOP legislators proposed in 2004 and 2005. Cut their leverage in half and you cut the current mess to a fourth.
2. Get Andrea Mitchell to dope Greenspan’s tea and get him to raise rates to at least 2% before handing the reins over to Princeton Boy.
3. Strangle mark-to-market accounting in the crib. Bank regulation makes accounting a legal endeavor. These rules are too harsh and give short sellers too powerful a tool to take a bank down.
4. Laugh the Community Reinvestment Act out of Congress. Do not require banks to make bad loans, they seem to do pretty well on their own.
Get halfway there on all of those and there’s no panic. I don’t fault China, but I do agree with Chang that both politicians have completely whiffed on this one.
Just a few brief points for now. Dollars that the Chinese lend to us is not "excess liquidity," for the simple reason that they come from our own money supply. And it certainly is dollars that they lend right back to us, because it makes no sense to turn their huge trade surplus of dollars into euros or whatever, when they need dollars to buy U.S. dollar-denominated securities. So you're absolutely correct to say that it comes down to the Fed. For the same reason, Chinese lending is not inflationary, because the Chinese aren't creating the dollars in the first place (aside from counterfeiting, whose effect is minimal).
Also, blaming China for lending us is the same BS as accusing mortgage lenders and credit card providers of "predatory lending."
"If you want to sell me stuff too cheap, I'm not one to complain."
Remember what Bastiat said: if someone's selling you something at a cheaper price than you'd otherwise buy, it's a *gift* to you. It can also backfire against attempted "dumping," as Herbert Dow showed the German bromide manufacturers. I've had the privilege of Burt Folsom telling me that story in person.
Posted by: Perry Eidelbus at October 1, 2008 9:51 PMGreat post, JK. Agree with PE that China cannot increase our money supply even when considering M2 and M3; only the Fed can do that.
Posted by: Boulder Refugee at October 2, 2008 11:01 AMSeptember 30, 2008
Defending James Glassman
It has to be done.
One of my favorite writers (and Buffy-sire) Jonathan V. Last has a little fun this week on the Galley Slaves blog. In About That Financial Crisis, he provides thumbnail photos of two books: "Why the Housing Boom Will Not Go Bust" and everybody's favorite whipping boy "Dow 36,000."
Fair enough and funny. If your innards don't squirm a little bit looking at the jacket thumbnails, you're not paying attention.
But it occurs to me that Gloom-and-Doom books outsell Bullish books by a healthy margin. Dow 36,000 is Glassman's personal albatross (Do you get wafers with that, Mister Coleridge?) It's been the butt of many a joke. And, when your bold prediction fails spectacularly, you deserve it. Back to the "But" part, I never see the Bears on CNBC when the DJIA crests new highs. "Mister Schilling, in your best-seller, 'We're All Totally F$%^ed Now.' you promised bank failures in 2006 -- what do you have to say for yourself, four eyes?"
We have a bias toward pessimism and cynicism -- which are a lot easier to predict. Long term, I have to throw my lot in with Kudlow. Free market capitalism will prevail even against the shackles we encumber it with. Human spirit and creativity will prevail. I'd be a buyer right now.
If I had any money.
Or if I could get a loan.
September 29, 2008
C'est Cheese!
Just in time for the failed bailout:
WSJ
Campbell and cheese giant Kraft are also teaming up to promote meals of soup and grilled-cheese sandwiches. Kraft's Web site will add recipes for cheap sandwiches and suggest Campbell soups to pair them with.On Nov. 2, newspapers nationwide will carry coupon inserts pitching Campbell soups and sandwiches made with Kraft Singles cheese as the "wallet-friendly meal your family will love."
It is a big shift for food makers. For several years they have tried to increase their profit margins by promoting higher-priced "premium" brands such as Campbell's Pepperidge Farm cookies and Kraft's Wheat Thins crackers.
I laugh to keep from cryin', boys. BR is right, now is a good time to stock up on ammunition. Remember back in oh-seven when we used to have Wheat Thins®?
Just for the record, this is not the $8 cheese to which The Refugee previously referred.
We'll know it's really bad when Kraft starts adversting meals "easily made in a tent after a long day in the unemployment line" and recipes such as, "Spit-roasted squirrel ala Central Park," or the old classic, "Pigeon with popcorn stuffing."
Posted by: Boulder Refugee at September 29, 2008 4:01 PMI was debating whether to include the modifier "government" cheese or not.
Posted by: jk at September 29, 2008 4:40 PMSeptember 28, 2008
Kudos To GOP Legislators
Can I have a mirabile dictu? The House GOP seems to have removed the worst parts of the "bailout bill." Minority Whip Roy Blunt ($$ - MO) offers a Side-by-Side Comparison of the Paulson Plan, the [Rep. Barney] Frank - [Sen. Christopher] Dodd bill, and the final compromise.
Damn, Sam. Admittedly this is Blunt's report, but it looks like the worst elements were stripped (payola to ACORN and union dictation of CEO compensation) and that most of the limitations to the Paulson plan are probably positive.
I am unhappy to see limits on compensation, but they may be caveatted out of existence: "For equity participation, over $300M total ban for top 5 executives on golden parachutes and tax deduction limit on compensation above $500,000." Sounds like a few escape hatches to me. Dodd wanted to hire some bureaucrat to manage a $700 Billion portfolio and pay him $75K, so the compromise looks good.
As Senator McCain said, Democrats and Republicans "worked together" to craft important legislation. But, praise NED, it looks like the Republicans won.
Hat-tip: Instapundit
PE: You're mistaken on one key point. That is, there is not sufficient liquidity in the system. Many banks do not have money to lend, even to worthy borrows.
As an example, my sister is the CFO of a small bank. This bank owned $1 million in Fannie/Freddie securities. The bank examiners have REQUIRED them to write down the value to $0. With that accounting move, the bank's capitalization ratios on their balance sheet no longer permit them to loan money (FDIC rules). As long as their current loans continue to perform the bank will survive. But the only way to get back into a position to lend money is by retiring existing loans and getting the capitalization ratios back in compliance.
This problem is systemic. Are there banks with enough cash to still loan money? Probably, but as you say, they are reluctant to do so because of the risk to their balance sheet and regulatory compliance.
If banks are able to unload those Fannie/Freddie securities, they will still take a bath. However, their capitalization ratios will allow them to get back into the business of loaning money.
BTW, I offered to take the Fannie/Freddie paper off her hands for book value... she said I'm long line behind a number of shareholders.
Posted by: Boulder Refugee at September 29, 2008 12:10 PMYou're failing to see the difference between the supply of loanable funds and what funds are being loaned out. Just because I'm not lending out what I *could* doesn't mean there isn't money to lend. Right now, global credit markets still have plenty of money, just not a desire to make loans. You've mentioned Caterpillar a few times now, but it's no different a situation than anyone else's: nobody wants to take the risk of lending Cat any money. That is, nobody wants to take that risk *at the prices Cat is offering*. Markets will clear if prices are allowed to adjust on their own, and if Cat must offer higher interest rates to lure investors, so be it. That doesn't mean there isn't money to lend out.
Right now, investors would rather flee for the safety of commodities (gold, oil) and even U.S. Treasury securities, rather than what the federal government wants American taxpayers to buy up. Austrian Business Cycle Theory teaches us that this is not inherently a bad thing. After the last several years of lending excesses, created and spurred by government interference in markets, we're seeing a necessary contraction as errors are eliminated from the market.
What's falsely perceived as "a lack of money to lend" is actually "a lack of trust to lend money." A lot of banks currently don't trust each other's ability to repay loans. They're waiting to see who's next to fail, merge and/or be bought out. This is perfectly sound behavior: a free market would allow participants to wait things out until they can get quality information.
What we have instead is the Federal Reserve "injecting liquidity" as part of its self-anointed role as "lender of last resort," and now the federal government is the "buyer of last resort." This by definition skews what neoclassical economics would call the optimal alignment of supply and demand forces. Austrian economics clarifies further: government interference has no profit motive and thus perpetuates errors, hindering entrepreneurs (who by definition have a profit motive) who would eliminate errors from markets. Austrian market processes in a nutshell: because information is imperfect, supply and demand are not naturally aligned, but it's the entrepreneur who seizes upon profit opportunities and thus brings them toward (if not to) alignment.
Now, back to what the Fed and feds are doing. Why should I, via inflation, be punished because someone couldn't get a loan except by central bankers creating new easy money? Why should I, via taxes, be forced to "invest" in something that I would otherwise not touch at all? "Collectivist" is the only word that can describe this: the individual is subjected to the whims of the majority, sharing in others' successes (if they are successful) but made to share the costs of their failures.
"This bank owned $1 million in Fannie/Freddie securities. The bank examiners have REQUIRED them to write down the value to $0. With that accounting move, the bank's capitalization ratios on their balance sheet no longer permit them to loan money (FDIC rules).
In a free market, your sister's bank would still be able to lend money if it has it, and its account holders could pull their money out if they don't like the bank's risk-taking. And instead of various regulations to prohibit/restrict behavior, bank officers can be held in check by courts. If they intentionally misrepresent material facts, they'll go to jail for fraud.
Do you see the real problem here? Government made worse what it created in the first place. Instead of letting people buyers and sellers determine what they think is the true value, the federal government is going to use our money to buy things here and now.
BTW, our firm, uh, was one of the top shareholders of Freddie and Fannie. And Lehman. And AIG. We took a real bath, but we're far more diversified than four companies, so we'll survive. Knock on wood, we're one of the few bigger companies who are still profitable. Our share price has taken a beating, but we're still paying a dividend. It's helped that we never did investment banking and thus never leveraged ourselves or otherwise exposed ourselves to the huge risks that ML, Bear Stearns and Lehman did.
"As long as their current loans continue to perform the bank will survive. But the only way to get back into a position to lend money is by retiring existing loans and getting the capitalization ratios back in compliance."
Do you see the irony? This comes from the same federal government that imposes such a standard on a bank while itself accumulating more and more debt (that others must pay!) as a regular routine.
"This problem is systemic. Are there banks with enough cash to still loan money? Probably, but as you say, they are reluctant to do so because of the risk to their balance sheet and regulatory compliance."
And trust, as I explained above.
"BTW, I offered to take the Fannie/Freddie paper of her hands for book value... she said I'm long line behind a number of shareholders."
Of course, the government is forcing the book value of zero, as you stated. Forced. Why not a true market value? Simply letting people act freely would do wonders to fix what government hath wrought.
Government states a book value of zero, then declares what's probably a too-high value on other things. Once again, if the latter is such a good deal, let others take the risk, instead of making me ride along. Is it too much to ask that I be left alone, that I not be coerced into joining what I deem a ride into hellfire?
I miswrote something earlier: Obama didn't say he'd postpone his social spending because of the bailout. He actually said he'd postpone his...middle class tax cuts. As if the Clinton Era proved we'd have gotten them anyway.
Posted by: Perry Eidelbus at September 29, 2008 2:56 PMOne thing I meant to add to the first paragraph. Or just because I'm not able to lend out money doesn't mean others aren't able (although waiting) to lend out money.
There's plenty of liquidity already! Kudlow is so full of it.
Posted by: Perry Eidelbus at September 29, 2008 2:59 PMSo government regulators have REQUIRED banks to write down the value of assets on their books to zero. Gee, that sounds familiar. [second link]
And "even the worst" of those assets "are worth no less than 40 cents on the dollar" yet the government has it's own price - 20 cents on the dollar. That sounds familiar too. [second comment]
Posted by: johngalt at September 29, 2008 3:41 PMPE: Not sure I'm getting the nuance between "would lend it but don't have it" and "have it but won't lend it" from a liquidity perspective. Businesses that file chapter 11 because they can't roll over a routine line of credit at an affordable rate won't care. Moreover, this puts the financial system into a death spiral.
I agree that current regulations are a serious problem, i.e. those cited, and contributed to the crisis. However, those are the rules the government set and that the companies played by. It's no more helpful to say, "Shouldn't have done it" than Obama's position on Iraq that "we shouldn't have gone in there." The fact is that we are in both situations and must deal with them.
I do support a switch, even retroactive, from mark-to-market to mark-to-model and would be interested in your thoughts in that regard.
Posted by: Boulder Refugee at September 29, 2008 6:03 PM"PE: Not sure I'm getting the nuance between "would lend it but don't have it" and "have it but won't lend it" from a liquidity perspective."
Well, let me try to put it this way. Paulson, Bernanke and Kudlow claim it's the first. That means there's no money available, regardless of how much people want it, no matter how "worthy" people are to borrow.
But the truth is that all the "injections" by the Fed are unnecessary. The truth is the latter example. There's money out there, but lenders are extremely cautious -- as they should be in these uncertain times. What they need most is *time*, because once things start settling down, they'll be able to gauge who can pay back money and who's not worth the risk.
"Businesses that file chapter 11 because they can't roll over a routine line of credit at an affordable rate won't care. Moreover, this puts the financial system into a death spiral."
Not necessarily. Only those who survive by repeated borrowing won't make it, which isn't a bad thing. Perhaps it's about time they relied on a more stable business model.
"I agree that current regulations are a serious problem, i.e. those cited, and contributed to the crisis. However, those are the rules the government set and that the companies played by. It's no more helpful to say, "Shouldn't have done it" than Obama's position on Iraq that "we shouldn't have gone in there." The fact is that we are in both situations and must deal with them."
Actually, blaming regulations is a warning that we need to let the market be free: more government won't get us out of it! As many have said, you don't rely on the arsonist to put out a fire that he set in the first place. So when Pelosi and Obama blame "deregulation," as they did today, it's a flat-out lie.
"I do support a switch, even retroactive, from mark-to-market to mark-to-model and would be interested in your thoughts in that regard."
I'm not an accountant, but I take a simple Austrian view: let buyers and sellers agree on whichever method works best for them. I personally view the clash over accounting methods as a red herring. It's coming down again to government setting rules that could very well be wrong. Both have strengths and weaknesses.
Mark-to-market realizes that we may not know something's true future value, so at the time we can only value it based on a current market price. Mutual funds' NAV, and margin account values, necessarily go by MTM. Part of my job is approving employees' personal investments based on being low enough that they won't negatively impact our clients' trades, and when they're trading options or futures, we go by what's effectively MTM. The problem is when you bought something for $1 million, and if it declines in value, mark-to-market means your books will show a loss. But in fact, you won't experience a loss unless you're actually trying to sell the whatever at that moment. If I buy a $500K house that in a year is worth less, even if it's down to zero, that doesn't necessarily mean I'll go bankrupt.
Now when you're dealing with something illiquid and/or uncertain in value, mark-to-model is useful. But even so, it inherently leaves people free to value changing/uncertain prices pretty much at whatever they want. Warren Buffett's been to correct to call it "mark-to-myth," although not to the extent he'd like us to think. But a lot of investing companies have used it to hide losses in their investments, and if they had had to report things based on mark-to-market.
In the end, we need not complicate things with accounting methods. We need only to let buyers and sellers be free to agree on a price, and for each side to accept the consequences of the decision without using government to coerce others into bailing out one or both sides. Putting this into an example, if you're going by mark-to-model in what you're offering to sell me, but I insist on mark-to-market, we of course won't agree. But it's not the accounting method that's important, it's the *price*. Value is subjective, however you calculated it.
Posted by: Perry Eidelbus at September 29, 2008 11:17 PMSeptember 26, 2008
Mark-to-Market or Mark-to-Model?
This, to The Refugee's ignorant eye, seems to be a pretty good primer on the difference between mark-to-market and mark-to-model accounting rules that may have precipitated the current financial crisis.
Brian Wesbury has a superb paper (pdf) that claims mark-to-market is 70% of the problem and that rescinding the rule should be 100% of the solution.
It is true that the root of this crisis is bad mortgage loans, but probably 70% of the real crisis that we face today is caused by mark-to-market accounting in an illiquid market. What’s most fascinating is that the Treasury is selling its plan as a way to put a bottom in mortgage pool prices, tipping its hat to the problem of mark-to-market accounting without acknowledging it. It is a real shame that there is so little discussion of this reality.
I've been the ThreeSources cheerleader for the plan, but must admit that this piece is the most compelling argument against it that I have encountered.
Posted by: jk at September 28, 2008 4:10 PM
Abject Terror of the Day
I'm a Kudlow optimist who is bullish on the long term prospects of the American economy. And I'm not quaking in my boots, selling stock, or loading up on water and ammunition.
But I have real concerns about the near term economy and am willing to suspend ideology if it means averting a liquidity crisis. There's no shortage of information or clever arguments for both sides. Here are four for mine, which is: the potential cost of doing nothing is too great, even a bad plan might calm markets; even the government will not lose the whole $700B; Secretary Paulson is as trustworthy to me as any of our 535 economists in chief, far more so than 532 of them.
1) Caterpillar’s 325 bps premium for financing over a similar loan just a few months ago. This is not Joe's Widgets, this is for CAT corporate debt.
2) Friend of a friend and long-time trusted commercial real estate developer is trying to refinance a $4 Million property and cannot get a loan of $900K.
3) A letter to Mankiw:
A LOT of payrolls get paid at the end of the month. The next for many companies is September 30. Three different people with hugely relevant knowledge said to me today words to the effect of: "Why don't your economist buddies want
[insert fortune 100 company/companies here] to be able to pay their employees on Tuesday. If Washington doesn't do something now, they won't be able to". That just scared the hell out of me. I can go into more details if you like, but all of them involve the four horsemen of the apocalypse.
4) Megan McArdle captures my sentiment:
Again, no one knows. Not $700 billion--that's the amount we're paying for distressed assets, some of which will yield profits. The entire portfolio of fire sale securities may lose money, but it's unlikely to be anything close to the entire amount.In some sense, the reason to do the bailout is that we don't know. I don't want to give money to GM because I have a pretty good notion of the scale of a GM collapse. Some people will lose their jobs and get new ones, the steel industry will take a hit, and a lot of managers will be looking for another line of work than pushing ugly, underperforming cars. On the other hand, I have no idea how far a bank collapse might spread. And I'm really not eager to find out.
Me either. Give the bald guy the damn money.
First of all, let's be clear: one can never have too much ammunition!
The problem, as you point out, is that it's impossible to accurately assess the value of these loans in the short period of time available. The only way to be sure that this does not become a huge give-away is to make sure the financial institutions involved have plenty of skin in the game. The Refugee has a moderate amount of faith in House Republicans, who seem to have suddenly rediscovered a principled spine, to drive a hard bargain.
Posted by: Boulder Refugee at September 26, 2008 3:27 PMThere used to be, in this country, a reliable and accurate way to assess the value of property. Old-timers called it "the free market."
Posted by: johngalt at September 28, 2008 2:30 AMSeptember 24, 2008
A Solid Critique of the Paulson Plan
ThreeSources friend The Everyday Economist pens a thoughtful post that compares the current situation to the S&L Crisis and the Paulson Plan to the Resolution Trust Corporation (RTC). It's a good read, allowing you to relive the 80s without big hair and skinny ties.
He comes out foursquare against the plan at the end, by economic and not ideological reasons. I'm not prepared to join him there at this time, but many cite the success of the RTC as a model for the Paulson Plan and the EE develops enough differences to force consideration.
jk, when the government breaks something, I don't want it to fix it. Don't you think the federal government's track record shows we shouldn't trust it, particularly when bailouts just get worse and worse?
