hearing aids and contact lenses

my loony bun is fine benny lava

You too can buy a senate seat!

Supply and Demand

Click for a larger view:

Bank of America Scum

This is standard procedure now. Employees are actually instructed to mislead grieving family members:

Paul Kelleher: Yes, I'm calling to inform you that my mom died on the 24th of January.

Bank of America Estates representative: I'm sorry. Oh, it looks like she never even missed a payment. That's too bad. Well, how are you planning to take care of her balance?

PK: I'm not going to. She has no estate to speak of, but you should feel free to just go through the standard probate procedure. I'm certainly not legally obligated to pay for her.

BOA: You mean you're not going to help her out?

PK: I wouldn't be helping her out -- she's dead. I'd be helping you out.

BOA: Oh, that's really not the way to look at it. I know that if it were my mother, I'd pay it. That's why we're in the banking crisis we're in: banks having to write off defaulted loans.

Brownfield Solar

Gregor:

Somewhere between the massive strength of utility grade solar and the small scale chic of personal, home solar there is perhaps yet another solution: brownfield solar.

What’s intriguing about brownfield solar is that it leverages land that would otherwise cost too much to clean-up. And, unlike utility grade solar, it uses PV panels. This combination, less expensive solar materials paired with vacant land in an urban setting, seems like a solution that brings long-standing issues into alignment.

Today I reviewed two PV systems of comparable size, but that are on opposite coasts of the country. The first is the Sunpower installation at the Microsoft campus in Silicon Valley (not a brownfield project, but useful for comparison of scale). The second is the Brightfield project in Brockton, Massachusetts. It appears each is going to generate a similar level of revenue (or savings) annually. And that payback will take at least 10 years, depending on the future price of electricity.

I maintain the projections of the future price of electricity are actually far too low. Many solar systems are currently projected to pay for themselves after 15~ years, but may wind up as cash cows after just 10 years. For example, what if average national rates for electricity, currently around .12 cents per kWh before delivery charges, go up 7 times by 2020? How about 10 times? After all, the entire economy will be much more electrified by then as the migration away from the automobile accelerates. Owning a large array PV system paid for in today’s dollars may turn out to be a quite the asset in 2020. Coal will be much more expensive by then, either through scarcity or carbon taxation or both. Natural gas and hydro-powered power generation will also cost more. Alot more. And demand will be enormous.

Todays dollars investing in tomorrow's energy? Clever.

speak out with ken sanders

Flirting with disaster

Krugman:

There has been a distinct change in tone from the Obama team today, as they seem to have become suddenly aware that there’s a real risk that the stimulus plan will either fail to pass, or be emasculated to the point that it doesn’t come close to doing the job. Obama himself has warned of catastrophe if we fail to act, and — finally!– denounced the tax-cut philosophy. Meanwhile, Larry Summers has finally made the point I’ve been pushing for a while — that we’re at major risk of falling into a deflationary trap.

I thought it might be useful to present a bit of evidence behind that concern. The figure above plots an estimate of the output gap — the difference between actual and potential GDP, as a percentage of potential — and the change in the inflation rate. Both series are taken from the IMF WEO database, for convenience, and use data from 1980-2007.

It’s not a perfect fit — this is economics, not physics, and anyway stuff besides the output gap bounces inflation around from year to year. But still, there’s a clear correlation, driven largely but not entirely by the deep slump and disinflation of the early 1980s, and an implied slope of about 0.5 — that is, every percentage point by which real GDP fall short of potential tends to reduce the inflation rate by about half a point over the course of the year.

And right now the CBO is saying that in the absence of a policy action the average output gap will average 6.8 percent over the next two years. Do the math: if anything like the historical relationship between output and inflation holds, we’re looking at major deflation.

OK, maybe that relationship won’t hold — getting to actual deflation may take a deeper slump than merely reducing the inflation rate. And maybe a regression driven in part by 80s data isn’t a good guide to current events. But deflation is a huge risk — and getting out of a deflationary trap is very, very hard.

We truly are flirting with disaster.

Mankiw's Fix

Greg Mankiw:

Regular readers of this blog have a pretty good sense of my policy preferences. But for those occasional readers who might be stopping by, let me reiterate what I would do right now if I were the fiscal king.

I would institute an immediate and permanent reduction in the payroll tax, financed by a gradual, permanent, and substantial increase in the gasoline tax. I would make the two tax changes equal in present value, so while the package results in a short-run budget deficit, there is no long-term budget impact. Call it the create-jobs, save-the-environment, reduce-traffic-congestion, budget-neutral tax shift.

I recognize that some state governments are now struggling in light of the macroeconomic crisis. For the next two years, I would let each state governor have the authority to divert a portion of the payroll tax cut in his or her state and take the funds instead as state aid. This provision would essentially be giving governors the temporary authority to impose a payroll tax on his or her citizens, collected via the federal tax system. Those governors who think they have valuable infrastructure projects ready to go would take the money. When designing a fiscal stimulus, there is no compelling reason for one size fits all. Let each governor make a choice and answer to his or her state voters. It is called federalism.

Any further federal spending projects should be evaluated on the basis of cost-benefit analysis. That analysis would take time, but it would ensure that the projects are not a waste of taxpayer dollars.

Some traditional Keynesians would object on the grounds that government spending has a larger multiplier than tax cuts. Even though that is the prediction of standard Keynesian models, the evidence is not completely consistent with that conclusion, as I have discussed here in previous posts. In addition, given the lags inherent in large spending projects, and the risks inherent in hasty spending at the federal level, the case for taxes over spending as the fiscal instrument of choice is compelling. To me, at least.

None of this should be viewed as a substitute for fixing the banking system and trying to come up with a better process for homeowners and banks to work out mortgage loans in default. Housing and finance are the real sources of the macro problem. Any fiscal stimulus, such as the one I propose above, is only an attempt to mitigate the symptoms. Those symptoms are severe, so mitigation is fully appropriate. But fiscal policy is not a panacea for what now ails the economy.