To reword an old saying, "Where free-marketers fear to tread." There's a very, VERY good reason that the private sector doesn't want to take the risk on these bad securities, at least not at these prices. If it were so possible for government to make a great profit in this bailout, then Buffett would have jumped all over them first. The man by himself could have bought out the remains of Lehman Brothers, but he didn't.
Oh, and I point I made elsewhere: if you think Paulson with these proposed powers would be bad, how much worse would it be with the powers wielded by an Obama choice for Treasury Secretary?
Posted by: Perry Eidelbus at September 25, 2008 12:59 PMActually, Refugee, Hoover did NOT let the market sort itself out. Hoover's response was "make work" public works programs and...tax hikes. Sound familiar? "Tax hikes" included the Smoot-Hawley Tariff, which destroyed global trade.
As it turned out, FDR merely continued and amplified what Hoover started. And after FDR's platform said that taxes are too high, power should be given back to the states from the federal government, and that money should be made sound by being backed by gold.
Posted by: Perry Eidelbus at September 25, 2008 1:07 PMFair points all around, Perry. But -- yet again this year -- laissez faire is not on the menu. I would prefer a $700B stimulative tax cut, maybe waiving cap gains for those that buy this paper today. Speaker Pelosi? Leader Reid? I thought so.
Why will I, then, agree to incur the liability against future taxation? Because I have bought into the seriousness of the situation. Caterpillar's paying a 325 basis point premium over an offering from a few months ago is unsettling. Secondly, I have bought in to the idea you dismiss of the government's ability to hold these until conditions improve. Andy Kessler suggests that government can actively reflate to improve conditions (warning: not safe for metalists!) Buffett could play here but he chooses to play conservatively. It's hard to name too many others who could buy enough - a'la Soros -- to drive the market, and none are quite as well capitalized as Sec Paulson.
I could be proven wrong on both counts, of course. We're predicting uncertain futures. I really don't want to live through a full blown liquidity/credit crunch, and I'll go all in with Paulson today to avoid it.
"laissez faire is not on the menu."
And that's the problem. If we don't like the menu, we should be able to pick up and choose a different restaurant. It's far beyond "getting old" that we have to pick between Beelzebub and Mephistopheles.
You need to ask yourself: do you really trust the guys who created this mess in the first place to get us out of it? As the saying goes, "Ye shall know them by their fruits." Look at what they've given us so far, and rely on *that* to predict their future track record, not their promises today of peace, land and bread. I don't trust Paulson for a second, particularly when the initial plan is to give him incredible powers without any oversight.
A $700 billion tax cut would be AMAZING for the American economy. You'd see domestic and foreign investment return with such confidence, because maybe there won't be as much profit, but the feds won't be stealing a chunk. Problem is, $700 billion of tax *cuts*, not what could be taxed, would require eliminating cap gains on $4.6 trillion worth of profit.
Coyote Blog had a great observation: the same Democrats who are afraid to privatize Social Security have no problem blowing $700 billion on this. It's "too risky" to let people invest for their own retirement, but it's ok for them to spearhead the federal government buying up the worst securities on the market today. Great deal!
Oh, and speaking of Soros: his hedge fund lost at least $120 mil on Lehman, depending on when it bought the shares. I cackled for five minutes at that. Shows how great his investment instincts are when he doesn't have someone on the inside, huh? Or maybe he did and believed Lehman's executives.
Posted by: Perry Eidelbus at September 26, 2008 9:21 AMPE, as with most political gambits we are talking about degrees of intervention here. Arguably, Hoover pretty much did everything wrong, e.g., constrict capital, raise taxes, tariffs and public works.
The bigger issue is the environment that the Wall Street crash created: immense domestic pain (25% unemployment) etc. etc. that created the conditions under which the New Deal could be passed. My non-interventionist ideals are in conflict with my practical realities. I would prefer some bailout to conditions that would foster a second New Deal.
That said, I'm pleased that the House Republicans are pushing back. They may be onto something. That is, much of the problem may be caused by accounting rules such as mark-to-market that artificially devalue some finanicial assets and thereby hurt liquidity. Can we get out of this without a massive bailout and without a public uproar for big government? The Refugee has all of his digits crossed.
Posted by: Boulder Refugee at September 26, 2008 12:59 PMActually, BR, the Great Depression would have been only a few mild recessions, had the federal government not intervened. History could very well repeat itself today, if the federal government succeeds in "preventing a collapse" when what we actually need is the complete collapse of a few companies, which will then be absorbed, rather than everyone fall "equally."
Remember, and this is some of the best wisdom you can pass on to your children, that collectivism is about bringing the successful down to the level of the unsuccessful, whether it's taxing income or ensuring "equality of outcome" -- including "bailouts."
For further reading on the Depression: http://eidelblog.blogspot.com/search?q=%22great+depression%22
Oh by the way, some "conservative" in comments at alarmingnews.com is accusing me of "championing economic liberalism" because I oppose the bailout. WTF?
Posted by: Perry Eidelbus at September 27, 2008 11:42 AMSeptember 22, 2008
Investment
The word "investment" has become so debased as a politician's euphemism for "spending" that most have stopped looking at the difference. Don Luskin spots one:
The fundamental mistake is that the $700 billion would be used to invest in income-producing assets, not to fund consumption. A dollar spent in Head Start, say, or in socialized health care, is gone forever, even though its expenditure may produce a benefit for whomever receives the service it funds. But a dollar spent on a mortgage earns interest, and can eventually be sold -- perhaps even at a profit. And in the meantime, if the government's temporarily holding these assets helps unlock the US real estate and securities markets, then so much the better. To be clear, I'm not endorsing the federal government investing $700 billion in private assets. But love it or hate it, it is investment -- not consumption.
Luskin never says that it is a good investment, and he provides for difference and discussion. But it is worth looking at the bailout in these terms and remembering that the gub'mint actually did turn a profit on the RTC.
That's what The Refugee loves about this country - irrational optimism!
Posted by: Boulder Refugee at September 22, 2008 3:36 PMMea Maxima Culpa!
I had a hunch I was wrong when I found myself siding with Bill O'Rielly against the WSJ Editorial Board. Reading this, I declare full capitulation:
McCain told 60 Minutes tonight that he would name New York State Attorney General Andrew Cuomo, son of former New York Gov. Mario Cuomo and Secretary of Housing and Urban Development (HUD) under President Bill Clinton, as chairman of the U.S. Securities and Exchange Commission, Mike Allen reports.“I've admired Andrew Cuomo,” McCain said. “I think he is somebody who could restore some credibility, lend some bipartisanship to this effort.”
AND MAKE ELLIOT SPITZER COACH OF THE GIRLS' VOLLYBALL TEAM?
I know stupidity reigns so thick at 60 Minutes that it's hard to stay focused, but this is the dumbest thing I have heard all campaign and falls well outside of the "let McCain be McCain" rubric. If he wants to play Teddy Roosevelt and rail about greed, I can shudder and look the other way. When he wants to promote Spitzerism to the SEC, it's game over. I'm going back to bed. Wake me up after Obama wins.
Hat-tip: Mickey Kaus "Note to my conservative friends: Hope Palin's worth it!" via Instapundit
Once Upon a Time
A little preaching to choir here, but don't miss the WSJ lead editorial today:
Once upon a time, in the land that FDR built, there was the rule of "regulation" and all was right on Wall and Main Streets. Wise 27-year-old bank examiners looked down upon the banks and saw that they were sound. America's Hobbits lived happily in homes financed by 30-year-mortgages that never left their local banker's balance sheet, and nary a crisis did we have.Then, lo, came the evil Reagan marching from Mordor with his horde of Orcs, short for "market fundamentalists." Reagan's apprentice, Gramm of Texas and later of McCain, unleashed the scourge of "deregulation," and thus were "greed," short-selling, securitization, McMansions, liar loans and other horrors loosed upon the world of men.
Now, however, comes Obama of Illinois, Schumer of New York and others in the fellowship of the Beltway to slay the Orcs and restore the rule of the regulator. So once more will the Hobbits be able to sleep peacefully in the shire.
They are sadly right that this will become believed and accepted as fact. This could set the cause of liberty (and prosperitarianism) back a lot further than a bad election.
September 19, 2008
The Refugee's Allies
Blog brother br is way too classy to hide behind the WSJ Editorial board, so I will make his "I Told You So!" post on his behalf.
The refugee and I had a small difference of opinion yesterday on Senator McCain's bruising criticism of SEC Chairman Chris Cox. BR was disturbed that it was scapegoating in lieu of a serious understanding. I agreed on the lack of understanding but suggested that I would not defend Cox, and that it might be smart politics to take a few whacks at a Bush Administration official.
My freedom mentors and intellectual betters at the WSJ Ed Page come down squarely in br's camp today:
To give readers a flavor of Mr. McCain untethered, we'll quote at length: "Mismanagement and greed became the operating standard while regulators were asleep at the switch. The primary regulator of Wall Street, the Securities and Exchange Commission (SEC) kept in place trading rules that let speculators and hedge funds turn our markets into a casino. They allowed naked short selling -- which simply means that you can sell stock without ever owning it. They eliminated last year the uptick rule that has protected investors for 70 years. Speculators pounded the shares of even good companies into the ground.
[...]
Wow. "Betrayed the public's trust." Was Mr. Cox dishonest? No. He merely changed some minor rules, and didn't change others, on short-selling. String him up! Mr. McCain clearly wants to distance himself from the Bush Administration. But this assault on Mr. Cox is both false and deeply unfair. It's also un-Presidential.
Gigot & Co. even defend the decision to not reinstate the uptick rule. This is something that Larry Kudlow has been calling for. Unlike the DH (against it!), I don't have strong opinions on the uptick rule. Put me down for laissez faire, but if the uptick rule (more like infield fly than DH) could keep the US and UK from banning all short selling, I'd give it a listen. Larry suggests "why don't we just ban all selling -- that would protect prices."
Reasonable blog brothers can disagree. I'm not convinced it was bad, but I would love to hear Senator Mac say something useful or true about the ECWTASTGD.
Far from being that classy, The Refugee referenced that piece in his reply to jk this morning! The Journal is far more erudite than this pathetic Refugee.
Posted by: Boulder Refugee at September 19, 2008 12:08 PMWell, it was classy to leave it in a comment and not throw it in my face...
I agree on not supporting the narrative of a failed Bush Administration. On the same token, I don't think all of his appointments have been stellar. You and I will rush to circle the wagons when Administration officials are attacked, but we're in an electoral minority. Better to defend the Administration's successes, good policy, and good appointments.
Oh my NED! Am I really in the O'Reilly camp on this? While you get the WSJ Ed Page? I must be wrong, but I just can't see it.
September 18, 2008
Congress Tries to Fix What They Broke
"I scream, you scream, we all scream for - REGULATION!"
In contrast to the major media narrative on the current financial turmoil there are two articles that everyone must read.
The first is Congress Tries to Fix What it Broke, an editorial by Investor's Business Daily.
Regulation: As the financial crisis spreads, denials on Capitol Hill grow more shrill. Blame an aloof President Bush, greedy Wall Street, risky capitalism — anybody but those in Congress who wrote the banking rules.(…)
In other words, nobody up and down the line — from the branch office on main street to the high-rise on Wall Street — analyzed the risk of such ill-advised loans. But why should they? Everybody was just doing what the regulators in Washington wanted them to do.
(…)
The original culprits in all this were the social engineers who compelled banks to make the bad loans. The private sector has no business conducting social experiments on behalf of government. Its business is making profit. Period. So it did what it naturally does and turned the subprime social mandate into a lucrative industry.
Of course, it was a Ponzi scheme, because they weren't allowed to play by their rules. The government changed the rules for risk.
In order to put low-income minorities into home loans, they were ordered to suspend lending standards that had served the banking industry well for centuries. No one wants to talk about it, so they just scapegoat Wall Street.
The other is Zachary Karabell's Bad Accounting Rules Helped Sink AIG, a WSJ editorial.
The current meltdown isn't the result of too much regulation or too little. The root cause is bad regulation.Call it the revenge of Enron. The collapse of Enron in 2002 triggered a wave of regulations, most notably Sarbanes-Oxley. Less noticed but ultimately more consequential for today were accounting rules that forced financial service companies to change the way they report the value of their assets (or liabilities). Enron valued future contracts in such a way as to vastly inflate its reported profits. In response, accounting standards were shifted by the Financial Accounting Standards Board and validated by the SEC. The new standards force companies to value or "mark" their assets according to a different set of standards and levels.
The rules are complicated and arcane; the result isn't. Beginning last year, financial companies exposed to the mortgage market began to mark down their assets, quickly and steeply. That created a chain reaction, as losses that were reported on balance sheets led to declining stock prices and lower credit ratings, forcing these companies to put aside ever larger reserves (also dictated by banking regulations) to cover those losses.
(…)
Among its many products, AIG offered insurance on derivatives built on other derivatives built on mortgages. It priced those according to computer models that no one person could have generated, not even the quantitative magicians who programmed them. And when default rates and home prices moved in ways that no model had predicted, the whole pricing structure was thrown out of whack.
The value of the underlying assets -- homes and mortgages -- declined, sometimes 10%, sometimes 20%, rarely more. That is a hit to the system, but on its own should never have led to the implosion of Wall Street. What has leveled Wall Street is that the value of the derivatives has declined to zero in some cases, at least according to what these companies are reporting.
There's something wrong with that picture: Down 20% doesn't equal down 100%. In a paralyzed environment, where few are buying and everyone is selling, a market price could well be near zero. But that is hardly the "real" price. If someone had to sell a home in Galveston, Texas, last week before Hurricane Ike, it might have sold for pennies on the dollar. Who would buy a home in the path of a hurricane? But only for those few days was that value "real."
No matter what else you hear or read on this subject, keep these two articles in mind.
The Refugee was about to rant that everyone seems to have forgotten Eliot "Stockings" Spitzer's now-discredited prosecutorial targeting of AIG and CEO Hank Greenberg. However, a quick Internet search proved otherwise.
Upon indictment, AIG stock dropped something like 45% and never recovered. This substantially hampered the company's ability to raise capital. An alternate universe does not exist to determine if AIG would have failed anyway, but it's worth contemplating what role prosecutorial abuse may have played. Right next to the calls of "Wall Street greed" let's put "political hubris." Spitzer can be the poster boy - from the waist up, please.
Posted by: Boulder Refugee at September 19, 2008 4:10 PMWell, everybody who is not doing Google® searches for "Spitzer, AIG, Screwed it up" probably has forgotten it.
We'll hear a thousand times about Phil Gramm revoking Glass-Steagall, but nobody is going to remind us of Fannie, Freddie, or "Client Number Nine."
Don't be so sure, jk. Yes it's only the Limbaugh faithful hearing it but today (Monday, 9/22) he's trumpeting "all roads [in the investment failures] lead to Fannie and Freddie and their Democrat buddies - Chris Dodd, Barney Frank, Nancy Pelosi, Franklin Raines..." No mention of Spitzer yet though.
Posted by: johngalt at September 22, 2008 3:22 PMGents - in this highly divisive political environment it is very easy to point to the opposite side for the present troubles. But before pointing fingers to Freddie, Fannie and the friends of the democrats, consider two things:
1: FRE and FNM until recently were Govt. sponsored organizations. Which means they had a govt. regulator appointed by a republican administration with the blessing of a republican congress for the bulk of the period of such excess
2: The root cause, cheap liquidity, can be tied down to the Greenspan Fed, a self proclaimed republican.
3: If not for FRE and FNM, could President Bush have touted "home ownership is at its peak" or something to that effect.
Heretic:
I'll concede the point on "highest home ownership;" without the bubble that would probably be true just by growth but would not have been dramatic enough to brag over.
I'm less interested in exonerating Republicans that free markets. Republicans frequently act against freedom (else we wouldn't bother blogging around here). But some free market forces, notably the WSJ Ed Page and (surprise!) Senator John McCain saw this problem developing and pushed or called for correction. Rep. Frank and Senator Dodd said everything was fine and cashed some big checks.
The GSE is a bad model and I'll happily a Republican who suggests it.
September 16, 2008
Don Luskin on FOXNews
I didn't think that could happen -- the Murdoch enforcement field is weakening somehow.
Anyways, Luskin's WaPo Op-Ed got some favorable coverage last night on Brit Hume's "Grapevine." Roll tape:
Greed and Gravity
ThreeSources friend the Everyday Economist links to a superb blog post by Lawrence H. White (EE calls him "Larry" but I don't know him well enough for such liberties).
On campus this afternoon I overheard the following remark by a non-economist, trying to explain to another non-economist the Lehman failure and today's stock market decline: “It’s a combination of deregulation and greed. Boy, if you deregulate enough, the greed will follow.”If I had butted in, I would have made two points. (1) If an unusually large number of airplanes crash during a given week, do you blame gravity? No. Greed, like gravity, is a constant. It can’t explain why the number of crashes is higher than usual. (2) What deregulation have we had in the last decade? Please tell me. On the contrary, we’ve had a strengthening of the Community Reinvestment Act, which has encouraged banks to make mortgage loans to borrowers who previously would have been rejected as non-creditworthy. And we’ve had the imposition of Basel II capital requirements, which have encouraged banks to game the accounting system through quasi-off-balance-sheet vehicles, unhelpfully reducing balance sheet transparency.
When I saw the excerpt, I was afraid that the author was whacking Senator John McCain. Sadly, Senator Mac has internalized TR too much, He reflexively blamed yesterday's meltdown on greed (gravity). Of course, Senator Obama blamed it on President Bush, so I am not really declaring a winner here.
But I expect a little more from Republicans, naive waif that I am.
Chuck "The Schmuck" Schumer was on "Hardball" last night, spewing the same "greed" and "deregulation" nonsense. And Chris Matthews looked like he was eagerly hanging on every word that idiot said, at one point grasping his pen with both hands and leaning forward slightly.
"Deregulation," what nonsense. Repealing the Glass-Steagall Act is often blamed for the subprime mess but actually did NOTHING beyond what was already there. Allowing commercial and investment banks to merge, and the ability to collateralize mortgages into securities, wouldn't have done anything without the very fact that people were buying homes they couldn't afford, and that mortgage lenders were being given carrots and sticks to give out subprime loans. In fact, collateralization of anything, not just debt obligations, doesn't make it possible to sell that underlying something. It only makes it *easier* to buy it in a bundle and at the amount you want. Investors, through whichever broker they use, could still buy a bunch of securities from a bank, but the popularity of CDOs made it much easier. There's nothing inherently wrong with that, either: as an investor, your punishment for a bad investment is built in.
Meanwhile, you can't tell me (some of you may recall I work in compliance) that the SEC and other government entities aren't regulating things. There is immense regulation everywhere you turn. The problem is that the regulation breeds moral hazard: investors think that if something is regulated (let alone it'll be backed by the government), it must be safer. Do we really think that Lehman would have lasted so long if investors didn't have the comfort of knowing it was buying "regulated" CDOs? Hell no: investors would have run for the hills once Lehman "announced intentions" to buy "these ultra-risky mortgage-backed securities that could lose all value at any time."