Oh brother!

Since September it now seems that the bailout conversation has once again come full circle and we are back to discussing equity injections! WSJ:

The Obama administration's financial-rescue plan is shaping up to include capital injections with tougher terms than the first round and an expansion of an existing Federal Reserve lending facility that could potentially buy up toxic assets ...

Instead of buying preferred shares, as it did before, the government is discussing taking convertible preferred stakes that automatically convert into common shares in seven years.

To deal with the toxic assets at the heart of the financial crisis, the administration is considering expanding the Fed's consumer-lending facility, known as the Term Asset-Backed-Securities Loan Facility.

This is a great idea (relatively speaking). Why did it take so long for the conversation to come back to this? And why don't we just get things over with and pre-privatize the banks!

spoons: "what are they?"

Buy American? (pt 2)

Professor Douglas Irwin, Dartmouth:

WORLD trade is collapsing. The United States trade deficit dropped sharply in November as imports from the rest of the world plummeted in response to the financial crisis and global recession. United States imports from China, Japan and elsewhere declined at double digit rates. The last thing the world economy needs is for governments to give a further downward shove to trade. Unfortunately, wemay be doing just that.

Steel industry lobbyists seem to have persuaded the House to insert a “Buy American” provision in the stimulus bill it passed last week. This provision requires that preference be given to domestic steel producers in building contracts and other spending. The House bill also requires that the uniforms and other textiles used by the Transportation Security Administration be produced in the United States, and the Senate may broaden such provisions to include many other products.

That might sound reasonable, but history has shown that Buy American provisions can raise the cost and diminish the effect of a spending package. In rebuilding the San Francisco-Oakland Bay Bridge in the 1990s, the California transit authority complied with state rules mandating the use of domestic steel unless it was at least 25 percent more expensive than imported steel. A domestic bid came in at 23 percent above the foreign bid, and so the more expensive American steel had to be used. Because of the large amount of steel used in the project, California taxpayers had to pay a whopping $400 million more for the bridge. While this is a windfall for a lucky steel company, steel production is capital intensive, and the rule makes less money available for other construction projects that can employ many more workers.

American manufacturers have ample capacity to fill the new orders that will come as a result of the fiscal stimulus. In addition, other countries are watching closely to see if the crisis becomes a general excuse for the United States to block imports and favor domestic firms. General Electric and Caterpillar have opposed the Buy American provision because they fear it will hurt their ability to win contracts abroad.

They’re right to be concerned. Once we get through the current economic mess, China, India and other countries are likely to continue their large investments in building projects. If such countries also adopt our preferences for domestic producers, then America will be at a competitive disadvantage in bidding for those contracts.

Remember the golden rule, or the consequences could be severe. When the United States imposed the Smoot-Hawley Tariff in 1930, it helped set off a worldwide movement toward higher tariffs. When everyone tried to restrict imports, the combined effect was a deeper global economic slump. It took decades to undo the accumulated trade restrictions of that period. Let’s not make the same mistake again.

Broder continues to fade into irrelevance

Paul Krugman:

Josh Marshall gives us David Broder talking about stimulus — which he says failed to achieve the predicted results the first time. It’s not clear whether he was referring to the TARP or the early 2008 stimulus package, but either way it’s a poor comparison. The TARP isn’t stimulus; the early 2008 package was 1/5 the size of the Obama proposal, and contained nothing but tax cuts.

But the part that really got me was Broder saying that we need “the best ideas from both parties.”

You see, this isn’t a brainstorming session — it’s a collision of fundamentally incompatible world views. If one thing is clear from the stimulus debate, it’s that the two parties have utterly different economic doctrines. Democrats believe in something more or less like standard textbook macroeconomics; Republicans believe in a doctrine under which tax cuts are the universal elixir, and government spending is almost always bad.

Obama may be able to get a few Republican Senators to go along with his plan; or he can get a lot of Republican votes by, in effect, becoming a Republican. There is no middle ground.

What Michael Phelps should have said

Dear America,

I take it back. I don’t apologize.

Because you know what? It’s none of your goddamned business. I work my ass off 10 months a year. It’s that hard work that gave you all those gooey feelings of patriotism last summer. If during my brief window of down time I want to relax, enjoy myself, and partake of a substance that’s a hell of a lot less bad for me than alcohol, tobacco, or, frankly, most of the prescription drugs most of you are taking, well, you can spare me the lecture.

I put myself through hell. I make my body do things nature never really intended us to endure. All world-class athletes do. We do it because you love to watch us push ourselves as far as we can possibly go. Some of us get hurt. Sometimes permanently. You’re watching the Super Bowl tonight. You’re watching 300 pound men smash each while running at full speed, in full pads. You know what the average life expectancy of an NFL player is? Fifty-five. That’s about 20 years shorter than your average non-NFL player. Yet you watch. And cheer. And you jump up spill your beer when a linebacker lays out a wide receiver on a crossing route across the middle. The harder he gets hit, the louder and more enthusiastically you scream.

Yet you all get bent out of shape when Ricky Williams, or I, or Josh Howard smoke a little dope to relax. Why? Because the idiots you’ve elected to make your laws have, without a shred of evidence, beat it into your head that smoking marijuana is something akin to drinking antifreeze, and done only by dirty hippies and sex offenders.

You’ll have to pardon my cynicism. But I call bullshit. You don’t give a damn about my health. You just get a voyeuristic thrill from watching an elite athlete fall from grace–all the better if you get to exercise a little moral righteousness in the process. And it’s hypocritical righteousness at that, given that 40 percent of you have tried pot at least once in your lives.

Here’s a crazy thought: If I can smoke a little dope and go on to win 14 Olympic gold medals, maybe pot smokers aren’t doomed to lives of couch surfing and video games, as our moronic government would have us believe. In fact, the list of successful pot smokers includes not just world class athletes like me, Howard, Williams, and others, it includes Nobel Prize winners, Pulitzer Prize winners, the last three U.S. presidents, several Supreme Court justices, and luminaries and success stories from all sectors of business and the arts, sciences, and humanities.

So go ahead. Ban me from the next Olympics. Yank my endorsement deals. Stick your collective noses in the air and get all indignant on me. While you’re at it, keep arresting cancer and AIDS patients who dare to smoke the stuff because it deadens their pain, or enables them to eat. Keep sending in goon squads to kick down doors and shoot little old ladies, maim innocent toddlers, handcuff elderly post-polio patients to their beds at gunpoint, and slaughter the family pet.

Tell you what. I’ll make you a deal. I’ll apologize for smoking pot when every politician who ever did drugs and then voted to uphold or strengthen the drug laws marches his ass off to the nearest federal prison to serve out the sentence he wants to impose on everyone else for committing the same crimes he committed. I’ll apologize when the sons, daughters, and nephews of powerful politicians who get caught possessing or dealing drugs in the frat house or prep school get the same treatment as the no-name, probably black kid caught on the corner or the front stoop doing the same thing.

Until then, I for one will have none of it. I smoked pot. I liked it. I’ll probably do it again. I refuse to apologize for it, because by apologizing I help perpetuate this stupid lie, this idea that what someone puts into his own body on his own time is any of the government’s damned business. Or any of yours. I’m not going to bend over and allow myself to be propaganda for this wasteful, ridiculous, immoral war.

Go ahead and tear me down if you like. But let’s see you rationalize in your next lame ONDCP commercial how the greatest motherfucking swimmer the world has ever seen...is also a proud pot smoker.

Yours,

Michael Phelps

Try both

Brad DeLong:

WHEN an economy falls into a depression, governments can try four things to return employment to its normal level and production to its 'potential' level. Call them fiscal policy, credit policy, monetary policy and inflation.

Inflation is the most straightforward to explain: The government prints lots of banknotes and spends them. The extra cash in the economy raises prices. As prices rise, people don't want to hold cash in their pockets or their bank accounts - its value is melting away every day - so they step up the pace at which they spend, trying to get their wealth out of depreciating cash and into real assets that are worth something. This spending pulls people out of unemployment and into jobs, and pushes capacity utilisation up to normal and production up to 'potential' levels.

But sane people would rather avoid inflation. It is a very dangerous expedient, one that undermines standards of value, renders economic calculation virtually impossible, and redistributes wealth at random. As John Maynard Keynes put it, 'there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose...'

But governments will resort to inflation before they will allow another Great Depression. We just would very much rather not go there, if there is any alternative way to restore employment and production.

The standard way to fight incipient depressions is through monetary policy. When employment and output threaten to decline, the central bank buys up government bonds for immediate cash, thus shortening the duration of the safe assets that investors hold. With fewer safe, money-yielding assets in the financial market, the price of safe wealth rises. This makes it more worthwhile for businesses to invest in expanding their capacity, thus trading away cash they could distribute to their shareholders today for a better market position that will allow them to reward their shareholders in the future. This boost in future-oriented spending today pulls people out of unemployment and pushes up capacity utilisation.

The problem with monetary policy is that, in responding to today's crisis, the world's central banks have bought so many safe government bonds for so much cash that the price of safe wealth in the near future is absolutely flat - the nominal interest rate on government securities is zero. Monetary policy cannot make safe wealth in the future any more valuable. And this is too bad, for if we could prevent a depression with monetary policy alone, we would do so, as it is the policy tool for macroeconomic stabilisation that we know best and that carries the least risk of disruptive side effects.

The third tool is credit policy. We would like to boost spending immediately by getting businesses to invest not only in projects that trade safe cash now for safe profits in the future, but also in those that are risky or uncertain. But few businesses are currently able to raise money to do so.

Risky projects are at a steep discount today, because the private-sector financial market's risk tolerance has collapsed. No one is willing to buy assets and take on additional uncertainty, because everyone fears that somebody else knows more than they do - namely, that anyone would be a fool to buy. Although the world's central banks and finance ministries have been devising many ingenious and innovative policies to stimulate credit, so far they have not had much success.

This brings us to the fourth tool: fiscal policy. Have the government borrow and spend, thereby pulling people out of unemployment and pushing up capacity utilisation to normal levels. There are drawbacks: the subsequent dead-weight loss of financing all the extra government debt that has been incurred, and the fear that too rapid a run-up in debt may discourage private investors from building physical assets, which form the tax base for future governments that will have to amortise the extra debt.

But when you have only two tools left, neither of which is perfect for the job - credit policy and fiscal policy - the rational thing is to try both, at the same time. That is what the Obama administration in the United States and other governments are attempting to do right now.

Its about what women want, not what men want.

Images speak louder than words sometimes. Here are two photographs juxtaposed against one another showing the two most important woman's rights bills being signed into law.

Kenyes 6 Friedman 0

"Refuted" economic doctrines. John Quiggin:

#1: The efficient markets hypothesis

#2: The case for privatisation

#3: The Great Moderation

#4: individual retirement accounts

#5: Trickle down

Buy American?

Brad DeLong:

If there's little excess capacity in the U.S. steel industry--so that the price of steel is high enough to induce people to look outside for suppliers--then a stimulus won't be much needed. If there's a lot of excess capacity so that a stimulus is needed, then steel customers should be able to bargain prices down to marginal cost--in which case foreign producers will have an extremely difficult time competing on price given that steel is heavy and distances are great. "Buy American" seems mostly designed to allow the steel producers to collude and push their profits up--at the expense of American taxpayers.