On the subject of Fannie and Freddie, it is FACT that they are responsible for the majority of the problems. Lenders made bad loans, which were collateralized, and Fannie and Freddie were all too eager to buy them. It is also fact that they were able to do so courtesy of their charters that gave them explicit backing by the federal government. THEY are the companies who grew too big, because government birthed, bred and fed them. I'm hardly the only one who warned that people are fooling themselves if they thought the federal government wouldn't step in to "save" them.
Posted by: Perry Eidelbus at September 16, 2008 12:15 PMAmen, brother.
The IBD has a nice editorial detailing the extent to which regulation caused it.
Obama and Democrats on the Hill think even more regulation and more interference in the market will solve the problem their policies helped cause. For now, unarmed by the historic record, conventional wisdom is buying into their blame-business-first rhetoric and bigger-government solutions.
While government arguably has a role in helping low-income folks buy a home, Clinton went overboard by strong-arming lenders with tougher and tougher regulations, which only led to lenders taking on hundreds of billions in subprime bilge.
Market failure? Hardly. Once again, this crisis has government's fingerprints all over it.
Posted by: jk at September 16, 2008 12:28 PM
The financial market is probably second only to pharmaceuticals in terms of regulation.
Actually, the solution is quite simple. Let's pass a law that prohibits stock and home values from ever declining. That'll solve it.
Posted by: Boulder Refugee at September 16, 2008 12:58 PMSeptember 15, 2008
Tough Love
The WSJ Ed Page (and I) agree about some tough love for the financial system:
The result will be a very rough Monday, but the government had to draw a line somewhere or it would have become the financier of first resort for every company hoping to buy a troubled firm. Especially with the Fed discount window now wide open to many more financial institutions, and to many kinds of collateral, Treasury Secretary Hank Paulson's refusal to blink won't get any second guessing from us. If Lehman is able to liquidate without a panic, and especially if its derivative contracts can be safely undone, the benefits would include the reassertion of "moral hazard" on Wall Street. The Merrill acquisition before it faces a Lehman-like run should also reduce the risk of contagion.
Besides, a complete meltdown of the banking system should take some San Dieagans mind off of football
UPDATES: Let's tack on some quotes of the day:
-- "Lehman Brothers, aren't they the guys who make the cough drops?" -- Don Luskin on Kudlow & Co. last week-- "Remember, if it’s black smoke, they haven’t chosen a Pope come up with a deal for Lehman; if it’s white smoke, they have".-- a rare QOTD appearance for Paul Krugman (ht:ee)
-- "You know the world is coming to an end when Lehman Brothers closes its doors, and the Cubs pitch a no-hitter." -- Club for Growth's Andrew Roth
September 13, 2008
It was the worst of times, and it was the worst of times.
Don Luskin takes on the pessimists in a WaPo guest Editorial today:
Barack Obama has frequently used the Depression exaggeration, including during a campaign speech in June, when he said that the "percentage of homes in foreclosure and late mortgage payments is the highest since the Great Depression." At best, this statement is a good guess. To be really true, it would have to be heavily qualified with words such as "maybe" or "probably." According to economist David C. Wheelock of the Federal Reserve Bank of St. Louis, who has studied the history of mortgage markets for the Fed, "there are no consistent data on foreclosure or delinquency going all the way back to the Depression."The Mortgage Bankers Association (MBA) database, which allows rigorous apples-to-apples comparisons, only goes back to 1979. It shows that today's delinquency rate is only a little higher than the level seen in 1985. As to the foreclosure rate, it was setting records for the day -- the highest since the Great Depression, one supposes -- in 1999, at the peak of the Clinton-era prosperity that Obama celebrated in his acceptance speech at the Democratic National Convention late last month. I don't recall hearing any Democratic politicians complaining back then.
Even if Obama is right that the foreclosure rate is the worst since the Great Depression, it's spurious to evoke memories of that great national calamity when talking about today -- it's akin to equating a sore throat with stomach cancer. According to the MBA, 6.4 percent of mortgages are delinquent to some extent, and 2.75 percent are in foreclosure. During the Great Depression, according to Wheelock's research, more than 50 percent of home loans were in default.
[...]
Here's another one not to be too alarmed about: Obama is flat-out wrong when he frets on his campaign Web site that "the personal savings rate is now the lowest it's been since the Great Depression." The latest rate, for the second quarter of 2008, is 2.6 percent -- higher than the 1.9 percent rate that prevailed in the last quarter of Bill Clinton's presidency.Full disclosure: I'm an adviser to John McCain's campaign, though as far as I know, the senator has never taken one word of my advice. He's been sounding a little pessimistic on the economy of late, too.
September 12, 2008
Where was the President?
Senator Dodd (D - Countrywide) looks to the collapse of Fannie Mae and Freddie Mac and "has the gall to ask in a Bloomberg Television interview: 'I have a lot of questions about where was the administration over the last eight years.'" Sorry for Senator Dodd, Al Hubbard and Noam Neusner answer him in the Washington Post today. The whole article is great fun, but the short answer is pretty much "dealing with intransigent House and Senate Banking Committees that refused to acknowledge a problem as they lapped up lobbying funds."
The two former Administration representatives document the number of times that concerns were raised by President Bush (including last year's SOTU) as well as President Clinton, former FOMC Chairman Alan Greenspan, Republican Senator Richard Shelby, &c.
How did Fannie and Freddie counter such efforts? They flooded Washington with lobbying dollars, doled out tens of thousands in political contributions and put offices in key congressional districts. Not surprisingly, these efforts worked. Leaders in Congress did not just balk at proposals to rein in Fannie and Freddie. They mocked the proposals as unserious and unnecessary.
[...]
As recently as last summer, when housing prices had clearly peaked and the mortgage market had started to seize up, Dodd called on Bush to "immediately reconsider his ill-advised" reform proposals. [Rep. Barney] Frank, now chairman of the House Financial Services Committee, said that the president's suggestion for a strong, independent regulator of Fannie and Freddie was "inane."
Hubbard and Neusner ask "Where was Senator Dodd?" -- Ooh, I know this one! He was at Countrywide getting a loan!
Hat-tip: Greg Mankiw
September 9, 2008
Fannie and Freddie
Two must reads on your new secondary mortgage business:
The Everyday Economist has a smart piece about Where Do We Go From Here (I have no idea whether he is a Buffy fan, but the line will get a couple of ThreeSourcers singing). His piece includes a link that exonerates Fan and Fred from the subprime imbroglio. I would personally blame these hybrid mutations for global warming and the lack of Oakland pass protection if I could, but Thomas Palley makes some good points as part of a larger picture.
The EE and I share concern over the Fed's larger role.
Perhaps more troubling is the development of new programs within the Federal Reserve to deal with this crisis. I have previously mentioned that the Fed has performed admirably in the face of the crisis, but this point needs to be better clarified. The Fed, contrary to its performance during the Great Depression, has been vigilant in its effort to serve as lender of last resort. However, as Allan Meltzer has pointed out, they have surpassed this goal and have actually become the “creditor of last resort.” This distinction is important because as lender of last resort, a central bank is an entity that serves to provide liquidity to the market whereas the creditor of last resort refers to a central bank that holds all of the bad debt that others are unwilling to hold.
He calls the Term Auction Facility a failure because it has not reduced risk spreads between LIBOR and OIS. I'm very concerned about the new Fed responsibility but would have to concede that I think it has contained their growth if it has not shrunk them. It's a smart read and I only had to look up two terms. Your mileage may vary.
It's ultimately a political problem long term as much as an economic problem short term. I suggested the other day that Senator Obama was committed to expanding public-private partnerships. Today, Senator McCain and Gov. Palin have a guest editorial in the WSJ.
The bailout of Fannie Mae and Freddie Mac is another outrageous, but sadly necessary, step for these two institutions. Given the long-term mismanagement and flawed structure of these two companies, this was the only short-term alternative for ensuring that hard-working Americans have access to affordable mortgages during this difficult economic period.We are strong advocates for the permanent reform of Fannie and Freddie. For years, Congress failed to act and it is deeply troubling that what we are now seeing is an exercise in crisis management rather than sound planning, and at great cost to taxpayers.
I like the high dudgeon, and I like the facets of the plan that Senator McCain claims credit for. I offer no comment on how legitimate his claims are, but he does pick out the good parts of Paulson's plan:
Treasury has broadly followed the McCain plan, outlined months ago, and gets at the short-term heart of the problem. That plan reinforces the federal commitment to meet our obligations and get this mess behind us. It replaces management and board members. It requires that shareholders take losses first. It puts taxpayers first in line for any repayments. And it terminates future lobbying, which was one of the primary contributors to this great debacle. (Emphasis mine)
That said, the editorial does not offer a compelling, first-principles objection to Government Sponsored Enterprises (GSEs). I know looking for libertarian first-principles from Senator McCain is a losing proposition. But most of what he says is good; he just fails to wrap it up in a big philosophical ribbon. That makes it read like a stump speech.
UPDATE: Don't miss David Harsanyi's Risk for Thee but Not for Me
Rather, economy columnist James Pethokoukis of U.S. News & World Report, asks, "doesn't this make the case for privatization, and powerfully at that? Don't forget that we are also sitting here with Social Security and Medicare leaving taxpayers on the hook for more than $50 trillion in liabilities."Isn't it ironic that government bars a citizen from risking his own Social Security funds because it's too chancy, yet it uses your money to bail out companies that have engaged in the very behavior government is supposedly safeguarding us from?
And really, what's more risky than letting Washington handle your money?
September 7, 2008
Congratulations, Taxpayers!
You're the proud new owners of a corrupt, bureaucratic, secondary mortgage institution.
Treasury Secretary Henry Paulson says the actions were being taken because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.
BUT WAIT!
Because Secretary Paulson called within the first twenty minutes -- they threw in another failed public political institution! That's right you get TWICE the liabilities!!
I jest. I cry. But mostly, I try to point out that Fan & Fred are textbook examples of the private-public partnership that Senator Obama and the Democrats always claim are the answer. They'll give us a health care Fannie and an energy Freddie. All the profits will go to well connected political types (Franklin Raines, paging Mister Franklin Rains...) and the liabilities will all go to the American taxpayer.
Senator Obama loves to talk about "millions of green collar jobs" that he will create (Government create jobs?) and that he will "put a million hybrids" on the road (government production planning?) Keep in mind that what he will create is a stream of hybrid public-private-not-fish-nor-fowl bureaucracies.
The Fannie and Freddie takeover could be instructive if anyone were listening.
August 21, 2008
Martinomics
The best Starbucks® The Way I See It I have yet to encounter. #112:
If you've got a dollar and you spend twenty-nine cents on a loaf of bread, you’ve got seventy-one cents left. But if you've got seventeen grand and you spend twenty-nine cents on a loaf of bread, you’ve still got seventeen grand. That's a math lesson for you. -- Steve Martin Comedian and actor
August 19, 2008
jk Turns Hawkish on Inflation
I have been the inflation dove around ThreeSources. I still consider a core CPI in the low "twos" to be manageable, but I think we are getting beyond that and am willing to concede that long term headline inflation cannot be ignored.
Brian Wesbury has an excellent guest editorial in the WSJ today. The First Trust Advisors Chief Economist and frequent Kudlow guest is a smart guy and a cool head. He's pretty slow to call for falling skies, but he has some serious 1970s-ish concerns about where we are now.
One would think that the odds of a repeat [of 1970s inflation] were low, and for 20 years, after Ronald Reagan and his Fed Chairman Paul Volcker had the courage to get inflation under control with tight money and tax cuts, this was true. Unfortunately, the lessons seem to be fading. Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency.Today's problems began seven years ago in 2001, when the Federal Reserve overreacted to the deflationary mistake it made in the late 1990s. The Fed vigorously pumped money into the economy in order to drive interest rates down rapidly.
Though I am still not calling for Bernanke's head on a pike, any fair observer would have to suggest that he is no Volcker. And I've seen the guys running for President -- neither is Ronald Reagan.
A good economist should be smart and lucky, and Wesbury may be both. The day his column runs, the WSJ news pages report a 27-year record rise in the PPI last month.
I think the FOMC's taking back 25 bps and suggesting another before year end would send a strong signal and leave us with what no sane person would call "tight money."
I'd suggest the Wesbury piece to even ThreeSourcers who do not get animated about monetary policy (odd eggs that you are). It's very readable and accessible.
Finally!
Posted by: Everyday Economist at August 19, 2008 3:46 PMAugust 7, 2008
Dude, Where's My Recession?
(1,000,000 thanks to James Pethokoukis for that line! Sadly, those are 2001 thanks, equivalent to about 920,000 thanks today...)
Don Luskin is at Disneyland:
THANK GOD THERE'S A GLOBAL RECESSION GOING ON Otherwise Disneyland would be really crowded! This photo was taken this morning at the front gate an hour before the park opens to the public -- this is just the "magic morning" people staying at the park's various hotels, who get admission one hour early. They've lined up like this at 7:00 am.
I'll admit you can go too far with this anecdotal stuff. But every time I sit and wait in the Starbucks drive-through in the middle of a weekday afternoon, I bore my wife with the same observation.
Not to say things are perfect, but a lot of people still line up at Disneyland and to buy $4 coffee on Thursday afternoon.
July 31, 2008
Home Run!
Megan McArdle, my favorite libertarian Obama supporter, hits one out of the park. The text below is formatted as a quote and I am not certain of its origins. But somebody is taking a marvelous whack at the University of Chicago professors who are protesting the Milton Friedman Institute:
"Many would argue that they have been negative for much of
the world's population... weakening ... struggling local economies"
I can think of lots of words to describe what's going on in, say, China and India, as well as what happened previously to countries that adopted the "neoliberal global order" like Japan, Hong Kong, and South Korea. Billions of people are leading dramatically freer, healthier, longer and more prosperous lives than they were a generation ago.Of course, we all face plenty of problems. I worry about environmental catastrophes, and their political, social and economic aftermath. Many people are suffering, primarily in pockets of kleptocracy and anarchy. Life's pretty bleak about 5 blocks west of the University of Chicago. In my professional life, I worry about inflation, chaotic markets, and their possible death by regulation. There is a lot for thoughtful economists and social scientists to do. But honestly, do we really yearn to send a billion Chinese back to their "local economies," trying to eke a meager living out of a quarter acre of rice paddy, under the iron grip of some local bureaucrat? I mean, the Mao caps and Che shirts are cool and all, but millions of people starved to death.
This is just the big lie theory at work. Say something often enough and people will start to believe it. It helps especially if what you say is vague and meaningless.
Read the whole (very short) thing. Hat-tip: Instapundit
Sure seems that way to me, but McArdle is the real deal.
Posted by: jk at August 1, 2008 2:30 PMNot if she supports Obama, and it takes only one thing to destroy your credibility.
It's one thing to like someone as a *person*, but no true libertarian could possibly support the candidacy of a raving socialist who wants to hike taxes and redistribute wealth, someone who not just believes in big government but *worships* it and wants to make it *the* driving force in our economy.
Posted by: Perry Eidelbus at August 1, 2008 4:39 PMI agree that it strains credulity -- the Obama-libertarian overlap is pretty thin. At the same time, Reason Magazine is 80% filled with articles bashing McCain and I almost never hear the Junior Senator from Illinois mentioned.
I plan to vote for McCain who has committed multiple sins against liberty and promises more every day on the campaign trail. McArdle doesn't swoon or get shivers up her leg, and she has taken some mighty whacks at him.
I think she's crazy -- why I bring it up -- but if you're committed to gay marriage or unrestricted abortion rights, oppose the Iraq War and want us out yesterday, you can most definitely call yourself a libertarian -- and Senator Obama's your guy!
Prosperitarians, in contrast, cannot be seen in the Democratic Camp, even for free food.
The overlap is thin indeed -- it's just about *only* the issues you listed. Even if you say, "Well, I'll vote for so-and-so who's pretty close but not exactly what I'd like," Obama's state-worshipping, his stance on economic freedom from taxation to envirowhorism, simply means no genuine libertarian could possibly support him.
Once someone says he or she supports Obama, I know the person's a liberal and/or deluded. With his desire to "talk" to Iran and Syria, and disarm the U.S. of its nuclear weaons, we may well regret that we didn't take Bruce Bartlett's advice and support Hillary.
Posted by: Perry Eidelbus at August 3, 2008 11:53 PMJuly 30, 2008
Guys Who Can Pronounce 'Schadenfruede'
Terri at I Think ^(Link) Therefore I Err links to an article in Der Spiegel that might be the worst article ever. Who else could marry smug Eurotrash socialism with dimwitted American populism? "We've combed the whole world to come up with the worst economic advice!" (It sounds better in German).
The article is dated January 8, 2008, so the Washington correspondent can reference the Democratic primary and have a perfect tie-in for economic nonsense.
Just in time for the recession and widespread layoffs many economists fear the American economy could face this spring, the presidential campaign has suddenly found its new hot-button issue: the dark side of globalization. The mortgage crisis, declining real wages and the fear that companies could even accelerate their outsourcing activities in a recession have relegated explosions in Iraq to the role of political background noise.
Huh? No Abu Ghraib? Well, we're talking NAFTA, specifically the theft of a bunch of good jobs assembling televisions in Tennessee to a plant in Juarez. Juarez, we are to believe was some sort of lovely, desert paradise until NAFTA.
In the United States, the city has come to symbolize a system of international trade that benefits only a few and harms the overwhelming majority, a system as detrimental to the wages of American workers as it is to moral standards.
Nein, danke, Herr Steingart, I seriously doubt many people think of Juarez as a "symbol of international trade." I'm thinking that "smelly, scary, dirty border town" would poll substantively higher.
Seriously, I went to school in New Mexico and financed one semester by driving to Juarez and smuggling back some not-quite-legal-in-the-US-yet tequila. Good stuff with a worm and all. This was more than a decade before NAFTA, and you will trust me that Juarez was a scary place. I got shot at once. Even doing the tourista parts several years later in daylight disturbed me. Sorry to contradict the good folks at the Ciudad Chamber of Commerce, but I'd suggest you pay the extra $100 and go a little further on to Puerto Vallarta or Acapulco or somewhere.
To Der Spiegel, poverty in America is caused by our past devotion to free trade. And poverty in Mexico is the fault of, well, not to put too fine a point on it, George W. Bush. Who is compared to a famous German Totalitarian Tyrant (nope, not that one):
The border crossing, in its coarseness, is reminiscent of the East German side of the former border between the two Germanys, except that the face on wall posters is that of George W. Bush and not of the former East German leader Erich Honecker.
Of course, the real problem with America and Mexico is that we have not embraced GDR Socialism:
The gap between rich and poor has grown by leaps and bounds in America, far more so than in countries like Germany. One-fifth of Americans earn more than half of all wages and salaries. Ten percent of the population owns 70 percent of all assets. This is what presidential candidate John Edwards calls the "two Americas."
Trade bad. America bad. Das ist alles.
Thanks for reading the whole thing, I never did finish after the first couple of pages.
It sounds like you've summed up what they were getting at. I kept looking for the part where they discuss the numbers of people moving from the countrysides purposefully to work at this Toshiba plant. The 54% increase in employment in said Ciudad.
No chance that Mexico's problems stem from centuries of corruption and Latin America's propensity toward collectivism.
Posted by: jk at July 30, 2008 6:26 PMJuly 18, 2008
Another Grim Milestone
James Freeman, assistant editor for the WSJ Ed Page, has a guest editorial on the, um, WSJ editorial page. It starts with some stark news:
Is the great American financial engine that gave the world Intel and Google grinding to a halt? Last quarter marked the first time in 30 years that not a single company backed by venture capital went public in the U.S.
He admits that markets are off and that there are other, exogenous factors. But a drought is a drought, and I find this a brutal reminder that while the market system is extremely durable, individual markets can be quite fragile. America's dominant capital markets have plenty of competition. And these competitors lack SarbOx and Spitzerism.
This is bad news for the U.S. economy. Does anyone think that we would be better off if Bill Gates and Michael Dell had sold out to corporate behemoths early in their careers, instead of leading their firms for years as public companies? Would consumers enjoy the same vibrant market in Web services if Yahoo had gobbled up a nascent Google? How powerful would our computers be if Intel had become an IBM subsidiary, instead of going public in 1971?
That golden goose is not immortal. This long without a venture IPO is a bad sign. A worse sign is that the American government is talking about more punishment: cutting back on Golden Goose Chow® when we need eggs, and [this metaphor has been terminated by the Editors]
I'm not sure more taxes, additional regulation, higher energy costs, and a Rube Goldberg cap and trade plan will bring capital back to the markets.
Naked Shorts Bother You?
I cringed when SEC chief Christopher Cox moved to prohibit naked shorts against Fannie and Freddie. And not just because my inner Beavis and Butthead heard Cox, naked, shorts, and Fannie in the same sentence.
In my mind, a naked short is a pure derivative play that allows a trader to bet on a stock's going down. I'm a dull, broad-index, ETF guy myself, but I believe pure option plays provide more efficient price information and get risk in the hands of those who can best handle it. This call from a sharp GOP administration official like Cox sounded like blaming oil prices on "evil speculators."
To my surprise, Donald L. Luskin strongly criticized the practice on Kudlow last night. I just sent a letter to Mr. Luskin suggesting that he expound on it. (Heh: just got a response, he says "Done." While I was typing this he answered and posted a response.)
"Naked" shorting and "naked" option-writing have nothing to do with each other, except for the coincidence of the term "naked." In the case of option-writing, the "naked" writer is simply taking a short position in a put or a call without a risk-offsetting position in the underlying asset (usually a stock). I have no problem with that at all. A short option, whether "naked" or not, is simply a contract to sell (in the case of a short call) or buy (in the case of a short put) at a fixed price by a fixed date. No issue there.However, "naked" shorting is an entirely different matter. When you sell a stock short, you are selling something you do not own. Yet the buyer requires that you deliver to him the thing he bought from you. Normally you accomplish that by arranging to borrow the shares from someone else who owns them. You sell the borrowed shares, and deliver them to the buyer in exchange for the buyer's cash. Ultimately, you expect to buy back the stock at a lower price, and replace the borrowed shares. In "naked" shorting, you sell to the buyer without any intention of borrowing stock to deliver. So on settlement day, your trade fails. You cannot deliver what you do not have. Yet when you made the sale, you were implicitly promising to deliver. After the fail, you can cure the problem by buying stock and delivering it, hopefully at a profitably lower price. But shat amounts to fraud -- in very much the same way that kiting checks amounts to fraud. It doesn't matter if you ultimately deliver. At the time of the sale, you had no intention or capability to deliver.
The WSJ Editorial page today is a little closer to my position. They're not full-throated endorsers by any means:
Not that the SEC's emergency order to bar naked short selling is quite the disaster proclaimed by some traders. It's possible that it won't do much harm, and this is a titanic achievement for any policy coming out of Washington these days. At the end of the day, the order is not a ban on all short selling, which is a bet that a stock price will fall and is a critical ingredient for efficient markets.Will the SEC rule prevent the 19 designated financial firms from reaching the valuations that investors would otherwise assign to them? Probably not. The only certain result is that Wall Street trading desks and IT departments will spend time and money scrambling to reconfigure their transaction systems by 12:01 a.m. Monday when the order becomes effective. This is sand in the gears of our financial markets and at the margin may slow down vital price signals, given the extra step required to lock down the shares before shorting them. In that way it may not benefit the firms it is intended to help because it will reduce liquidity.
I am on vacation, so I have some time to ponder Luskin's response. I understand the technical difference but I am not sure I grab a philosophical difference that makes one side a legitimate play and the other the equivalent of kiting checks. I'm keeping an open mind.
The Refugee thinks that Mr. Luskin is using the definition of "kiting" at loosely. Here is a great discussion of kiting. Basically, kiting is going from one instition to another with intent to defraud. In other words, one writes a check on Bank A to pay Bank B, and on Bank B to pay Bank C. Since the banks (often) give immediate credit for a deposit, even though they have not actually received the funds through the system.
This is very different from check floating. When one floats a check, one might pay a bill by check and drop it in the mails knowing that he has insufficient funds at that moment. He also knows that it will take a day for the mail to be delivered and another day for the check to be deposited. Therefore, on day 2 he transfers funds to cover the check. While acknowledging that this is technically illegal, The Refugee will admit to having done such and suspects that most bill payers have done so at one time or another. The key is no intent to defraud; the funds are there to cover the withdrawal. It is worth noting that that neither the financial institution nor the the Fed look at mail and deposit timing and says, "Wait, it's not possible..."
The Refugee believes that short selling contains no attempt to defraud and is therefore not analogous to kiting. If one sells short and guesses wrong, he must pay the difference and take the loss in a timely manner - just like covering a check. Open financial markets are critical to efficiency and liquidity.
One final note on efficiency. Unlike buying an selling stocks, deriviatives are a zero-sum game. For every winner, there is a corresponding loser. That's what makes them so efficient (and brutal to the casual investor). They are a perfect reflection of accurate pricing in the marketplace. If you eliminate the possiblity of either selling or buying under certain conditions, then the efficiency is lost. Some investors, rather than losing part of their investment, will lose it all. That additiona risk will be built into the equation causing even greater volitility.
Posted by: Boulder Refugee at July 18, 2008 12:44 PMI almost offered the disclaimer that this ex dirty hippie guitar player had indeed practiced bona-fide check kiting. Write rent check on account A on the 29th. Deposit check from account B into account A on the 31st. Deposit money into account B on the 3rd. You can tell from the date spreads this was a long time ago. Computers killed the kiting star.
The comparison seems apt because the check kiter has intent to pay, yet it clearly is fraudulent.
Coincidentally, I was explaining this to someone at lunchtime. Luskin is correct.
BR, you bring up derivatives, efficiency, etc., but those are beside the point. Re-read what Luskin said. This isn't about *all* short-selling, but a kind of short-selling that can very well be fraudulent.
Some people think that short-selling should be illegal, because it's supposedly selling something you own. No, you're selling something that you've *borrowed*, with the contractual promise to repay what you borrowed (by definition you're borrowing and repaying something fungible).
But naked shorting is entirely different, which were my words too at lunchtime. Naked shorting means you haven't even borrowed the shares yet. So as Luskin points out, let's say you want to short-sell XYZ. You're getting money with the implicit promise that you'll deliver the agreed-upon number of shares at settlement time. That means you have to borrow the shares by the end of settlement. So it *is* like check-kiting, because settlement typically won't happen for a few business days -- you'll have that much time to borrow the shares. But what if you can't? And that's the problem: it's entirely possible for the number of shorted shares to increase the number of floating shares (meaning shares available on the market).
The WSJ editorial is so ignorant of how financial firms' technology works. There's no need for them to "scramble" to fix technology. All a company needs to do right now is a policy change: no naked shorting, with the threat of "disciplinary action, up to and including termination" if someone breaches that rule. Then the company can look at some way to audit
Where I'll disagree with Luskin, to a very very minor extent, is that naked shorting is necessarily fraudulent, because you're receiving the money and representing that you *at the time you sell* have the shares to deliver, but the short-seller might in fact have every intent to deliver. Maybe he thinks he can borrow them but then can't. That's also I don't believe there should be any "regulations." Rather than new SEC rules, there instead should be prosecution and incarceration of people who commit naked short-selling and then don't deliver the shares. People go to jail for writing bad checks, why not for short-selling shares and then failing to borrow and deliver? Both are fraud.
Disclosure: as some of you may remember, I'm a compliance analyst on the personal trading end. Our firm is very strict, more so than just about anyone else, particularly on short-selling. We don't allow our employees to short anything that's long in our clients' portfolios.
Posted by: Perry Eidelbus at July 18, 2008 5:03 PMThe Refugee will agree with some of what PE says, that is failure to cover a short should be treated the same as writing a bad check.
That said, I disagree with the basic premise that naked shorts are inherently fraudulent. As an analogy, when I go to the bank and borrow money to buy a house, I'm representing that I'll be able to pay it back. Obviously, I do not have the money at this time to cover the debt. I'm betting that I'll earn the money in an amount and time to pay it back according the covenants. However, I may lose my job that would prevent me from paying back. Fraudulent? No. Of course, I'll lose the house and whatever equity I put into it. I realize it could be a fraudent transaction if I lie about my income or circumstances, but that fact that I do not today have the money to repay the loan does not in itself constitute the basis fraud, or we'd all be in jail.
Posted by: Boulder Refugee at July 22, 2008 3:45 PMJuly 15, 2008
Pander To The Economists
Professor Mankiw tells the candidates how:
The American Economic Association represents only a small fraction of 1 percent of the electorate. In every election season, we economists expect to be largely ignored, and, unlike many of our other forecasts, that one often turns out to be right.But suppose it were otherwise. Imagine that those running for office tailored their economic positions to attract the experts in the field. What would it take to put the nation’s economists solidly behind a candidate?
Aside from a little Pigou-sneak, I think all of his suggestions are superb! Of course, if somebody would accept them in toto I would accept the energy taxes easily in exchange for all the other ideas.
Short, sweet, true. Read the whole thing.
July 14, 2008
Can't Say They Weren't Warned
I guess we take another step toward nationalizing the secondary mortgage market this morning. Only Congress would vote to expand the scope and authority of an entity the same quarter it votes to bail it out. Everyday Economist links to a superb summary of How we got into this mess by James Hamilton at Econbrowser.
And the WSJ Ed Page offers a nice collection of editorials they have run about Freddie and Fannie, They call it Fannie Mayhem, but they could have called it I told you so.
I'm saddened but far from surprised, There was always an implicit government put on these two GSEs. Everyone knew it, it's just come out in the open.
This was so obvious to anyone who understands that government intervention breeds nothing good. It took several decades, but more of FDR's chickens have come home to roost.
"Fannie Mae is a disaster waiting to happen. The trouble is that it is neither fish nor fowl. Fannie Mae’s government connections insulate it from discipline by markets and investors. Worse yet, the markets believe (with some justification) that the federal government has (implicitly) guaranteed fannie Mae’s debts, which allows it to also avoid by market discipline by borrowing at below-market rates. Moreover, because the board includes political appointees, it is further insulated from investor discipline. The solution is privatization. Let it run as a for-profit corporation in a competitive market, with full disclosure."
Professor Bainbridge wrote that in November. November *2004*. Link
Posted by: Perry Eidelbus at July 14, 2008 3:12 PMJuly 8, 2008
Quote of the Day
Don't blame speculators for the food crisis: It was already here when they arrived. Rather thank them for a wake-up call. Financial markets are driving today's prices to match expectations of tomorrow's values – the consensus of countless investors and producers is that the era of surpluses and cheap food is over. Yet even a credible promise that G-8 protectionist policies will be reversed would raise output down the road and drop prices at the corner grocery counter overnight. -- AEI's Adam Lerrick, explaining that subsidies, not free markets, cause a misallocation of food.
July 2, 2008
The Pigou Club Is After Me
I thought for sure it would be the FDA that would come after me for my blogging, possibly arranging a special clinical trial of crushed razor blades and coffee.
But no, I have run afoul of the Pigou Club. My anti-Pigouvian post of June 26 attracted a smart comment and a link from Mike Moffatt, who writes an economics blog on About.com. Moffatt says "Every decision governments make either implicitly or explicitly make at least one determination about goodness or badness. It is entirely what governments do. Why object to it only in this case?"
A fair point to which I will return. I followed the link to his blog post, An Absurd Anti-Pigouvian Argument Absurd? Pretty strong language from a guy who wears a suit on his blog photo. He excerpts the original (Tim Kane) post and my assent. And continues:
What the author is advocating here is not some limited government libertarian fantasy - he is advocating for anarchy. I will explain with an example:
The example provided is murder. Because I do not support a tax on global warming, I reject the right of government to proscribe murder.
I responded by email (does about.com require membership or registration? the comment link did not work)
Mr. MoffattI appreciate your comment and link to the ThreeSources blog and am certain that the absurd anti-Pigouvian argument you referenced was Tim Kane's and not mine.
I accept your premise that governments do separate good from bad. I offer that:
a) I would like our government to do less of this. Inviting our 535 benighted betters in Washington additional opportunities to attack global warming, or trans-fats, or wide neckties by relative taxation of various pursuits does not seem wise.
b) I would like to separate the collection of revenue from the good/bad decisions. Revenue is required and decisions of what to regulate and proscribe are also needed. To merge those two functions invites more meddling than I would like.
To take your example of murder, there is clear legislation to proscribe it and punish those convicted. Adding a carbon or trans-fat tax creates a new category of behavior that is permitted but discouraged through taxation. You would be correct in pointing out that there are examples of this. I don't think that makes it right.
Let government enact specific legislation to regulate or ban products or procedures. These can be discussed and the legislators can be held accountable. Do not create a new, soft, method for government to further influence behavior.
UPDATE: I went to my sent box to copy the letter and it appears I sent an unspellchecked and horribly typed version. I'm sure he is now telling Professor Mankiw, "Yeah Greg, these guys are something else..."
More information about the reach of regulatory agencies can be found here:
http://en.wikipedia.org/wiki/Chevron_U.S.A.%2C_Inc._v._Natural_Resources_Defense_Council%2C_Inc.
I guess my big frustration and all this (and my unjustified snottyness than pops up from time to time) is how "conservatives" and "libertarians" keep comparing Pigovian taxes to some kind of idealized libertarian regulatory world that doesn't exist.
If the anti-Pigovians considered how chemical regulatory law works (and surely isn't through ballot box issues and signing ceremonies in the Rose Garden), they'd probably be more amenable to alternatives.
Posted by: Mike Moffatt at July 2, 2008 8:34 PM"Every decision governments make either implicitly or explicitly make at least one determination about goodness or badness. It is entirely what governments do. Why object to it only in this case?"
And those, Moffatt, are precisely why governments *should not* be making economic decision. Tell me how bureaucrats have the right to decide that something is "good" or "bad," when it harms no one but the person voluntarily buying/ingesting/using it.
"Have you ever seen the size of a year's worth of Federal Registers?"
Do you not see the simple answer, that it means the federal government is exceeding its constitutional powers? So don't worry about *controlling* bureaucracy, when you must *destroy* it.
One doesn't have to be an anarchist to make jk's argument, and I can assure you that he's hardly one anyway. However, he and I know that the only, ONLY purpose of legitimate government is to protect life, liberty and property. Murder is a violation of someone's life and is therefore punishable. If I eat properly made cannoli, that's not violating anyone's rights.
If I want to buy gasoline, or something made with trans fats, why is it of your concern? Who make *you* God, that you have the right to "regulate" my "behavior"?
Remember that "busybodies," as well as liars and fornicators, are condemned to hellfire. But go ahead, go on and keep worshipping the state, believing it will save you from your own sins, and that through it you can save others from their sins too.
Posted by: Perry Eidelbus at July 3, 2008 9:16 AMOne more thing I'll address, before I leave you and jk to hash things out between yourselves. You said:
'"conservatives" and "libertarians" keep comparing Pigovian taxes to some kind of idealized libertarian regulatory world that doesn't exist.'
That's a ludicrous strawman, and if you have a modicum of intelligence, you know it is. So which is it: are you the moron I'm starting to take you for, or are you deceitful in making your arguments?
A society of freedom and individualism does not exist only because people of your ilk destroyed it and won't allow it to return. You make specious arguments about "regulation," "banning" and the most "efficient" ways to control others' lives to your liking. You use fuzzy logic and throw around "Pareto improvement," when you wouldn't know a real example of the latter if it bit you in the behind. Every time you deny me the right to eat trans fat-laden food or do something that harms no one else, I'm harmed. Period, end of story, quod erat demonstrandum.
Polluters don't have to be regulated; they just need to be held accountable for their damages, by and ONLY by the people who are actually harmed. I suggest you read about polluters in Lew Rockwell's piece about what he would do in his first 30 days.
Go on, return to your worship of the almighty State. I really don't care if you do; you have the freedom to. Just don't make *me* worship it with you.
Posted by: Perry Eidelbus at July 3, 2008 9:29 AM"Lew Rockwell's piece about what he would do in his first 30 days."
Read it. It is highly flawed, as I will demonstrate below.
"Polluters don't have to be regulated; they just need to be held accountable for their damages, by and ONLY by the people who are actually harmed."
And how are you going to manage that?
Stylized Example - Someone gets sick from air pollution (which happens all the time - go visit a respiratory ward and you'll see what I mean) and racks up a $10,000 medical bill. For the sake of argument, assume that 90% of that pollution came from automobiles and there are 30,000 registered cars in the area.
I have clearly been harmed here. But what is my option - to sue each and every driver in the city for 37 cents to cover my damages?
Posted by: Mike Moffatt at July 3, 2008 9:54 AMI wanted to thank Mike for his thoughtful comments, welcome him to ThreeSources, and mention that if he called me an anarchist, pretty soon some real anarchists around here would take umbrage.
I am the blog pragmatist and am often chided for not demanding more of the liberty promised in the Constitution. I don't believe in an ideal libertarian state, but I do fight at the margins every proposal and every election to stop, slow, or possibly even roll back a little government encroachment.
You're right about the supra-Constitutional regulation. I also fight the arrogation of powers to the Executive branch that allows its agencies to make law without deliberation or balance of power. Because we are leaking liberty like a sieve, does not make me any more favorable to the giant drain of Pigouvian taxes. Always fighting at the margins: more liberty, less government coercion.
I *have* read it, long ago. How else do you think I cited it?
I'd wager you didn't read it till today. The only reason you think it's "flawed" is because you don't think it can work in the real world -- because you're a pathetic, dribbling state-worshipper and don't believe in freedom.
I do like your example of automobiles. It demonstrates that you're harmed by an inconsequantial amount by an individual, but there's no significant damage from any single source. So in the ideal libertarian world, you chalk it up to, "Well that's how life is." It also demonstrates your absurd thinking that you can quantify such things when there are so many involved, and that when all else fails, you want to lump everyone together. A car may be registered in the area, but it does not necessarily have a proportional amount of blame. I drive mostly on weekends only, so should I be held to the same standard as someone who drives to work and also does two trips nightly? When I walk down Fifth Avenue and crinkle my nose at all the second-hand smoke, do I blame all smokers who live and work in the area?
It's the same as someone who lived before modern times, who obtained water from a river that people upstream also used for washing, bathing, etc. If someone kills you, or cuts off your arm, that's easy enough to figure out. But there's no reasonable way, let alone a practical one, to allocate a fixed percentage of blame when you're dealing with so many people of so many different actions. What you *can* do is say, aha, this New Jersey refinery was built in the area where I've lived all my life, I don't smoke, my family has no history of cancer, but I developed lung cancer, and these several independent doctors and biopsies blame it on the type of pollution emitted by the refinery. *That* you can demonstrate beyond a preponderance of the evidence (the usual requirement in civil suits). It's really not hard if you want to *think* about it for a little bit, instead of spewing your state-worshipping drivel.