And Brad is right. Lawmakers (and even many economists) seem to be missing the underlying points. What is the purpose of a fiscal stimulus? The Keynesian answer is to fill the excess capacity gap. In the long run we know that idling factories and an unemployed workforce are far more detrimental to long term growth than a short-term deficit boost.

What we need now is to avoid inducing ourselves into a protectionist mantra. Instead, we need carefully crafted policy intended to help the economy regain its footing. I fear, however, that the protectionists will win, the economy will be marginally stimulated, and a handful of politically connected groups will profit exorbitantly from it.

get it on

Back in the U.S.S.R.

Are we more similar than we're comfortable to admit? David Leonhardt:

Richard Freeman, a Harvard economist, argues that our bubble economy had something in common with the old Soviet economy. The Soviet Union’s growth was artificially raised by massive industrial output that ended up having little use. Ours was artificially raised by mortgage-backed securities, collateralized debt obligations and even the occasional Ponzi scheme.

The boys at FreeExchange (The Economist) follow-up with:

There are three sources of economic growth—labour, capital, and productivity—but there exist diminishing returns to labour and capital, at least in the short and medium run. Thus, a sustained level of growth comes only from increases in productivity, brought on by innovation. Russia experienced so much growth in the postwar era because it acquired lots of capital, but it ultimately could not sustain prosperity because the marginal value of adding more capital diminished after a certain point. Increased capital and labour also explain the impressive growth rates of the Asian tigers.

The mortgage backed securities in Mr Leonhardt’s example constitute innovation, not capital. Much of the financial innovation of recent years did facilitate sustained growth. It gave firms the means to acquire productive capital. But the innovation outpaced the necessary regulation and capital was misallocated. That doesn't mean we are fundamentally doomed to economic failure.

Mr Leonhardt goes on to say that growth comes from investment, which is correct. But, as the Russian example illustrates, the simple addition of more capital cannot provide growth indefinitely. Investment that leads to sustainable growth targets things that enhance productivity. The market ultimately determines which innovations are useful and can be successfully adopted.

Mr Leonhardt believes government investment is the way forward. He cites the infrastructure projects of the 1950s and 1960s as examples. That was productive capital accumulation and it provided the institutions necessary to let market based innovations thrive. It certainly contributed to growth, but was not solely responsible for it. As we learned from command economies, government spending on capital does not provide long term prosperity. Government investment is often necessary, but not sufficient, for growth. The investment must provide incentives and support for innovation in the marketplace, which is why investments in education (which he mentions), infrastructure, and R&D are so important.

Mr Leonhardt is critical of the flagrant consumption habits of Americans. But according to Amar Bhide the appetite for new and better goods actually gives Americans a comparative advantage. It means that new innovations (developed at home or abroad) can thrive in America moreso than elsewhere—innovation can't spur growth if there is not a market for it. But too much consumption can indeed harm growth, via reduced saving and eventually less capital accumulation. American consumers need to save more, but their “venturesome consumption habits” should be encouraged

It is dangerous to presume that government investment is generally a better engine of growth than the private sector. Government investment can lead to high rates of sustainable growth, but that investment must enhance a market place where private investment thrives as well.

Before you take a sigh of relief, remember that The Economist is full of "very serious people" who were dead certain there was no housing bubble in 2005. FreeExchange rests their entire argument upon the presumption that we were making financial innovations. What isn't addressed in their response is that these so called "financial innovations" worked by distorting risk valuations, scrupulously avoiding regulation, and were poorly understood by the investors who purchased them. And when you look at it that way it seems a lot less like a "financial innovation" and more like a 21st century mega-scam. And indeed, it was.

Think of it this way: Is it innovation to take a group of 9,000 subprime mortgages and turn it into a capital structure pyramid where even the equity trenches are sometimes given AAA ratings?

Not innovation we can believe in.

Grownups needed

Andrew Sullivan speaks his mind and echoes my thoughts on the Michael Phelps debacle:

Yes, Michael Phelps took a few hits from a bong at a party. He also threw back a great deal of alcohol, maybe made a few passes at a few girls and bonded with a few dudes. This is news?

And yet this absurd ritual takes place in which Phelps has to pretend he did something dreadful and we all have to tut-tut and frown and furrow our brows, and the sponsors cluck and the press preens - while the only conceivable news is that a 23 year-old had a good time at a party, breaking no professional rules since he was not competing when he was goofing off.

And, seriously, does anyone think that smoking pot would give him an unfair advantage in the pool? Please. When on earth are we going to grow up as a culture?

The hysteria that never dies

Paul Krugman on social security fanatics:

A while back Jon Chait wrote a great piece about the peculiar insistence of many people in DC that Social Security is a looming crisis, despite the fact that the numbers say it ain’t so. I can’t find a link to the original, but there’s a good summary here. The key graf:

Ten or 20 years ago, you could plausibly deem Social Security’s finances among the most pressing national problems. Those who were willing to take on the problem were admired for their farsightedness, bipartisanship, and seriousness of purpose. Social Security’s place on our list of national problems has long since been overtaken, but, among Washington establishment types who remember those days, the issue retains its totemic significance. Entitlement hysteria has become less a response to a crisis than an expression of statesmanship.

And to prove their seriousness, people are ready to repeat any number they’ve heard about Social Security’s problems — or, worse yet, a number they think they’ve heard, which isn’t remotely correct.

George Bush launched his political career campaigning upon the vow to "fix" social security. He said, in 1978, that social security would be bankrupt by 2000. He also said we'd find weapons of mass destruction... uh oh. I'm not even going to go down that road again.

Democracy works more slowly when one party is intellectually bankrupt

"Not in the history of mankind has the government ever created a job."

-Michael Steele; Chairman of the Republican National Committee.

yes I'm a gummy bear

Recess

Busy weekend. Updatese to follow tomorrow morning

and you thought your life was trippy

To be a congressional republican

"Who am I? Why am I here? Where am I going?"