But even in this "ideal" libertarian world you denigrate, there's the practical side of going after people who harm you only if they've done significant damage. Even the most die-hard anarchist (unless he's actually a psychopath) doesn't talk about going after others for the tiniest infractions, because Pyrrhic victories exist in all real universes. We bump into each other all the time. Unless it's serious, like a broken bone or torn clothes, dust yourself off and move on.
You still haven't addressed the issue of how *you*, who is not deity, have the authority to tell me how to conduct my peaceful, voluntary commercial transactions. Stop dodging the question, if you're not afraid. Meanwhile, take the beam out of your own eye, before telling me about the speck in mine.
Posted by: Perry Eidelbus at July 3, 2008 12:06 PMJuly 1, 2008
Corporate Tax Rates
"Sure, Senator Obama would raise tax rates to the levels they were in the Clinton years," said [insert Democrat name here] on [insert name of political show here], "but I recall things were pretty good back then." Take that you GOP scallywags! Tax rates were high, but the livin' was easy. Fish jumping. Cotton high.
There are several good ripostes to that statement, but here is one of the best:
As we have been sliding further into dirigisme, the rest of the world has gone supply side. Between onerous regulations and higher tax rates, we are scaring capital out of the world's best capital market -- at the same time technology and trade make it easier.
The chart is from a WSJ Editorial that is well worth a read in full. It discusses the success of a one-year tax holiday on repatriation of foreign profits. The amount proves that tax rates matter and that money moves very quickly.
America's tax laws are repelling capital at the same time the rest of the world is inviting these dollars and the jobs and growth that inevitably follow. House Ways and Means Chairman Charlie Rangel wants to dig the ditch deeper by taxing American companies on their foreign earnings whether or not they bring the money back to the U.S. He thinks this will raise money for the Treasury, but the likelier effect is that more American multinationals will relocate abroad.
I'd certainly like to make my home welcoming and comfortable for money -- couldn't the Congress try that as well?
June 28, 2008
The Short-Krugman ETF
ThreeSources friend Josh Hendrickson (The Everyday Economist) is quoted on Don Luskin's site:
Paul Krugman has placed himself front and center in the debate as to whether or not oil prices are out of line with fundamentals (he believes the prices do reflect fundamentals). Isn't it therefore time to declare oil prices to be the latest bubble?
Heh. I'm thinking there is a market for an index fund that takes a contrary position to whatever Krugman says. Past performance is not an indicator and all that, but I'm thinking you might have done well in that fund over the last several years...
June 26, 2008
Pigou Club, Vol XCVI
Once again, it's me versus Harvard Economics Professer N. Gregory Mankiw. With all due respect -- and I have the greatest repect for Mankiw -- I happen to be right. Here's the Pigou Club reading that he approvingly links to today:
Yes. Although raising taxes is probably as politically incorrect as can be, it is probably up to our generation (Sorry, Greatest) to clean up the Boomers' national debt extravaganza. And when the time comes to balance the budget, we should aim to tax the bad things (noise, gasoline, trash, violent crime, evil foreign dictators) and untax the good things (homegrown profits, employment, innovation). Other ideas?P.S. So Greg, can I join the Pigou Club now?
I know there's plenty of tongue in cheek going on here, but this is truly the reductio ad absurdum that disproves the Pigou Club. The Government is put in charge of deciding what is good and what is bad. I do not trust them that far.
Take more of my money in taxes? You can't have it.
Posted by: johngalt at June 26, 2008 3:56 PMHat tip on that prior comment: The O'Reilly Factor
Posted by: johngalt at June 26, 2008 3:57 PMEvery decision governments make either implicitly or explicity make at least one determination about goodness or badness. It is entirely what governments do. Why object to it only in this case?
Posted by: Mike Moffatt at July 2, 2008 4:58 PMJune 19, 2008
Dr. Arthur Laffer
Quoted in his commencement address to Mercer University:
Pursuing your dream of prospering will benefit everyone . . . When I graduated from Yale University, we had a serious commencement speaker not like the one you are stuck with today. The commencement speaker was President John F. Kennedy. And the point I'm making today is the same point he made all those years ago. He said, "No American is ever made better off by pulling a fellow American down, and all of us are made better off whenever any one of us is made better off." He concluded by using the analogy that "a rising tide raises all boats."Never forget or be ashamed of the fact that pursuing your own self interest furthers everyone's interest. Without you, the poor would be poorer.
Awesome. Hat-tip: Don Luskin
And what do we have when people sacrifice their own self interest to pursue everyone's interest? More poor.
"An obscenely rising tide raises all boats to obscene heights."
Posted by: johngalt at June 19, 2008 2:53 PMJune 18, 2008
On Baggage Fees
One thing seems hard-wired into people's brains: once someone has been given something for free, he or she will refuse to pay for it ever again. On what planet is it unreasonable for airlines to charge for luggage? President Carter may have deregulated the airlines, but some of the expectations from the old times live on.
I have sat still while people complain. But I must link to two great articles today. First, ThreeSources friend Perry Eidlebus suggests that George Mason University Professor Mark Katz contacts his school's storied economics department for a little refresher course. In a CSMonitor,com piece, Katz warns "Flying with luggage this summer? It's going to cost you."
Perry references a post he wrote before:
Because I am a rational person who understands that I'm not being "forced," my "hide" doesn't "chap" at all at what many airlines are doing. American Airlines will soon start charging economy passengers $15 for the first checked bag, unless you bought the full-price fare, but nobody's being forced into it. What it really is is a $15 across-the-board increase for economy passengers who buy discounted tickets, but with a $15 discount for bringing only carry-on baggage. Take the difference between 50 and 15 pounds, multiply it by a few hundred people, and that saves fuel.
Also well said is a WSJ Editorial from Holman Jenkins, Jr.
Smart businesses ask themselves how they can make themselves more popular with customers by "unbundling" the goods or services they provide. Burger joints charge extra for cheese, but not usually for lettuce and tomato. Yet fairness is surely served by letting haters of lettuce and tomato escape the burden of subsidizing those who love them?Never mind. No business is more loathed than the airlines right now, even as they do their customers the unbundling favor. Carriers are slicing away at services to create options for the most price-sensitive fliers to avoid services they don't want to pay for: checked luggage, meals, pillows and blankets.
Jenkins says that not even unbundling will help the carriers unless the economics of fuel or fares change pretty drastically -- ending his piece:
Without a decline in fuel prices, massive airline bankruptcies are almost certainly coming. About the only suspense is who will be in the White House when they hit.
I'm reminded of CNBC madman-at-large Jim Cramer. Cramer has been up and down on every sector and every individual stock in the Wilshire 5000, but he has consistently warned investors to avoid the airlines. Cramer says the model is broken and one just cannot make money in that industry. Individual carriers will see some profits and growth for a while, but he is right than none has built a lasting business model (though I'm thinking a worldwide RyanAir might make it...)
Tough business. Makes jazz guitar look pretty good.
I'm mostly with you on this, though something in the back of my mind gnaws a bit of "unfairness" for the female sex in this.
Personally, I hardly ever wear makeup and work for a company who dresses casually, but women in the big time really DO have different dress requirements than men do.
Packing a carry on for a week isn't actually possible while men can throw a suit and a shirt in a computer bag and be done with it.
Still - charging for services rendered IS fair. I'm just gnawing on it is all.
Posted by: Terri at June 18, 2008 1:42 PMThat's a slippery slope. tg (you've been around here long enough to get abused by your initials). I am disabled, and frequently check in a bag smaller than most folks would carry on. Parents probably have the worst of luggage needs.
You concede that paying is fair -- I think it is fair on first principles, that it actually costs the airlines more in weight and processing.
I completely agree with you. Can't help the gnawing is all. I suspect with your smaller bag you've been gnawing all along.
It IS fair on principles. More than just weight. Also on service. The baggage handlers, the space on board, the time spent at the baggage check with a service person. It all adds up.
To be fair, women should be charged higher ticket prices at ball games because we use the john (with the flushing and the paper and the janitorial needs [well maybe not that last bit]) more than men do. Slippery slopes all around!
I don't begrudge the airlines their xtra dollars.
Posted by: Terri at June 18, 2008 5:07 PMJune 11, 2008
McArdle on Investment Regulation
Megan McArdle catches the flaw in my idea that an Investment Bank could eschew the discount window to avoid the sort of regulation demanded by Obama-reinstated-economist Austan Goolsbee.
[Quoting Commenter Matt:] A bailout, when justified, isn't a favor you do for the bank. It's something you do because it's necessary to avoid larger negative consequences throughout the economy. So a promise to avoid the discount window would be valueless. But if the public is going to need to guarantee that financial institutions that grow "too big to fail" don't fail, then the public is going to need to regulate those institutions.
I fear she is right. Hey, it wasn't my idea, it was that Harvard Guy!
Then, the brilliant Obama backer provides the best objection to such regulation, what Tom Maguire calls the absence of omniscient, prescient regulators
When I try to get people to specify, beyond those four rather anodyne suggestions, we should do, there's a lot of hemming and hawing. Even the left-wing think tankers sort of look at their shoes and whisper "We need a better regulator". At which point even the left-wing journalists in the audience start asking "Where are we going to find regulators who understand this better than the guys at Goldman Sachs--and are willing to work for, say, a GS-13 salary?" The only people who confidently state that they have a surefire master plan to fix the problem are, not to put too fine a point on it, morons with very limited understanding of financial markets. These people generally start by talking about how the Bear Stearns crisis can really be traced back to the repeal of Glass-Steagall, then almost immediately reveal that they know nothing of Glass-Steagall other than its name.I have tried all sorts of ways to ask these questions. Nor am I engaged in "libertarian gotcha"; though the game is hours of fun, I am not actually against better or even more regulation of investment banks*. I just want to know what sort of regulation we are going to have; I am against doing something for the sake of doing something.
And, yet, she will vote for...
June 8, 2008
FDR and the "Gold Clause"
I've read with interest upon these pages the vigorous debates between Perry and JK over the demise of the gold standard which once backed the US dollar. There are good points on both sides but neither has me fully convinced.
Consider the related issue of the "gold clause" once used in private contracts and also outlawed on FDR's watch. A fascinating essay on the history of these events was written for the Wall Street Journal by Amity Shales. Here is just a morsel:
The market rally in the spring of 1933 slowed as investors watched FDR fiddle with the dollar and commodities over the course of the fall. In 1934, FDR thought better of it all and fixed the dollar to gold again, albeit now at $35 dollars an ounce. But the abrogation of the gold clause suggested that Washington had no regard for property rights. The general uncertainty generated by government economic policies did not abate. Capital went on strike. The Great Depression endured to the end of the decade. The positive transparency that the Securities and Exchange Commission or the creation of deposit insurance brought to markets was offset by losses like that of the gold clause.
None of us should despair our inability to judge the rectitude of current monetary practices, however:
After a majority of the Supreme Court upheld the constitutionality of the gold clause abrogation, Justice James McReynolds read the dissent. Today McReynolds is generally regarded as an irrelevant reactionary, a footnote himself. But his rueful words ring true for those trying to reckon the dollar's future. It was, he said, "impossible to estimate the result of what has been done."
To get the whole story you'll have to read it all, but it is brief and you'll be glad you did.
Hat tip: 'The American' magazine, again.
Somebody's hawking The American Magazine on ThreeSources and it's not me -- awesome.
Amity Shlaes is incredible. I cannot recommend any book more highly than her "The Forgotten Man." I just learned last weekend that she is married to Seth Lipsky (of New York Sun fame). I wouldn't mind a dinner invitation there. (Shlaes got a highly positive review corner last year and I received a nice thank you email from her. Well, I did give her five stars!)
I will take credit for JG, "hawking," The American. I picked up this article,
http://american.com/archive/2008/may-june-magazine-contents/can-money-buy-happiness/
in a client lobby and found it to be about 95% philosophically correct. That is bordering on miraculous by my standards. I recommended the article to him. He apparently found plenty of other stuff to read as well.
My favorite line from the article above, "How we use this power and freedom is up to us, and depends on our values: We can make decisions that lead to happiness, or we can make decisions that make us miserable. But to throw out free markets because capitalism does not bring happiness directly would be senseless: It would be like trashing your computer because it didn't make your coffee."
Posted by: dagny at June 9, 2008 11:46 AMI don't mind paper money *inherently*. My problem is that there are people who are not accountable to me in the slightest, who have the power to create more of something I use as a medium of exchange (which means devaluing what I've saved).
In the same way I don't want others to force me to use paper money, I don't want to force others to use gold-backed currency. What I do demand is that we have the freedom to use gold if we want. Paraphrasing Lincoln on being a slave and being a master, the beginning of true libertarianism is when a person realizes, "So as I would not be forced, so as I would not force you." Now, U.S. law makes Federal Reserve notes artificially competitive. We aren't required to use it, but there's artificial confidence (borne of an implied government-backed guarantee) in Federal Reserve notes, and most people (including Schlaes?) don't know that the Gold Clause Resolution of 1933 is still in effect -- you can't insert a clause into a contract stipulating that repayment be made in gold. It's not necessarily a criminal act, but your contract can be ruled null and void. Why shouldn't people be able to receive payment in gold if they so desire, without being made into criminals? And didn't the other person enter into the contract freely, with the clause right there to read? So Congress legislatively blackmailing mortgage lenders into freezing rates is not the first time that the federal government forced the rewriting of contracts (especially when detrimental to those expecting repayment).
Resultingly, the Fed's control over our money supply is virtually a monopoly. A true monopoly, unlike this myth of Microsoft's "uncompetitive practices." Thus it's much harder for us to use other mediums of exchange, whether we're buying or selling. We've been *bred* to like paper and look funny at hard metal. Again, the former isn't inherently bad, but the people in charge can render your savings less valuable, if not worthless like in Zimbabwe. Think about how oil prices would impact you less if you could have used gold-backed money issued by private banks. As gold prices increased, indicating an increase in demand but more so the weakening dollar, people who saved in gold could better afford $4/gallon gasoline.
Bringing this back to Schlaes, she wrote a good piece, but why must she hold back? Of course the federal government had no regard for property rights -- it was clear to anyone who had gold and was forced to sell it, or else face prison time and fines. And FDR, that evil bastard who I hope to God is rotting in hell as we speak, *lied* during 1932 campaign, campaigning on a platform that advocated sound, gold-backed money. Mere days after he was inaugurated, he issued Executive Order 6102, making it a crime to hoard more than $100 in gold unless for "collecting" (which has been gradually done with firearms). It's just like Ayn Rand said:
"There's no way to rule innocent men. The only power government has is the power to crack down on criminals. When there aren't enough criminals, one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws."
Posted by: Perry Eidelbus at June 10, 2008 4:25 PMJune 4, 2008
This IS Serious
If recession is when your neighbor loses his home, and depression is when you lose your home, what does it mean when Ed McMahon loses his six bedroom Beverly Hills mansion?
Ed McMahon, the longtime sidekick to television star Johnny Carson, faces the possible loss of his Beverly Hills home to a foreclosure action initiated by a unit of Countrywide Financial Corp.Howard Bragman, a spokesman for Mr. McMahon, said late Tuesday that his client is having "very fruitful discussions" with the lender and hopes to find a resolution. It isn't clear whether that would allow the 85-year-old Mr. McMahon and his wife, Pamela, to remain in the six-bedroom home.
I'll not make light of the housing crisis again.
June 3, 2008
Defending Financial Instruments
Don Luskin has a guest editorial in the WSJ today about commodity index funds. In a sane world, I don't think such a vehicle would need a defense. But, this is an election year:
In the political quest to place blame for high food and energy prices, a new scapegoat has been found: commodity index funds. Politicians of both parties, energy company executives and farm lobbying organizations all agree these funds should be regulated or prohibited altogether. Who says this is an age of political discord?
The piece is (unsurprisingly) smart and worth a read in full.
The larger and more frightening point is that few of our 535 economy-commissars comprehend the instruments and activities they seek to regulate. With apologies to Martin Niemöller:
In the 80's, they came for my junk bonds.
Because I held only AAA, I was silent
Then they came for the REITs.
I did not speak up because I was in equities.
Now the Senate wants to ban my securitized mortgage derivatives
And no one is left to speak up for me.
Most people overlook the progress that new financial instruments bring. From the Corporation to the ability to hedge risk. new instruments may not match the transistor but they have allowed us to direct capital to its best uses and get risk to those who can best manage it. If Congress wants to be the equivalent of the middle-ages church in banning "usury" and send all of us back to cash in the mattress, few people will speak up.
UPDATE: Mr. Luskin uses my poem.
May 31, 2008
2.8 Cheers For the Dismal Science!
As it regresses to the mean... Say what you like about economists, they look pretty good to me in the 2008 Copenhagen Consensus Conference. Reason Magazine reports:
Eight leading economists, including five Nobelists, were asked to prioritize 30 different proposed solutions to ten of the world's biggest problems. The proposed solutions were developed by more than 50 specialist scholars over the past two years and were presented as reports to the panel over the past week. Since we live in a world of scarce resources, not all good projects can be funded. So the experts were constrained in their decision making by allocating a budget of an "extra" $75 billion among the solutions over four years.
The top ten are practical and cost-efficient real solutions to real problems. Getting Vitamin A and Zinc to children in developing countries tops the list. DAWG mitigation clocks in at 30:
So what proposed solutions are at the bottom of the list? At number 30, the lowest priority is a proposal to mitigate man-made global warming by cutting the emissions of greenhouse gases. This ranking caused some consternation among the European journalists at the press conference. Nobelist and University of Maryland economist Thomas Schelling noted that part of the reason for the low ranking is that spending $75 billion on cutting greenhouses gases would achieve almost nothing. In fact, the climate change analysis presented to the panel found that spending $800 billion until 2100 would yield just $685 billion in climate change benefits.
Even the believers in the bunch (Bjorn Lomborg, call your office!) see the greater value in more realistic projects. I think if you empanelled a group of serious anthropologists, environmentalists, or geographers, you'd be certain to get Global Warming in the top five. And unless Lomborg was seated, you wouldn't likely get much else of consequence.
Hat-tip: Instapundit
May 29, 2008
Football Parable
A good friend of ThreeSources sends a link to a piece by Stephen Malanga in RealClearPolitics. Malanga is studying the income distribution in the NFL and finds it maps pretty closely to the US labor force in dreaded "income inequality."
In football, it seems that while all incomes have risen, those for top talent have risen faster (Alan Reynolds, call your office!)
Facing such a dynamic in the labor market, there are a few things a society may be able to do to narrow the income gap for some people, like ensuring that public schools do the best job possible preparing kids for college, so that those with the potential for college don’t get their aspirations quashed because they’re stuck in a bad system.But in a world in which not everyone is cut out to earn college or post-graduate degrees, as long as the economy keeps valuing the sheepskin so much it may be difficult to restrain income inequality. The goal in that case is to continue to ensure that the overall economy keeps growing so that everyone’s pie gets bigger, even if it’s impossible to micromanage how the pie is cut up.