I can't remember where I read this today. I think it was somewhere in the Washington Post. Nonetheless, it registered in my mind as very fitting.

classic

Bailout? Just Buyout

Brad Setser: How much is $350 billion?:

My colleagues at the Council’s Center for Geoeconomic Studies calculated that it was enough to buy most of the common equity of the US financial system – at least on January 21.

That isn’t the best use of the TARP’s funds, but it does illustrate just how little common equity is now supporting the financial sector’s large aggregate balance sheet.

"Arbitrage out the Arse"

Yes and Not Yes:

I’ve got three interesting arbitrage opportunities for you.

First are SPAC liquidations (via Dealsleuth).

Second is the recent Pfizer/Wyeth merger (via Dividend Growth Investor).

Third is one that I have been looking at for weeks, which is the acquisition of Image Entertainment (DISK) for $2.75 per share. Today there was a large sell-off without any news whatsoever. I purchased some shares. I can only assume that it was a hedgie selling off for other purposes.

$4500 bid on that $7200 sofa

NYTimes reports of haggling at ultra-high end furniture stores in lower Manhattan:

The sofa was made in the Netherlands, I was told. The designer, Bjorn Mulder, is a big shot in Europe, I was told. The price was $6,447, I was told — at which point I asked the obvious question: is the sofa part of the avalanche?

The saleswoman, tall, slim, a little hungry in the eyes, said it was not, but that she could give me the same 20 percent “to the trade” discount that she extends to decorators and architects. That brought the price to $5,158 before tax. At this point, I took a breath and steeled myself for something I had never tried before, or even thought to try, in a high-end furniture store: haggling.

There has been a lot of talk in the last year about shoppers taking advantage of the economic climate by bargaining with retailers, mostly on volume merchandise like TVs or mattresses. But Manhattan’s sanctums of new and vintage modern design were a different matter, it seemed to me. I’d always liked what they sold, but I found the gallery-like stillness of the showrooms intimidating, and the prices were generally too high for me. Until now, anyway, the idea of challenging those prices would have struck me as absurd.

But these days, the thinking goes that it’s a buyer’s market for anyone looking to buy anything. And, as it happens, I’m currently in the market for everything, having just moved into a new apartment where the sum total of my décor is two card tables and an old leather recliner. I may not be a regular customer of the design boutiques of SoHo and TriBeCa, but if there is ever going to be a time for me to furnish my home in high style, this would seem to be it.

"And now, for something completely different"

It appears the world's gathering of leading economists and top business leaders has the most horribly bizarre diversion running along side the conference:

It's no joke either. Bill Easterly:

Did the words “insensitive,” “dehumanizing,” or “disrespectful” (not to mention “ludicrous”) ever come up in discussing the plans for “Refugee Run”?

I hope such bad taste does not reflect some inability in UNHCR to see refugees as real people with their own dignity and rights.

Of course, I understand that there were good intentions here, that you really want rich people to have a consciousness of tragedies elsewhere in the world, and mobilize help for the victims. However, I think a Refugee Theme Park crosses a line that should not be crossed. Sensationalizing and dehumanizing and patronizing results in bad aid policy – if you have little respect for the dignity of individuals you are trying to help, you are not going to give THEM much say in what THEY want and need, and how you can help THEM help themselves?

Unfortunately, sensationalizing, patronizing, and dehumanizing attitudes are a real ongoing issue in foreign aid. David Rieff in his great book A Bed For the Night talks about how humanitarian agencies universally picture children in their publicity campaigns, as if the parents of these children are irrelevant. A classic Rieff quote: “There are two groups of people who like to be photographed with children: dictators and aid officials.”

child's play

watching bank after bank line up for TARP money hearkens back to childhood soccer matches when everybody was given a medal of participation, no matter how abysmal his performance.

60 Seat Majority

Excellent:

Roll Call reports that the Obama administration is floating Sen. Judd Gregg (R-NH) for Commerce Secretary. No decisions have been made, but Gregg and Symantec CEO John Thompson are both considered leading candidates.

Of course, Republicans will do everything they can to stop him from taking the job since they would be assured of the appointment of a Democrat by New Hampshire Gov. John Lynch (D).

If Democrats also prevail in the Minnesota recount, that would give them 60 seats.

Mortgage requirements tighten significantly

Genworth now considers entire states "distressed markets" and is demanding credit scores of 720 or better for any mortgage:

Underwriting Guideline Changes – Effective February 2, 2009
• Minimum Credit
Score = 680
• Maximum Debt to Income (DTI) = 41% regardless of AUS or
Submission Channel
• High Cost Loans (> $417,000) Minimum Credit Score = 740

o Loan amounts > $417,000 in CA – Ineligible

• Cash Out Refinance – Ineligible
• Second Homes – Ineligible
• Manufactured Homes – Ineligible
• Construction to Permanent – Ineligible

Declining/Distressed Markets Changes – Effective February 2,
2009
• Minimum Credit Score = 700

o AZ, CA, FL, NV = 720 (as per existing guidelines)

• Maximum Debt-to-Income = 41% regardless of AUS or submission
channel
• Additions to our Declining/Distressed Markets List

o 17 states added in their entirety
o 69 MSA/CBSA added
o Please see Attachment A for a complete list of new markets

The distressed markets list has now been expanded to include the entire states of: Arizona, California, Connecticut, Delaware, Florida, Michigan, Nevada, and New Jersey, Colorado, Maine, New Hampshire, Rhode Island, Wisconsin, Hawaii, Maryland, New Mexico, Utah, Idaho, Massachusetts, Ohio, Vermont, Kansas, Minnesota, Oregon, Washington.

Thanks to CalculatedRisk for catching this.