You have to read this one in full. My emailer suggests a better world if we were to all learn from football parables and suggests "What is Lombardi's render unto Lombardi..."
May 27, 2008
The Anti-Mankiw
I missed this post over the weekend. ThreeSources friend Josh Hendrickson at The Everyday Economist takes on the Pigou Club. Many economists, most notably L. Gregory Mankiw, become captivated by the efficiency and the seemingly free market mechanisms of Pigouvian taxation. The question is: "who decides what is bad enough and how bad it is?" (And do we want government deciding?)
The problem inherent in any such analysis is the view of societal benefit and societal loss that is assumed to be easily calculated and dealt with through Pigouvian taxation. The ability to identify the social cost of a particular action is extremely difficult as each individual has his or her own subjective valuation. The problem is communicating each of these preferences in aggregate form to some central authority. This is a distinct problem in terms of both Hayekian knowledge and a neoclassical framework (Arrow’s Impossibility Theorem). In the absence of this ability, setting the tax rate is extremely difficult.What’s more, the idea of externalities as a market failure misunderstands the role of the market and what is meant by efficiency. Markets are not efficient in the sense that they produce the optimal outcome of some economist, environmentalist, or other casual observer who wishes for a certain outcome. Markets are efficient because they serve to allocate resources to those who value them the most.
Quote of the Day
If Zimbabwe dictator Robert Mugabe were clever, he would emphasize the "core inflation" rate--i.e., not count food and fuel. Things wouldn't look nearly as bad then. -- James Taranto, referring to Zimbabwe's 1,063,572 percent inflation rate.That's my gift to the ThreeSources inflation hawks. I'm still a core CPI believer.
May 23, 2008
Staying True to Principles
Fred Thompson, my first choice for GOP candidate has an piece in the Wall Street Journal decrying the chicken-littles who are marking the end of conservatism. (again)
Conservatives should stay true to their principles and remember:- Congress cannot repeal the laws of economics. There are no short-term fixes without longer term consequences.
- In a free and dynamic country with social mobility, there will be great opportunity but also economic disparity, especially if the country has liberal immigration policies and a high divorce rate.
- An education system cannot overcome the breakdown of the family, and the social fabric that surrounds children daily.
- Free markets, not an expanding and more powerful government, are the solution to today's problems. Many of these problems, such as health-care costs, energy dependency and the subprime mortgage crisis, were caused in large part by government policies.
Read it all
May 15, 2008
Numbers Two Through Five
Hat-tip: Barry Ritholtz
Color me relieved to be in the German equivalency zone instead of China's!
Posted by: johngalt at May 16, 2008 3:38 PMIs that the Boulder - Weld County line that divides them? Hang on jg, I'm joining you in eight days.
On the serious side, I'm not sure I place Germany that far above China. On one hand, Sharansky makes clear that Germany is a free society and China a fear society. But this Prosperitarian sees a capitalistic dynamism in the PRC and an anti-capitalist dirigisme in the land my Great Grandfather fled.
Not to mention that the Communist Country loves America a lot more: Q.E.D.
Posted by: jk at May 16, 2008 5:14 PM
Two words: Beer. Bratwurst.
Posted by: johngalt at May 19, 2008 2:37 PMGood point on beer. Not sure you want to carry the cuisine argument too far...
Posted by: jk at May 19, 2008 3:08 PMMay 8, 2008
Pigou Club -- Just Say No!
It's me against a famed Harvard economic professor in a battle of wits. Wagers, anyone?
I have undying respect for L. Gregory Mankiw. His blog is a must read every day. But every two or three days, he promotes his "Pigou Club." The Pigou Club is named after the economist Arthur Cecil Pigou and the premise is that a direct "Pigouvian" tax on gasoline would be the most efficient and fairest means of reducing consumption. Whenever somebody proposes or extols the benefits of a gas tax, Professor Mankiw says "Welcome to the Pigou Club."
When his blog allowed comments, I would sometimes leave a short, respectful, comment that taxes are to raise revenue and that social engineering was a slippery slope even if one agreed with a gas tax to prevent global warming (which I did not). He no longer allows comments (related?), so I have to object here.
Today he offers A Graphic for the Pigou Club from a WSJ article.
The article is a well reasoned objection to the gas tax holiday, but the graphic underscores my point, not Mankiw's. The graph axes could as easily be labeled "Government Intrusion by Country, 2008 Source: threesources.com"
Thankfully, I am not alone. Earlier this week, Everyday Economist linked to Peter Klein’s Question for the Pigou Club
But my main beef with today’s Pigouvians is that they cherry-pick a case here and there — taxes on gasoline, primarily — without fully pursuing the implications of the analysis. If increasing gasoline taxes is efficient, why stop there? What other market failures should the state be empowered to remedy? Here’s my question, specifically:Please name the activities you believe deserve Pigouvian subsidies. For each activity provide the efficient subsidy amount, explain how this was calculated, and say how the revenues should be raised.
Brilliant!
Despite America's federal gas tax being less than 1/12th of those in "old Europe" we still don't see America's most tax-happy politicians proposing to increase it.
Some might attribute this to Americans' "love affair with the automobile" or greater distances to travel. I say it probably has more to do with the fact that they've yet to take our guns away.
Posted by: johngalt at May 11, 2008 11:44 AMApril 30, 2008
A non-Classic Recession
No, I am not saying that the US economy is not and will not be in recession.
Like the old schoolmarm who still tries to teach the difference between who and whom and cautions her students to not, I mean not to split infinitives, I am standing up for a recession as a specific, measureable, binary thing. My main nemesis is the Associated Press wire service:
Economy grows by only 0.6 percent in 1st quarter of 2008WASHINGTON - The bruised economy limped through the first quarter of this year at only 0.6 percent as housing and credit problems forced people and businesses alike to hunker down.
The country's economic growth during January through March was the same as in the final three months of last year, the Commerce Department reported Wednesday. The statistic did not meet what economists consider the classic definition of a recession, which is a retraction of the economy. This means that although the economy is stuck in a rut, it is still managing to grow, even if modestly.
So, like New Coke® and Coke Classic®, we have a classic recession, where the economy suffers two consecutive quarters of negative GDP growth, and a "New" recession where a Republican is in the White House and growth is sub par. Got it.
UPDATE: Professor Mankiw notes that the probability of a recession in 2008 has fallen to 25 percent in the latest trade at intrade.
April 29, 2008
Global Food Crisis
Not content with helping Senator Obama to a victory in Pennsylvania, Senator Casey turns to solving the global food crisis.
How?
Government.
President Bush had previously requested $350 million for the year. Durbin and Sen. Robert P. Casey Jr. (D-Pa.) held a press conference Monday calling for an additional $200 million in food aid to be added to the upcoming war supplemental bill.“This global food crisis now risks creating a series of failed states, as anger at inadequate food stocks spur riots and political instability,” said Casey. The Democrats said the additional $200 million would go primarily to the U.N.’s World Food Program, which provides emergency food aid for up to 78 million people annually.
Earlier in the day, White House press secretary Dana Perino said the administration is monitoring the situation closely; the administration recently announced it was releasing an additional $200 million in wheat reserves to be sent to developing countries.
Oh, and let's give it to the UN, of all people. A model of efficiency.
The President doesn't escape blame, but is anyone in government willing to look at the real cause of the global food crises?
Government.
... specifically the US and EU mandates for Ethanol production and consumption.
When it pays better to burn food for fuel than it does to sell it for food, is anyone, outside of Democrats and liberal do-gooders, really surprised?
April 28, 2008
Good Timing
Sure I bought real estate during the crash and sold after. But at least I selected a mortgage before "we're from the government and we're here to help" makes all mortgages prohibitively expensive. The NYTimes Business Section carries a bylined piece today, Loan Industry Fighting Rules on Mortgages. I don't think the Times ever met a regulation it didn't like, but even they are sympathetic to the poor slobs who are going to try to buy a house after the Federal folks fix it.
As the Federal Reserve completes work on rules to root out abuses by lenders, its plan has run into a buzz saw of criticism from bankers, mortgage brokers and other parts of the housing industry. One common industry criticism is that at a time of tight credit, tighter rules could make many mortgages more expensive by creating more paperwork and potentially exposing lenders to more lawsuits.To the chagrin of consumer groups that have complained that the proposed rules are not strong enough, the industry’s criticism has already prompted the Fed to consider narrowing the scope of the plan so it applies to fewer loans.
"Predatory Lending" is the greatest thing that ever happened to the poor in this country. It allowed them to reach out and purchase property and to access the equity in property they own. Sorry that bad choices were made, the good that was done certainly overwhelms the bad.
Amen.
Posted by: Terri at April 28, 2008 11:01 AMApril 27, 2008
I Love This Country!
People don't understand how wealthy we are. You hear these Paul Krugman wannabes on TV, cherry-picking dates to point to anemic growth in real median income. You can point out the flaws in their statistics, or better yet, direct them to read Alan Reynolds.
But I'd suggest you show them this article. It seems that people are getting Lasik surgery to correct their vision, and then going out to buy designer eyeglasses with no prescription as a fashion accessory.
The LensCrafters chain, once known for dowdy ads touting discounts and quick service, now uses supermodels like Heidi Klum to hawk its wares in fashion magazines like Vogue. It has redecorated stores with chandeliers, flowers and leather benches to make shopping for glasses seem less medical. Another addition: full-length mirrors to let customers check out their complete look.Ads in magazines ranging from GQ to New York are no longer limited to designer sunglasses. Prada and Gucci are among the brands featuring models posed wearing retro-looking rectangular frames (think Buddy Holly). High-end eyewear brand Oliver Peoples now releases four collections a year, up from two two years ago, hoping customers will want to change frames as often as they, perhaps, switch handbags.
Virginia Postrel, call your office.
This is the greatest economic story ever. Having the choice to do this, whether you do or not is a sign of our affluence, right up there with good Thai food, free cell phone weekends, and $500 laptops. What a country.
April 26, 2008
Misters Case and Shiller, Call Your Office!
I am a proud contrarian, but even I was a little concerned with my latest venture into the real estate market. The day after I buy a condo, the WSJ has a cover story about gluts and prices spiraling down.
Then, of course, I get to sell my house when every day features a dark headline about housing.
But let the record show that Don Luskin and Larry Kudlow are right. The housing bears are focused on the East Coast and other markets that have boomed: Las Vegas, Florida, San Diego. The bulk of the country, including Lafayette Colorado, has not cratered. I accepted an offer this morning, selling my house nine days after it was listed at better than 95% of the asking price.
And I plan to spend my government stimulus check on candy.
UPDATE: I'd just like to confer a "stand-up guy" award to Don Luskin. I sent this to him and received a nice note back -- on Saturday evening. It occurred to me that he has responded to every email I've ever sent him. He certainly doesn't know me, nor has he any financial gain from our association (ThreeSources friend Perry knows him). Yet he has always taken the time to acknowledge every email. That's a rare trait these days. ("Dear Sir, Thank you, I have no need for 'C@nad!an discu0nt C!@lIs' at this time, thank you for your inquiry...")
March 31, 2008
I Love Idiotic Stories Like This
The Independent "reports":
Food stamps are the symbol of poverty in the US. In the era of the credit crunch, a record 28 million Americans are now relying on them to survive – a sure sign the world's richest country faces economic crisis.
I view this as the growth of the welfare state rather than signs of another Great Depression. I also wonder if the reporter read his own story which contains the following information regarding food stamps:
- Recent efforts have sought to increase awareness with respect to the program.
- The switch to plastic cards rather than coupons has removed some of the stigma of using food stamps.
- The stamps are available even to some individuals with incomes above the poverty line.
What do these three things all have in common? They increase demand!
Here is the kicker:
And the next monthly job numbers, to be released this Friday, are likely to show 50,000 more jobs were lost nationwide in March, and the unemployment rate is up to perhaps 5 per cent.
5 per cent?! A depression indeed.
Wasn't there some sort of a quota system to reward people that referred "the poor" to the food stamp system?
Posted by: AlexC at April 1, 2008 1:19 AMMarch 19, 2008
Common Error Number 61
Dr Madsen Pirie at adamsmith.org thinks it is thinking "It is important for us to understand the causes of poverty." Against which he offers this superb rejoinder:
There are no causes of poverty. It is the rest state, that which happens when you don't do anything. If you want to experience poverty, just do nothing and it will come. To ask what causes poverty is like asking what causes cold in the universe; it is the absence of energy. Similarly poverty is the absence of wealth. For most of humanity's existence on this planet, poverty has been the norm, the natural condition. People hunted to survive or lived by subsistence farming, and they were poor. In some parts of the world this is still the case.The unusual condition is wealth. This is what changes things.
It's not much longer and is well worth a read in full. Hat-tip: Samizdata
March 17, 2008
Mankiw on Trade
Professor Mankiw has a smart piece in the NYTimes today on trade and politics. While economists see the benefit, new polls show the electorate moving farther away.
The general public, however, is less likely to take its cue from Adam Smith than from Lou Dobbs. In December, an NBC News/Wall Street Journal poll asked Americans, “Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheap labor?”
He then provides a nice enumeration of Senator McCain's votes and support for free trade, before closing with Democrats' opposition:
BUT another reason is that many economists don’t really believe the populist rhetoric coming from the Clinton and Obama campaigns. They expect that once in office, either candidate would pursue a policy more like that of Mr. Clinton, who relied heavily on the advice of economic moderates like Mr. Summers and Robert E. Rubin, another former Treasury secretary. When reports surfaced recently of an Obama economic adviser telling the Canadian government to ignore his candidate’s anti-Nafta rhetoric, some people were appalled, but many Democratic economists I know were secretly relieved.It is hard to be confident, however, that on issues of trade policy either Democratic candidate would act like the last Democratic president. Maybe the candidates’ records as legislators are not good indicators of what their policies might be as president. Maybe campaign rhetoric about Nafta is nothing more than that. But counting on it requires, one might say, the audacity of hope.
March 12, 2008
Anarcho Capitalism?
Anarcho Capitalists love to point out that it is often better to deal with pirates than with governments. For many governments and some pirates I agree (Robert Mugabe vs. Kiera Knightly comes to mind).
Blog friend Perry Eidlebus has proudly invoked Chiquita's paying protection money as an alternative to my cherished Liberal International Economic Order (LIEO). There are a million opportunities for liberty infringement by government -- else we wouldn't have a ThreeSources -- but if there is rule of law, some self determination, and power of redress and remedy, I still like it over piracy.
I whack Perry not to be personal, but his favorite pirates have been in the news. It seems not everybody is so keen on paying off FARC to get their potassium fix:
The case sheds much-needed light on the role that U.S.-based companies (and certainly others) play in fomenting conflicts that cost thousands of lives. Chiquita has admitted to being one of them.The new suit is part a series of legal battles Chiquita has been fighting since the Cincinnati-based company acknowledged paying armed parties in the Colombia conflict. Last year Chiquita agreed to pay a $25 million fine to settle Justice Department charges in these matters.
It is often forgotten that the FARC has abducted and killed U.S. citizens throughout its history. None except the three U.S. contractors being held now had anything to with the war on drugs or Colombia's internal strife.
For all it Bolivarian rhetoric and calls for a "humanitarian" agreement, the group has a remarkable track record of shedding innocent blood.
And Chiquita, it seems, in the interest of protecting its profits, made several costly deals with numerous devils in the Colombian conflict. Unfortunately for Colombia, it chose the two worst groups to try to pay off so bananas could keep flowing north.
Hat-tip: Instapundit, who also links to a WSJ Law Blog entry
A spokesman for Chiquita, which claims it made the payments under duress, reportedly said: “Our actions were always motivated to protect the lives of our employees and their families. We are contesting the suits vigorously and believe we have a strong defense.”
I'm not commenting on the case, but I still say Pax Americana is a better way to go.
Lost in your quoting of my old post, and references to our old back-and-forths, is that your position assumes an effective government, and one that will enforce the rule of law. That's not always the case. You also misrepresent my position by saying "proudly," which it isn't at all. I don't say that it's inherently better to buy off bandits, but I DO say that it's sometimes better to buy them off rather than pay tribute to government, in times that government is worse than the bandits.
We're fortunate enough that the United States at least superficially operates under the rule of law, and more importantly, that our home-grown mobsters and ghetto gangs are not to the level of paramilitary terrorist groups like FARC. Most Americans can sleep at night without the fear that their homes will have grenades thrown through the windows, and that they won't just be abducted on the street. There's plenty of violence in America, but per capita, it's small enough that when two college girls in the South are brutally murdered, it's national news. Most of us live our lives in safety, not even wondering "Will I be kidnapped on my commute home?" because the probability is so small and not worth a neural synapse.
On the other hand, what South American governments can effectively deal with FARC and similar thugs? Add to that the madness of King Hugo, who's directly financing the terrorists (i.e. COMMITTING AN ACT OF WAR), and the governments simply can't win. Not in their current incarnations. Colombia just doesn't have the monetary or human resources to combat them effective, there are enough corrupt police and army officials who are purposely ineffective.
So what will we do, send in more of the U.S. military to help? And they'll do what, exactly? The terrorists will simply fall back into the forests, hide, regroup, then come out again. Jungle warfare is the only thing worse than urban warfare, whether it's in South America against FARC, or in the Philippines against Abu Sayyaf.
Now let's sit back and think that, for $23 million, Chiquita could have paid off terrorists for a while longer. Fining Chiquita isn't going to do a damn thing, and it only punishes Chiquita for being a victim trying to extricate its employees from a perilous position. Instead, everyone around the globe gets to pay slightly higher prices for bananas (Chiquita has to pass off the fine *somehow*, right?) while Chiquita worries that FARC will step things up to make a fresh statement.
Posted by: Perry Eidelbus at March 15, 2008 1:33 PMOne more thing. You know I don't mean to belittle your position, but the way things are going, when Pax Americana arrives in South America, you and I will have already left this mortal life. You might prefer the rule of law defended by legitimate government, but that doesn't mean you can spread such ideals (let alone *creating* a government of such ideals) everywhere.
Posted by: Perry Eidelbus at March 15, 2008 1:35 PMWhat? The "Justice" department is fining a corporation for paying blood money to protect its employees lives overseas? What law does this violate? The one against life, liberty, or the pursuit of happiness? (Or all three.)
Personally my first inclination would be to find out how much Blackwater firepower those extortion payments (and now, the fines) would buy and go after the pirates privately. But this is a losing equation since the pirates lives are of such little value compared to those who would bring them to justice.
The moral answer is MOAB bombs, napalm and tactical nukes. Not in the name of bananas, but in the name of man's right to trade peacefully with other men. (This is the moral solution to Islamic terrorism too, Jeremiah Wright's protestations notwithstanding.) And why not? How much more could they possibly hate us than they do already?
Posted by: johngalt at March 15, 2008 3:23 PMProbably not fair to say proudly -- I retract that. But you did seem to present it as an alternative to American military might.
The context was Rep. Paul's suggestions to stop supporting "American Empire" and my suggestion a'la Lal (if I worked hard, I could make a palindrome) that American Empire may be costly but that it pays for itself in increased trade.
Posted by: jk at March 15, 2008 8:13 PMBut again, you misunderstand what Paul is talking about. When he refers to the "American Empire," it's not about Jefferson sending our navy to deal with Tripoli pirates, but about maintaining a military presence *everywhere*. There's no military reason for us to remain in Saudi Arabia, or Germany, France, etc.