Obama's work habits

Political Wire:

With a week under his belt, the New York Times says some of President Obama's "work habits are already becoming clear. He shows up at the Oval Office shortly before 9 in the morning, roughly two hours later than his early-to-bed, early-to-rise predecessor. Mr. Obama likes to have his workout -- weights and cardio -- first thing in the morning, at 6:45. (Mr. Bush slipped away to exercise midday.)"

"He reads several papers, eats breakfast with his family and helps pack his daughters, Malia, 10, and Sasha, 7, off to school before making the 30-second commute downstairs -- a definite perk for a man trying to balance work and family life. He eats dinner with his family, then often returns to work; aides have seen him in the Oval Office as late as 10 p.m., reading briefing papers for the next day."

Obama is also "a bit of a wanderer. When Mr. Bush wanted to see a member of his staff, the aide was summoned to the Oval Office. But Mr. Obama tends to roam the halls."

And as we mentioned on his first full day as president, the dress code is less formal than during the Bush years.

the REAL M.I.A. break

Whats it to a business?

Ever wonder how much the grocery store has to pay to transact your payment by credit card? Now there is a website that can tell you exactly that and you may be surprised how much its costing them.

TrueCostofCredit.com

Quote of the day

"Economists who have spent their entire careers on equilibrium business cycle theory are now discovering, in effect, that they invested their savings with Bernie Madoff."

-Paul Krugman, 2008 Nobel Laureate criticizing Real Business Cycle Theorists (mostly of the Chicago school).

Drinking the Chicago Kool-Aid

The truce between the freshwater and salt-water economists has been broken and there is a war of words spinning across the blogosphere. Krugman's latest take:

There seems to be an amazing amount of misunderstanding of the basics of fiscal policy, even among people who should know better. Leave on one side the remarkable parade of economists who think that the savings-investment identity proves that government action can’t increase spending; PGL points us to a higher-level fallacy: the widespread belief that Ricardian equivalence doesn’t just say that tax cuts have no effect — which it does — it also says that private consumption automatically offsets any rise in government spending, which is just wrong.

Justin Wolfers suggests that this is because economists just haven’t been thinking and writing about fiscal policy. Maybe. But in my own neck of the woods, that isn’t true. In the New Open Economy Macroeconomics, which dates back to classic work by Obstfeld and Rogoff in the early 90s, both fiscal and monetary policy are usually analyzed.

And by the way: these are extremely buttoned-down models, with lots of intertemporal maximization, careful attention to budget constraints, and at most some assumption of temporary price rigidity. Nobody who was at all familiar with this literature could make the logic mistakes that are coming fast and furious from the fresh-water economists.

What this reveals, I think, is just how insular part of the macroeconomics profession has become. They just don’t read anything that doesn’t come from their cult circle; they just weren’t aware of major bodies of work that didn’t happen to be in their preferred style.

This insularity is asymmetric. Ask a PhD student at Princeton what a real business cycle theorist would say about something, and he or she can do that; ask a student at one of the freshwater schools what a new Keynesian would say, and I doubt that he or she could answer. They’ve been taught that there is one true faith, and have been carefully protected from heresy.

It’s a sad story.

In the land before time...

I posted economic commentary to my Facebook page. And last September I pointed out that WaMu was offering interest rates a full 130bps better than HSBC and 100bps better than ING Direct on their 12month CDs. Of course the reason for this was obvious then. WaMu knew their balance sheets were deep in the red and they need a fast injection of deposits to shore things up. Unfortunately for WaMu what ended up happening was a lot of their own customers simply transferred deposits out of their checking accounts and into high-yield CDs.

The moral hazzard here is that WaMu understood there was a very real risk of being arrested by the FDIC and that the FDIC had voluntarily honored the yields IndyMac was offering on their CDs (IndyMac was doling out high interest rates for the same reason). The thing is, no bank is going to make any money with those rates. The only reason a bank like WaMu would offer such rates given the circumstances would be to try to protect share and boldholders. But the protection is being financed by the implicit guarantee that the FDIC will insure customer CDs. Afterall, if WaMu is clearing struggling and on the brink of collapse, what customer is going to invest in their CDs unless they are confident the FDIC will insure the deposit?

So about that moral hazzard, seems the FDIC has taken notice and is beginning to act:

The Board of Directors of the Federal Deposit Insurance Corporation today proposed for comment a regulatory change in the way the FDIC administers its statutory restrictions on the deposit interest rates paid by banks that are less than Well Capitalized.

Prompt Corrective Action requires the FDIC to prevent banks that are less than Well Capitalized from soliciting deposits at interest rates that significantly exceed prevailing rates.

Continues:

Concerns about Moral Hazard. In the insurance context, the term "moral hazard" refers to the tendency of insured parties to take on more risk than they would if they had not been indemnified against losses. The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk. Unless deposit insurance is properly priced to reflect risk, banks gain if they take on more risk because they need not pay creditors a fair risk–adjusted return. A truly risk–based assessment discourages such risky behavior. The moral hazard problem is particularly acute for insured depository institutions that are at or near insolvency but are allowed to operate freely because any losses are passed on to the insurer, whereas profits accrue to the owners. Thus problem institutions have an incentive to take excessive risks with insured deposits in the hope of returning to profitability.emphasis added

The problem is with our ethics exams

Now its all beginning to make sense. Take a look at the full exam here. A snippet:

Instructions: Please read the questions thoroughly, and circle the letter of your chosen response. And NO CHEATING!!

1. A mortgage broker known to you only as "Big Mo'" offers you a package of loans for your securitisation operations. Your wife is high maintenance, and your kids' Exeter fees are due next week. Select the statement that best identifies your first sentiments

(a) "AIG will insure it for WHAT?!?!"
(b) The spotty kid at S&P says they're AAA.
(c) "How close are we to our budgeted P&L"
(d) "Who did the property valuations, how were they compensated, what percentage of the purchasers actually have jobs, who will these be on-sold to, and what representations will be made?"
(e) "Has anyone aggregated the retrospective underlying values over the past decade?

4. You are a wealth manager. You discover that even when you're late putting in buy or sell orders for certain mutual funds, your orders are accepted - even AFTER the cutoff time which is meant to protect existing investors from being predated by new investors taking advantage of market-moving information. What is the best course of action?

(a)Set up a hedge fund to exploit the opportunity until it goes away.
(b) take advantage of the loophole infrequently, but in a big way, so you can profit but at the same time maintain plausible criminal deniability.
(c) trade frequently and in smaller size so as to not attract undue attention, but allow you to profit continuously.
(c) Anonymously inform the SEC to assuage your conscience, while simultaneously doing it from time to time.
(d) Just say No!, but don't be a whistle-blowing sissy.
(e) Call a reporter at the Wall Street Journal with a scoop.

(7) You are a senior trade-executor at a large buy-side money-manager. Your trades are often of significant size, and as such have enormous value to anyone apprised of them such as executing brokers who can front-run them or quietly pass the information to other hedge fund clients who pay premium commissions to the broker precisely for such information. Which statement best summarizes how you know your broker is being honest with your orders?

(a) He was a fraternity brother. He would NEVER do that.
(b) He allocated me lots of Hot Issues during the boom-times.
(c) He scored Miley Cyrus tickets for my daughter's birthday party in the Deluxe Box and even arranged pony rides for them IN THE BOX!.
(d) I've got dirt on him like the photos from that time he showed-up with those Russian hookers...
(e) We have our own post-trade analytics that factor-analyze the outcomes.

my brain hurts!

from Russia with love

Gregor:

The United States reached peak oil production in 1971, as forecasted by M. King Hubbert, the Shell geologist. Before that time the US attained a form of glory in its oil age with spectacular discoveries in Texas, a robust industry, strong exports to the rest of the world and lots of free wildcatting. The oil age in the US also gave rise to novels and films, like Upton Sinclair’s Oil and of course George Steven’s vehicle with James Dean, Giant.

Russia appears to have peaked now without enjoying any such glory. Perhaps the promise of Khodorkovsky’s Yukos, which charged out of the gate and looked to deliver on the dream of a modern, efficient corporation was doomed by the oligarchical terms of its founding. Large mega-projects like Sakhalin also succumbed to the vagaries of the State, and now the bloated Gazprom looks more like a portrait of decay than an instrument of power. It’s not just the volatility in the price of Oil and Gas that was the undoing of Russia. It was Russia’s historical propensity to eat itself.

2008 saw Russian oil exports fall by over 5.00% and the outlook is not pretty from here. The fall in oil prices not only hurt Russia economically. Current prices are simply way too low for great swaths of Russian production to carry on profitably. While GDP per capita is still much lower in Russia than in the OECD, Russia simply does not have the kind of dirt-cheap labor or materials advantage that it enjoyed just 10 years ago. Very few oil producers do. And as a general point, oil at 45.00 continues to set the stage for a supply collapse. Russia is vulnerable to a huge drop in production.

The old paradigm where oil producers both had the discretion to increase production as prices fell, and the ability to do so, is over. non-OPEC supply is on a severe downward path. Some are even calling for a global supply collapse. Randy Ollenberger, managing director of oil and gas research at BMO Capital Markets, said global oil supply could decline by as much as 20 million barrels a day over the next three years if the oil industry stops investing. That is grim.

good morning

photos by saumacus

"Time to bang my head against the wall (Pre-Elementary Monetary Economics Department)"

Brad DeLong:

Oh boy. John Cochrane does not know something that David Hume did--that the velocity of monetary circulation is an economic variable rather than a technological constant. Cochrane:

Fiscal Fallacies: First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”...

Let us take this slowly.

Suppose that we have four agents: Alice, Beverly, Carol, and Deborah.

Suppose that Beverly has $500 in cash that she owes Carol, due in two months. Suppose that Alice and Carol are both unemployed and idle.

In one scenario in two months Beverly goes to Carol and pays her the $500. End of story.

In a second scenario Beverly says to Alice: "I have a house. Why don't you build a deck--I will pay you $500 after the work is done. Here is the contract." Alice takes the contract and goes to Carol. She shows the contract to Carol and says: "See. I will be good for the debt. Cook me meals so I will have the strength to build the deck--here's another contract in which I promise to pay you $500 within 90 days if you cook for me." Carol agrees.

Two months pass. Carol cooks and feeds Alice. Alice goes and builds the deck.

Alice then asks Beverly for payment. Beverly says: "Wait a minute." She goes to Carol and says: "Here is the the $500 cash I owe you." Beverly pays the money to Carol. Beverly then says: "But now could I borrow the cash back by offering you a long-term mortgage at an attractive interest rate secured with an interest in my newly more-valuable house?" Carol says: "Sure." Beverly files an amended deed showing Carol's mortgage lien with the town office. Carol gives Beverly back the $500. Beverly then goes to Alice and pays her the $500. Alice then goes to Carol and pays her the $500.

The net result? (a) Alice who would otherwise have been idle has been employed--has traded her labor for meals. (b) Carol who would otherwise have been idle has been employed--has traded her labor for a secured lien on Beverly's house. (c) Beverly has taken out a mortgage on her house and in exchange has gotten a deck built. (d) Carol has the $500 cash that Beverly owed her in the first place.

Alice has more income and consumption expenditure than if she hadn't taken Beverly's job offer. Carol has more income and saving than if she hadn't cooked for Alice and then invested her earnings with Beverly. Beverly has an extra capital asset (the deck) and an extra financial liability (the mortgage) than if she had never offered to hire Alice.

A deck has gotten built. Meals have been cooked and eaten. Two women have been employed. And all this has happened without printing any extra money.