Except maybe to protect our embassies, but what good will that do when we're too cowardly to fight against a bunch of Serbs?
Posted by: Perry Eidelbus at March 18, 2008 12:40 PMMarch 10, 2008
A Great Supply-Side Takedown of Stimulus
Blog friend Everyday Economist has a comprehensive and well supported critique of the stimulus package (not that it had a lot of fans around ThreeSources to begin with).
First, in order to consume, one must earn an income that allows for consumption (even borrowing is based upon one’s income and credit standing). If one is not producing, one cannot consume. As we have previously detailed, this is the major insight of Say’s Law. Without getting into a discussion of which comes first, demand or supply, it should seem quite obvious that if Keynes is true and Say’s Law does not hold up in the short run and that government intervention could facilitate the lack of demand, it would only be admissible to follow such a policy if the benefits exceed the costs. However, a Wicksell-based understanding of intertemporal coordination suggests that the cost could be substantial given the potential subsequent macroeconomic discoordination. Thus, it is doubtful that the benefits of temporary stimulus could exceed the costs of future discoordination.Second, financial news pundits love to highlight the fact that over 60% of GDP is consumption. Thus, it must follow that consumption is what drives economic growth, right? Wrong. GDP accounting is merely, as the name would suggest, an accounting device. Given the fact that GDP is the total of new final goods and services produced in a given year, it is hardly a surprise that a majority of those final goods would be consumed by a developed country. Discussing the share of GDP as though it were a predictor of relative importance is incorrect. The large consumption share of GDP is not a signal of begin the driver of economic growth, but rather a reflection of the prosperity in the United States. Economic growth is caused by technological innovation and productivity. The result of economic growth.
Read the whole thing. Send it to your favorite Keynesian.
March 3, 2008
If Larry Kudlow Can Change...
Fair to say that I acquired my dove-ness on inflation from Art Laffer and Larry Kudlow. Now, I am ready to follow Larry into greater concern. I still hold my lonely beliefs in the disinflationary effects of trade, technology, and productivity. And I am still moderately comfortable with a 2.5% core CPI.
But I am not comfortable with a $1.50 Euro. While I'm willing to defend all the Fed's actions to date as protection from deflationary shocks, I'll join Mr. Kudlow in suggesting no further cuts.
Kudlow presents a strong dollar as an opportunity for John McCain. I think he is on to something here. The GOP is always called callous because the Democrats are always quicker to enact a program to help those who are hurting. A dollar restoration platform could speak to those who are struggling, without abandoning free market principles. This is the way to close the Huckabee gap, to get Sam's Club and Country Club Republicans on board:
Folks are making fun of the dollar. Our enemies around the world are pointing to the unreliable dollar as evidence of American weakness. It’s as though the administration’s neglect of the dollar is “peso-izing” or “Latin-Americanizing” the greenback.Something must be done to reverse this trend, and McCain is in a good spot to do it. Remember, McCain was a foot soldier in the Reagan revolution. Borrowing a page from the Gipper — who always said a great nation has a strong currency — he should argue on the campaign trail for a dollar surge.
For patriotic reasons alone it is time to reverse the decline of the dollar. A strong dollar should be emblematic of a strong America and a strong defense. Sen. McCain should insist that a President McCain will order the Treasury Department to back up its stale “strong dollar is in the nation’s interest” rhetoric with real open-market actions to boost the greenback. He should say that his Treasury will take actions to strengthen the greenback by conducting dollar diplomacy with Europe, Britain, Canada, and Japan. He should also state that a President McCain will appoint a Federal Reserve chief who will stop ignoring the dollar, as Fed Head Ben Bernanke did last week before Congress.
Jack Kemp and Phil Gramm could set up some fiscal and monetary benchmarks that would allow McCain to speak to oil and food prices, and underscore his advantages in strength and patriotism.
How about Jack Kemp for the next Fed Chairman? Yes, he's getting along in years, but he could restore monetary sanity. That and a President McCain wielding the Tax Axe could make it like the 1980s all over again.
The more I think about it, the more I fear we're looking at a repeat of the 1970s, especially with a Dem in the White House.
Posted by: Perry Eidelbus at March 4, 2008 10:49 AMI don't know that QB Kemp could get confirmed but he would have my vote.
An eerie thought on Kudlow the other night, I think from Stephen Moore. He said (quoting form memory) "Reagan raised the fed funds rate and lowered taxes, we're looking at easier money and higher taxes."
Posted by: jk at March 4, 2008 6:55 PMNafta
A great friend of this blog always made me laugh by calling the inexpensive -- and good quality -- guitars that Fender started importing from Mexico "NAFTA Strats." My positions on trade were not well developed at that time and I was suspicious of NAFTA because it had President Clinton's signature.
What a difference a decade makes. I think most of the less expensive Fenders are coming from the Pacific Rim and, as we have noted, the Democrats have turned away from one of the great achievements of the last Democratic president.
An editorial in the Financial Times makes the important point to dissever jobs and trade (WARNING: British spelling and punctuation):
The purpose of liberal trade is not to “create jobs” – the term is a badge of economic illiteracy – but to change the pattern of work and raise living standards overall. As with new technology, there are winners and losers. The right policy is not to turn back integration, any more than it would be to ban the fork-lift truck. It is to ensure that the overall gains are widely shared and the victims get help.The saddest thing is that the Democrats who understand this reasoning believe that the party’s supporters are too dull to grasp it, and must be fed some protectionist red meat. The challenge, they believe, is to pander to ignorance while doing the least harm. Good policy rarely happens that way. And is the logic of trade really so hard to grasp – or to sell? Bill Clinton gambled on making the forward-looking case for economic integration, and NAFTA was one of his signal political wins. Today’s economic conditions are less favourable, to be sure, but the substance of the matter has not changed.
On this crucial issue, Mr Obama and the Democrats have been seized with a kind of intellectual and political cowardice. The implications of this lack of spine are grave – and extend beyond economics. The next Democratic administration promises to repair US alliances and standing in the world. A worthy aim. Yet its first act, the party says, will be to tell its closest neighbours that the rules they are all agreed to are defunct – and if they do not like it, tough luck.
Hat-tip: Everyday Economist
February 29, 2008
The Irish Miracle
We had to hear about Sweden from lefties all through the 70s. It is only fair that we now tell the story of Ireland. Stephen Moore in Political Diary:
The other day Paul Krugman of the New York Times once again attacked supply-side tax cutting ideas and snarled that "Reaganomics was oversold" and its successes were "shortlived." We won't fight that fight again, but it is interesting that for all their attacks against supply-side economics and all their prophesies that high tax rates don't hurt, the one thing economists and politicians on the left cannot explain is the Irish Economic Miracle.In the 1970s and '80s Ireland had one of the highest percentage of its citizens on welfare or collecting unemployment benefits, and the country of four million people was losing population each year. An estimated one million Irish-born immigrants were living in America -- many of them illegal aliens, and many of them their country's best and brightest.
Starting in 1989, Ireland's politicians began cutting tax rates, and now its corporate tax rate is 12.5% -- by far the lowest in Europe. The highest personal income tax rate came down to 41% from 58%. In the following years, Ireland's growth rate soared to 8% per year, more than twice the U.S. growth rate and nearly three times Europe's. Ireland is now the continent's third-richest nation on a per capita basis. Over the last 18 years the nation's employment has increased by an astonishing 75%.
A key element of John McCain's platform is cutting taxes on corporate profits to 25% from 35% -- bringing America's corporate tax rate closer to the average of our European and Asian competitors. In selling his plan, Mr. McCain might talk not only about what Ireland has achieved, but what it means for U.S. competitiveness. An Intel executive confided recently that his company builds most of its new plants offshore because of the high U.S. tax on corporate profits. According to Barry O'Leary, head of the Investment and Development Agency of Ireland, a U.S.-based plant would have to grow profits by 45% a year "to achieve the same [after-tax] income available in Ireland. He adds: "Our tax cutting has made Ireland the highest growth nation in Europe over the last decade. We are importing firms and workers."
Meanwhile, Senators Clinton and Obama are peddling the idea that the U.S. can tax its ways to prosperity in the competitive global economy. If one of these two wins in November, Ireland is going to get richer than ever.
And, for the record: Sweden seems to have learned more than her apologists. Henry Olsen, writing in The American Magazine:
So Americans might be surprised to learn that “Old” Europe is actually ahead of us in tackling many of the most vexing domestic policy challenges. Without much fanfare, Sweden, Holland, and other countries known for their social-democratic welfare states have adopted innovative, market-based reforms on issues such as pensions, transportation, and education. What’s more, while U.S. politics remains paralyzed by partisanship, European parties on the left and the right have teamed up to implement free-market policy ideas that are criticized by the American left as extreme.
The start up I was involved with headquartered in the Republic of Ireland for tax purposes. Sadly, we did not take advantage on the 0% rate on IP-generated capital gains. But before we ran out of Euros, we provided several man-years of employment to Irish software developers, plus frequent travel to and entertainment in Dublin, and the contracting of Irish accountants and legal counsel. Incentives matter.
February 25, 2008
Private Research
I applauded the FDA last week, I might as well give a shout out to Archer Daniels Midland Corp. ADM is a private company, but I always smell their filthy corn-infested hands behind farm subsidies and ethanol mandates. Rightly or wrongly.
There was a fun story in the Wall Street Journal today on Steve Bytnar who develops more effective compounds for melting ice on roads. He uses byproducts from ethanol distillation. He was launched by some forward thinking by ADM:
Mr. Bytnar, 37 years old, plunged into the field of de-icing in the mid-1990s after Minnesota Corn Processors, a cooperative where he worked as a researcher was acquired by Archer Daniels Midland Co., Decatur, Ill., gave him free rein to experiment."I saw it as a way to separate myself from everyone else," he recalls. "They said don't lose $2 million and blow the plant up, but otherwise do what you want to do."
One of his first projects: finding a way to turn the Hungarian discovery into a commercially viable product. The result was "Ice Ban," a brown blend of magnesium chloride and residue from ethanol distillation. It attacked the ice-and-pavement bond more effectively and at lower temperatures than sodium chloride did, he says, allowing highway managers to cut their salt use.
February 15, 2008
Trade Goood!
Trade better than wheel! And fire!Political Calculations has a good and brief explanation of Comparative Advantage, complete with a tool to calculate savings from specialization: Why Cavemen Love Free Trade
February 5, 2008
America's Middle Class
January 30, 2008
Body Trafficking
Who knew there was a market? (well, I did)
A nurse admitted Wednesday he plucked body parts from 244 corpses in Philadelphia and helped forge paperwork so the parts, some of them diseased, could be used in unsuspecting patients.Lee Cruceta, 35, of Monroe, N.Y., was the lead cutter in a group that trafficked in more than 1,000 stolen body parts for the lucrative transplant market, authorities say.
Cruceta pleaded guilty Wednesday to conspiracy, taking part in a corrupt organization, abuse of a corpse and 244 counts each of theft and forgery.
Prosecutors also expect accused ringleader Michael Mastromarino, 44, of New York, to plead guilty, Assistant Philadelphia District Attorney Bruce Sagel told a judge.Mastromarino, a former oral surgeon, paid funeral directors $1,000 per corpse, then sold the parts to tissue banks, Sagel said. The body parts fetched up to $10,000 apiece, though the tissue banks resold them to hospitals for many times that amount, he said.
Actually, I think if more people were allowed to sell the body parts (post-death, where applicable), there would be a lot more available for transplants etc.
Gruesome? Well... not as much as other "procedures" in medicine today. Certainly not as icky as the under-the-radar corpse trade.
Think about it.
You could sell a kidney, while you're still alive. Yes, the kidneys would go to the highest bidders. But as more kidneys came on the market (we've all got a spare), prices would fall.
Right now your drivers license says "ORGAN DONOR"... what if it said "ORGAN SELLER"?
Hospitals would then get a cut (heh) of the cost for handling fees. Brokers would be around to take care of the transaction. An entire on-the-up-and-up economy would be born.
Side benny is that people would take care of their gear to fetch the best price.
"Low cholesterol?" Clean bill of sale.
"Low weight?" Mo' money.
"No smoking?" Cough up the cash.
Altruism only gets you so far, that's why we have waiting lists... but people are dying all the time.
I don't believe the govt has thought about it, but by accident, it is prevented. You see, you REALLY want that flat screen tv. Mkay. That lazy spouse of yours without health insurance, a job or life insurance ... they'll be taking a ride down the stairs on their neck so you can harvest his 'net worth'.
Got a lot of kids? Remember that scene in Monty Python's 'The meaning of life' where the father tells the kids that he cannot afford to feed them so he is selling them to the Pharma Industry as test subjects? Yep.
Posted by: mdmhvonpa at January 31, 2008 9:01 AMJanuary 25, 2008
Democrats' Tax Hike Folly
I waited all day for our resident Prosperitarian to post this but was left wanting. I guess my stilted analysis will have to do.
Blog favorite Arthur Laffer writes on today's WSJ Ed page of 'The Tax Threat to Prosperity' wherein Democrats want to "soak the rich" to return the federal treasury to surpluses and make milk and honey run in the streets. But then reality took over:
Using recent data, in other words, it would appear on its face that the Democratic proposal to raise taxes on the upper-income earners, and lower taxes on the middle- and lower- income earners, will result in huge revenue losses on both accounts. But some academic advisers to Democratic candidates have a hard time understanding the obvious, devising outlandish theories as to why things are different now. Well they aren't!
And this doesn't even count the oft-disputed supply side effects:
Even these data grossly understate the total supply-side response. A cut in the highest tax rates will increase lots of other tax receipts. It will lower government spending as a consequence of a stronger economy with less unemployment and less welfare. It will have a material, positive impact on state and local governments. And these effects will only grow with time.
Laffer ends with an ominous warning:
Mark my words: If the Democrats succeed in implementing their plan to tax the rich and cut taxes on the middle and lower income earners, this country will experience a fiscal crisis of serious proportions that will last for years and years until a new Harding, Kennedy or Reagan comes along.
I know the blog is always in good hands.
Laffer's piece was excellent, but it was unnerving to see the second most optimistic man in America (next to Kudlow) on Kudlow's show, expressing serious concern about the future of the economy if one of these folks win.
Laffer is by no means a partisan hack, he boasts that he voted for President Clinton twice. But this is not your grandpa's President Clinton.
January 24, 2008
Recession regression
Yesterday Ms. Rodham Clinton had some things to say about how American consumer spending is to blame for the "global economic crisis" that disrupted international equity markets beginning Monday and that ultimately, you guessed it: it's Bush's fault.
Today there's another explanation:
The huge losses in Europe on Monday -- which caused fright throughout the rest of the world -- probably were caused as much, if not more, by Societe Generale unwinding what had been a big long position [related to a securities fraud scheme] in Europe's top stock-market indexes than by any concern about the broader economy.(...)
That's not to say that the fears of a U.S. recession aren't valid. But the market's recovery from lows earlier this week hints that perhaps those concerns were overblown.
Hillary's rhetoric overblown? Naaah.
Interesting link. There was much speculation on Kudlow & Co. last night that Trichet and the ECB will not follow the FOMC in easing because of current labor negotiations in Germany. If they signal any inflation, they will have to offer a more generous contract.
That, Senator Clinton, is another superb reason to have government less involved in regulating the market.
January 23, 2008
Investing for the Apocalypse
Larry Kudlow offers great sense for investors during the current uber-volatility: buy and hold.
I always recommend buying broad stock market indexes. For example, the Dow Jones Wilshire 5000 or the S&P 500. Owning international indexes also makes sense, including emerging-market indexes. A package like this gives investors good diversification, keeps it simple, and covers the world.I don’t foresee the overthrow of free-market capitalism, and not even Senator Clinton will bring back state-run socialism. Folks who bought the market in late 1987and held it for twenty years did extremely well. I don’t recommend timing the cycles, and certainly not trading on a daily or short-term basis. The idea is to stay long-term.
That's me. I love to watch Kudlow but I am the world's dullest. dollar-averagin' broad ETF-buyin' investor. I'm not selling, I'm buying. Jg is fishing for some John Deere shares on sale, I hope to fund my IRA this week with some more S&P500 indexed, dividend indexed, and international ETFs. If it goes down some more next week, that’s life. Larry and I know it will come back.
I'm struck by how little attention some market experts are paying to this. Don Luskin has a nice post bashing Paul Krugman today and a lengthy and thoughtful endorsement of Rep. Ron Paul yesterday. Larry has the short post I excerpted. I don't see them jumping off buildings.
CNBC, in contrast, is in full panic mode. Imagine FOX if a dozen pretty white women were missing. Kudlow & Company was preempted last night so that less stable commentators could have more time. Larry sat at the desk, and a handful of his regular guests were available, but the producers went around the world to hear financial journalists in London, Davos, and Hong Kong predict the future.
They would have done their viewers a far better service to provide an hour of Kudlow's thoughtful rationality.
January 22, 2008
I'll take the 75 bps
Now that it's all Kumbayas around here on immigration, I'll toss a stink bomb into the group hug: I think Chairman Bernanke was right to cut three quarters (75 basis points to us posers). I know the inflation hawks around here are displeased.
The Everyday Economist has a sparkling new design and a post "Ridiculing the Fed," posted in anticipation of the cut:
The Fed is proceeding down a dangerous path. We are experiencing quite a dichotomy with inflation above the Fed’s comfort zone and the economy experiencing a great deal of friction in the housing and credit markets (which are slowing spreading outward). Loose Fed policy encouraged this mess and now the Fed is seeking to remedy the problem with more liquidity. Yeesh!
I don't want to get on the Bernanke bandwagon. I think that he has shown his rookie stripes by projecting a lack of control or seriousness. I would have preferred a (Kudlow Shock-and-Awe) 100 bps cut a week ago accompanied by a firm disavowal of further cuts. "Here you go kids, that's all the candy you get, make it last to Lake Minnetonka..." I thought his testimony to Congress suggesting that Keynesian nonsense rebates might be effective was awful.
All the same, I followed The EE's suggestion and read Maestro file's book and still feel that we are in tolerance for Inflation Targeting. I'm comfortable with 2.25 core CPI and I disagree with my right wingnut buddies at the WSJ Ed Page that it is wrong to "chase" (I'd call it normalize) short term T-bill rates.
The DJIA is down 160 as I type this, recovering from a 300 pt decline in the face of world financial turmoil and more bad news at home. Yaaay team!
Can you say "buying opportunity" boys and girls? I've been looking at DE (Deere and Company) since late December and bought today on an uptrend at nearly a 10% discount.
Posted by: johngalt at January 22, 2008 3:03 PMJanuary 21, 2008
Hillarinomics
The Junior Senator from New York is ready to run the economy for us:
“If you go back and look at our history, we were most successful when we had that balance between an effective, vigorous government and a dynamic, appropriately regulated market,” Mrs. Clinton said. “And we have systematically diminished the role and the responsibility of our government, and we have watched our market become imbalanced.”She added: “I want to get back to the appropriate balance of power between government and the market.”
Who better to decide the perfect balance than President Hillary Clinton?
David Harsanyi suggests: "Some of us still believe that the worth of a CEO should be determined by stockholders rather than the President of the United States." What an old fashioned guy.
And Dr. Helen thinks she wants to get us all on government cheese. (As a side note, Dr. Helen has received so many links from Instapundit, I'm starting to think she may be sleeping with somebody over there, As Drudge would say, "Developing...")
Quote of the Day
Take it away, Don Luskin:
WE'VE GOTTA BE NEAR A BOTTOM When subprime mortgage investors start murdering their wives and then killing themselves, you be sure we're near the climax of the present financial freak-out.
UPDATE: The second I post that, Glenn Reynolds gets the runner up:
AND IT'S NOT LIKE WE HAVEN'T TRIED! "'We cannot ignore the recent improvements both in the security and political situation in Iraq,' Staffan de Mistura, head of the U.N. Assistance Mission for Iraq (UNAMI), said in a speech to the Security Council."
January 17, 2008
Not So Dismal
The Everyday Economist links to an Alexander Tabarrok column in Forbes that makes Larry Kudlow look like a pessimist. Tabarrok says not to worry about recession or temporary ups and downs. In his mind economics predicts "a new era in which miracle drugs will conquer cancer and other killer diseases and technological and scientific advances will trigger unprecedented economic growth and global prosperity."
The central thesis of his piece is anti-Malthusian:
People used to think that more population was bad for growth. In this view, people are stomachs--they eat, leaving less for everyone else. But once we realize the importance of ideas in the economy, people become brains--they innovate, creating more for everyone else.New ideas mean more growth, and even small changes in economic growth rates produce large economic and social benefits. At current income levels, with an inflation-adjusted growth rate of 3% per year, America's real per capita gross domestic product would exceed $1 million per year in just over 100 years, more than 22 times higher than it is today. Growth like that could solve many problems.
Amen, brother. He points out that, as India and China gain wealth, the market for these innovations grows. A hundered million new cancer patients with the means to seek treatment will mean more to research funding than a bake sale (though if every person on the continent of Asia bought a pink ribbon...)
Seriously, it’s a good piece with fundamental underlying truth about the value of human life and the value in making a market larger. I could bring up immigration in this context but I'm in trouble already.
UPDATE: Scott Wickstein of Samizdata voices some concerns I shared:
I would just add one caveat to Professor Tabarrok's optimism. Long term economic growth requires a stable framework of liberty, peace and a consistently applied rule of law. The trend of events by governments in the last decade have not been positive on these metrics, and governments who think that they can erode the rights and liberties of their citizens without it having an economic impact in the long term are kidding themselves.
January 16, 2008
Joseph Alois!
Joseph Alois Schumpeter (1883-1950) was not on the Michigan Ballot. Not even the truncated Democratic one. But I was thinking of the famed economist all the same. Governor Huckabee doesn't seem to have much faith in "Schumpeterian Gales or Creative Destruction." His Huckness refused to accept the premise that "some of the jobs lost in Michigan are not coming back." The Governor suggests that with the right government in place, buggy-whip manufacturers will find work. (He's certainly right -- government excels at stopping progress.)
Stephen Landsburg takes to the NYTimes today (Bill Kristol, Dean Barnett, I do feel for the denizens of the Upper West Side) to suggest that those who profit from globalization need not compensate those that do not. He's noticed the rhetoric as well:
IN the days before Tuesday’s Republican presidential primary in Michigan, Mitt Romney and John McCain battled over what the government owes to workers who lose their jobs because of the foreign competition unleashed by free trade. Their rhetoric differed — Mr. Romney said he would “fight for every single job,” while Mr. McCain said some jobs “are not coming back” — but their proposed policies were remarkably similar: educate and retrain the workers for new jobs.
[...]
Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care. Access to a trained physician might reduce the demand for grandma’s home remedies, but — especially at her age — she’s still got plenty of reason to be thankful for having a doctor.
A superb and short piece. Read it. Bookmark it, send it to your niece in Berkeley.
Hat-tip: Greg Mankiw
UPDATE: Rick Sincere finds the US Senate paying an elevator operator to run an automatic elevator. Yup, the Capitol walls are Schumpeterian gale-proof. Said operator -- I mean Vertical Location and Positioning Engineer -- is highlighted in a Jim Hightower column as "a 21-year-old college student who has had to drop out of school because of our country's messed up health insurance system."
January 15, 2008
De Mortuis Nil Nisi Bonum
The WSJ Ed Page declares Rubinomics officially dead:
If our Washington, D.C., readers noticed a cortege of blue suits carrying a casket in front of the Brookings Institution last week, be not mournful. You were merely watching the leading economists of the Democratic Party burying the faith once known as Rubinomics. May it rest in peace.
The editorial goes on to debunk the loony Gospel:
As a matter of policy, this passing is just as well. Rubinomics never did have much economic basis, and even casual observation over the last 25 years has exposed its illogic. As deficits rose in the 1980s, interest rates fell. In the current decade, deficits rose and interest rates fell for a time, then later deficits fell but interest rates rose.Even in the 1990s, the facts never matched the theory. The rate on the 30-year Treasury bond did fall in 1993 amid the Clinton tax increases, but it slowly climbed again throughout 1994. The historic market turn -- in stocks and bonds -- came exactly on the day in 1994 that Republicans won the House of Representatives for the first time in 40 years. Interest rates move up or down based on multiple variables, such as monetary policy and global capital flows. Deficits within reasonable bounds are a bit player.
The biggest trouble with the deficit talk is that it doesn't prevent spending, but it is a very useful tool to preclude tax cuts. Democrats have grabbed onto this implausible economic explanation with both hands, explaining growth in the Clinton years without having to reference free trade, or the capital gains tax cuts, or any of the actual causes against which they've turned.
I'm not as sanguine as my buddies on the ed page. The Democrats, like Gene Sperling in the Glenn and Helen podcast, will be able to explain this as "an exception" to a pliant press corps. But we'll know:
"Stimulus shouldn't be paid for," declared Mrs. Clinton on NBC's "Meet the Press" on Sunday. "The stimulus, by the very nature of the economic problems we're facing, is going to require an injection of federal funding." And no less than the oracle himself, Mr. Rubin, appeared at Brookings last week to declare that a deficit-padding stimulus "can give the economy a timely boost in the face of great uncertainty and concern with the short-term economic outlook." The coroner will note that the cause of death here is suicide.
January 14, 2008
Revising 2007
Tyler Cowen looks at the data (instead of the editorial page) and spots some interesting things we have learned in the last 12 months:
Predatory lenders? How about predatory borrowers?
Many of the frauds were simple rather than ingenious. In some cases, borrowers who were asked to state their incomes just lied, sometimes reporting five times actual income; other borrowers falsified income documents by using computers. Too often, mortgage originators and middlemen looked the other way rather than slowing down the process or insisting on adequate documentation of income and assets. As long as housing prices kept rising, it didn’t seem to matter.In other words, many of the people now losing their homes committed fraud. And when a mortgage goes into default in its first year, the chance is high that there was fraud in the initial application, especially because unemployment in general has been low during the last two years.
Better get some gub'mint program to bail 'em out! And how about "Cold Kills:"
Spells of extreme cold kill over 27,000 Americans each year, or about 700 people each very cold day. Heat waves may receive more publicity, but it turns out that cold periods — days with an average temperature below 30 degrees —have more significant and longer-lasting effects on human mortality. More people die in cold periods than in homicides.Extreme cold brings cardiovascular stress as human bodies struggle to adjust to the temperature; many of the deaths in these periods come through heart attacks. Heat waves tend to kill people who were already weakened and would have died soon anyway; cold periods bring additional people to the verge of death.
When retired people move to a warmer state, their life expectancy rises dramatically. In fact, 8 to 15 percent of the increase in American life expectancy over the last 30 years comes from people moving to warmer climates, according to research done by two economics professors, Olivier Deschenes at the University of California, Santa Barbara, and Enrico Moretti, at the University of California, Berkeley.
The death tolls from ice storms last month were third-worldish. One of the milblogs pointed out one week that 120 had died in an ice storm in the Midwest, while the same week on 31 had died of violence in Iraq. Last month's City Journal had an article about efforts to revitalize Buffalo, New York. Even with pedestrian malls and subsidized mixed-use retail space, the population still hungers for warmer climes.
Great article, Read the whole (short) thing. Hat-tip: Everyday Economist
January 10, 2008
Prediction Markets
We have a lot of prediction markets fans around here. I was wondering how the unpredicted NH primaries reflected on them. Gotta love the blogosphere, the Everyday Economist has a great rundown.
December 31, 2007
Good Economic News for 2007
Kevin Hassett of the American Enterprise Institute has a list of the Top 10 pieces of Happy Economic News in 2007.
Hat-tip: Samizdata
December 26, 2007
Does 2.4 Really Lack Luster?
The WSJ News pages report "Stocks Drop on Weak Retail." Huh? I had heard that they were up 3.8% YOY -- not bad for the middle of a housing recession that has most Americans living in Tent Cities.
The next article points out that the 3.8 figure was 3.6 and that it included lots of expensive gas.
The 11th-hour rush helped strengthen a weak holiday season. From the day after Thanksgiving to midnight Monday, total retail sales, excluding automobiles, rose 3.6% over the previous year, according to MasterCard SpendingPulse, a unit of MasterCard Advisors. But factoring out spending on gasoline -- which soared thanks to a 27% average price increase since this time last year -- retail sales increased a lackluster 2.4%. Industry forecasts had predicted gains of 3.5% to as high as 4.5%.
Maybe you don't throw a party for 2.4%. or give your staff the week off. But the mercenary bears on Kudlow & Co. have been saying that the recession has already started and that the consumer has thrown in the MasterCard. I think 2.4 growth in a difficult year is a pretty good sign.
One of my economics commandments: thou shalt not measure an economy by consumer spending alone.
Spending doesn't matter as long as the economy grows overall. Employment, REAL employment that creates well, depends as much on savings as on spending.
Posted by: Perry Eidelbus at December 26, 2007 3:46 PMI should add: GASOLINE COUNTS AS MUCH AS ANYTHING ELSE! It counts as much to economic growth as groceries, rent and business investment.
Posted by: Perry Eidelbus at December 26, 2007 3:47 PMDecember 24, 2007
Didn't Ted Nugent Write About Tent Cities?
No. Wait. That was "Intensities in Ten Cities."
ThreeSources friend Perry Eidlebus has submitted the leading nomination to Don Luskin's "most insanely exaggerated news story concerning the housing market slump." It's a goodie:
ONTARIO, Calif., Dec 21 (Reuters) - Between railroad tracks and beneath the roar of departing planes sits "tent city," a terminus for homeless people. It is not, as might be expected, in a blighted city center, but in the once-booming suburbia of Southern California.
The noisy, dusty camp sprang up in July with 20 residents and now numbers 200 people, including several children, growing as this region east of Los Angeles has been hit by the U.S. housing crisis.The unraveling of the region known as the Inland Empire reads like a 21st century version of "The Grapes of Wrath," John Steinbeck's novel about families driven from their lands by the Great Depression.
As more families throw in the towel and head to foreclosure here and across the nation, the social costs of collapse are adding up in the form of higher rates of homelessness, crime and even disease.
This is from The Guardian's business section. That's gotta be like being "Gay Pride Editor" at National Review, or the Faith and Religion section of The Objectivist Newsletter.
It's a Reuters article that I first read on Yahoo. When I e-mailed Don, I used the Guardian's link because it was the most permanent of the choices. Yahoo's news links tend to expire after a couple of weeks.
Posted by: Perry Eidelbus at December 26, 2007 3:38 PMDecember 20, 2007
"Crass" Commercialism
Don Boudreaux writes a letter to USA Today Editors, responding to an article about "crass consumerism:"
Commerce is peaceful. It involves sellers working hard and taking risks to bring to market goods and services that consumers want to buy. No one forces anyone to do anything; all is voluntary.What truly is crass is politics - that sorry spectacle of power-seeking ego-maniacs who, when not pronouncing platitudes, are promising to help group A by picking the pockets of group B. While commerce is honest, politics is duplicitous. While commerce is peaceful, politics inevitably pits citizen against citizen.
Hat-tip: Samidata
December 17, 2007
Pragmatism Attacked
A good friend of this blog sends a link to a Peter Boettke post. Boettke links through to an FT piece. I do not subscribe to FT, so I can only read the teaser:
Alan Greenspan said he could support the use of public cash to help struggling US homeowners on Sunday, in remarks likely to fuel growing political pressure for a more radical response to the housing crisis.The former chairman of the Federal Reserve told ABC’s This Week programme the least harmful way of intervening would be to give direct financial aid to distressed homeowners.
Boettke links to a 1987 critique of Greenspan from Murray Rothbard implying that Greenspan's pragmatism proves Rothbard right. Boettke:
With all these philosophical laissez faire people in town for the past two decades it is a wonder that statism has made such advances. But I guess when you are only laissez faire at a "high philosophical level" and a pragmatist in day to day action this is the expected result. I wonder if we had policy makers who were socialists at the "high philosophical level" and pragmatists in day to day action if the results would in fact be any different. I would wager to say there would be no difference.I think when we read of political decision-makers and their use of the word "philosophical" to modify their beliefs, we should substitute the word "not" and go from there. Greenspan's "philosophical laissez faire" becomes "not laissez faire" and we get a more accurate picture.
From the two free sentences at the Financial Times, it sounded like he was saying that direct aid to borrowers would be more efficient than Paulson's rewriting of contracts.
I'm not a big Greenspan defender, but that seems reasonable and pragmatic. With Democrats in charge of both houses and a "compassionate conservative" at 1600 Pennsylvania, lasseiz faire is not going to be an option in an election year. Seeking the least moral-hazardous and most efficient method seems appropriate.
Rereading this, I am on a precipitous limb, here.
Having not read the FT piece, and lacking the stomach to watch "ABC This Week," My defense may not be warranted. It this indeed becomes a useful tool for Chairman Franks et al to push for more Federal action, I will recant.
I don't need to read the actual article. The opening reveals all I need to know.
"Public cash" - meaning taking money from me to pay for someone else's irresponsibility.
F*** you, Alan.
Posted by: Perry Eidelbus at December 18, 2007 1:21 PMI saw a little more of the interview last night. That scurrying sound you here is me running away from my position on this. I was clearly too kind to The Maestro and I promise it will not happen again.
Posted by: jk at December 18, 2007 2:11 PMThere is nothing, NOTHING too harsh to say about (or to) that goddamn bastard.
Posted by: Perry Eidelbus at December 19, 2007 11:20 AMDecember 14, 2007
Break With Milton Friedman
It makes me nervous to part company with Milton Friedman. Only Hayek would give him a run as the man whose views most closely match my own. But I think I am ready to sign up for "New Monetarism." We've had a bit of monetarist persiflage around here. My contentions that productivity and trade are counter-inflationary have repeatedly been met with Friedman's assertion that "inflation is purely a monetary phenomenon."
I have to publicly break with that. The money supply is not being created by central banks and the deflationary effects of expanded trade, technology and productivity cannot be ignored. David Roche has written a book titled "New Monetarism" and he provides a brief summary on the Wall Street Journal ed page today.
The reason for the exponential growth in credit, but not in broad money, was simply that banks didn't keep their loans on their books any more -- and only loans on bank balance sheets get counted as money. Now, as soon as banks made a loan, they "securitized" it and moved it off their balance sheet.There were two ways of doing this. One was to sell the securitized loan as a bond. The other was "synthetic" securitization: for example, using derivatives to get rid of the default risk (with credit default swaps) and lock in the interest rate due on the loan (with interest-rate swaps). Both forms of securitization meant that the lending bank was free to make new loans without using up any of its lending capacity once its existing loans had been "securitized."
So, to redefine liquidity under what I call New Monetarism, one must add, to the traditional definition of broad money, all the credit being created and moved off banks' balance sheets and onto the balance sheets of nonbank financial intermediaries. This new form of liquidity changed the very nature of the credit beast. What now determined credit growth was risk appetite: the readiness of companies and individuals to run their businesses with higher levels of debt.
Roche is not at all sanguine about this. This is a bubble-creatin' machine to him which will exacerbate the current credit crunch and contribute to a catastrophic burst of a China Bubble in 2008.
I cannot join his pessimism but I agree that we can no longer measure inflation by looking at the rate of growth for the money supply. Roche seems to only see the inflationary side in his editorial (I just ordered the book). To admit that this liquidity has been created off balance sheets and outside of reserve requirements is to assume an unignorable inflation rate. Even the worst inflation hawks do not claim any such thing.
I think you admit this ex nihilo money creation, and then admit that it is counterbalanced by the incredible efficiencies of trade and technology. It puts the Fed and Central Banks in the correct perspective: they influence but do not define monetary policy.
Also,
"To admit that this liquidity has been created off balance sheets and outside of reserve requirements is to assume an unignorable inflation rate. Even the worst inflation hawks do not claim any such thing."
We don't "claim any such thing" because it's irrelevant. Let's say the money supply is $10, and fractional reserve banking turns it into an effective $100. That is *not* inflation. If the bank makes it $10, $50 or $100, that's based on supply and demand (interest rates and consumers' preference for borrowing). But no matter what they decide, it becomes $20, $100 or $200 if the central bank decides to double the money supply.
Posted by: Perry Eidelbus at December 14, 2007 4:28 PMIt's exactly fractional reserve banking. But Roche is pointing out that as soon as the loan is securitized it comes off the books and the bank is empowered to lend it out again, creating money that does not come from a central bank. This is not your grandpa's reserve banking.
Yes, Perry you've told me several times. I respectfully suggest that you are too closely wedded to a textbook theory that does not match what we are seeing in the global economy. The Everyday Economist linked to a paper called "The continuing muddles of monetary theory" by Charles Goodhart who believes that "monetary theory has a long way to go." I believe that to be true.
It's still fractional reserve banking. It doesn't matter *how* the accounting is done, only that the bank is still lending out something that was deposited with it. And again, it doesn't matter what banks do with money *after* its creation. They only amplify the money supply that the central bank creates in the first place.
My strict usage of "inflation" and "deflation" are in fact *contrary* to what nearly all economics textbooks say. Most economics texts that discuss inflation to any degree are Keynesian in basis. I, however, go by the true definition, i.e. Milton Friedman pointing out that inflation is purely a monetary phenomenon. Look, it doesn't matter even if Kudlow says that trade and productivity are "deflationary": if that's how he terms it, he's wrong. He's said silly things before about liquidity, and Mises.org has called him on it.
By your definition, the jewelry industry, or at least one of its members, had some pretty big deflation this last weekend. Odds are pretty good that my fiancee won't read this, so I can mention something I have for her. Guys are worried about if they're "big enough," and also if jewelry is big enough. Not that my fiancee wants anything beyond my love, but I became dissatisfied with a pendant that I bought the previous weekend. So, I returned it this Saturday and exchanged it for one with exactly twice the carats. The first one cost $x, and the bigger one cost exactly $2x. This past weekend, though, the first was reduced to $.75X, and the bigger was reduced to $1.5x (which I didn't even know until they rang me up in the exchange and quoted me half of what I was expecting, what a happy surprise). Did Kay's suddenly experience tremendous deflation? Of course not. So I caution you again, don't confuse inflation with supply and demand.
As I wrote before, baskets of goods and services are ridiculous measures of money's value. You need to judge inflation by fungible things, like gold, crude oil, and copper. They won't be exact measures, because there is still supply and demand at work, but as I pointed out with crude oil prices, the price jumps are far more than what s