John Cochrane would say that this is impossible. John Cochrane would say:

[I]f money is not going to be printed, it has to come from somewhere. If Beverly borrows a dollar from Carol, that is a dollar that Carol does not spend, or does not lend to Deborah to spend on new investment. Every dollar of increased Beverly spending must correspond to one less dollar of Carol or Deborah spending. Alice's job created by Beverly spending is offset by a job lost from the decline in Carol or Deborah spending. We can build decks instead of fountains, but Beverly stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out”...

John Cochrane is wrong.

You sometimes see this mistake in freshmen students in Economics 1, students who do not fully understand either the circular flow of economic activity or what a credit economy is. They think--like Cochrane--that the flow of spending must be constant unless somebody "prints money" because, you see, you need "money" in order to buy things.

The premise is true--you do need "money" to buy things--but the conclusion is false: the flow of spending is not necessarily constant. In the world in which Beverly does not hire Alice but instead pays the $500 directly to Carol, that $500 turns over only once--its velocity of circulation is equal to one. In the world in which Beverly does hire Alice, the velocity of circulation of the $500 is four--it goes from Beverly to Carol, from Carol to Beverly, from Beverly to Alice, and from Alice to Carol.

Cochrane's mistake--an elementary, freshman mistake--is because he has not thought enough about how a credit economy works to recognize that the velocity of circulation can be an economic variable and is not necessarily a technological constant. And as the velocity of circulation varies, the amount of the flow of spending varies as well: it is now longer the case that if Beverly borrows a dollar from Carol that is a dollar that Carol does not spend.

Milton Friedman knew this. Irving Fisher knew this. Simon Newcomb knew this. David Hume knew this. John Cochrane does not know this: does not know that the velocity of circulation is an economic variable rather than a technological constant.

I do want to pound my head against the wall.

I do not know what else to do...

from East Oakland, CA

Classic early 90's.

buehler? buehler?

How much TARP money should be spent on lobbying Congress to loosen the restrictions on getting TARP money in the first place?

"Because they'll screw it up!"

Yes and Not Yes:

One of the books I’m currently reading is The Partnership by Charles Ellis, which is basically a history of Goldman Sachs. The quote in the title comes from the chapter that describes the period of time in Goldman’s history where there were two leaders, John Whitehead and John Weinberg. After Gus Levy died, the two Johns agreed with each other to become co-senior partners of the firm.

As leaders of the firm, it was part of their job and duty to worry about competitors. One example was the commercial banks. According to Ellis, one of Whitehead’s major accomplishments “was his successful lobbying to extend the life of Glass-Steagal, the federal law that kept the commercial banks out of the securities business for decades.”

Of course, this was in the firm’s self-interest to prevent competitors from intruding upon their market, but there was also another reason that is extremely salient at this current stage of financial history.

“Why is the firm so worried about commercial banks getting into our investment banking business?” Weinberg supplied the answer to his own question, “Because they’ll screw it up!”

Now, can anyone argue that the repeal of Glass-Steagal was a good thing? Well, to put it in a Yogi Berra-type of description, I think the repeal of Glass-Steagal was good until it became bad. Certaintly, the financial problems we are experiencing today would be smaller if Glass-Steagal had not been repealed.

Amex profits decline 79%

WSJ:

"Our fourth-quarter results reflect an operating environment that was among the harshest we have seen in decades," Chief Executive Kenneth I. Chenault said in a statement. He noted overall cardmember spending fell 10% year-over-year, or 5% excluding the impact of foreign-exchange rates.

Chenault added that the credit-card issuer remains cautious about the economic outlook through 2009, with expectations for cardmember spending "to remain soft with past-due loans and write-offs rising from current levels."
...
Delinquencies of 90 days or more rose to 3.1% of American Express's managed U.S. lending portfolio, from 1.8% in the prior year. The portfolio's write-off rate climbed to 6.7% from 5.9% in the third quarter and 3.4% in the prior year.

More nominee trouble?

Woodward:

"This may be tantalizing but vague. I don't think the nanny or household tax problems and so forth are over for the Obama administration..."

-- Washington Post investigative reporter Bob Woodward, appearing on the Chris Matthews Show yesterday, but refusing to give more details.

Sounds like he's full of it. But don't say you didn't read it here first.

Global Slump

Reposted in full from Brad Setser:

Only a few months ago it was common to argue that growth in the emerging world would prevent a global recession. That forecast looks increasingly wide of the mark. The slowdown in the emerging world now looks to be as severe – and potentially more severe – than the slowdown in the advanced economies.

Morgan Stanley’s currency team recently observed that “Brazil’s growth collapsed in 4Q08, with several activity indicators displaying the worst decline on record.” Earlier this year Brazil was growing strongly on the back of both strong domestic demand and strong global demand for its commodities. The domestic growth dynamic (and the improved state of the balance sheet of Brazil’s government) made me think it might be able to ride out this crisis relatively well. Guess not.

Russia is in even worse shape. Output is poised to fall sharply. Danske Bank expects a 3% fall. That might be optimistic. Moving from a budget that balances at $70 oil to a budget based on $41 a barrel isn’t fun even if Russia uses its fiscal reserve to adjust gradually. Eastern European economies that relied on large capital inflows rather than high commodity prices to support their growth aren’t doing any better.

The Gulf is in better shape than Russia, but that isn’t saying all that much. $40 a barrel oil requires the Gulf to dip into its foreign assets, but most countries still have plenty of spare cash (though not as much as before). Still, all of the Gulf is slowing. And the most exuberant bits of the Gulf – Dubai in particular – are in real trouble. Most of the Gulf’s sovereign funds under-estimated their countries need for emergency liquidity. They aren’t quite in the same position as Dubai’s Istithmar (looking to sell Barneys for cash as demand for luxury goods falls), but they presumably do wish that they had more liquid assets — and more assets that weren’t correlated with oil.

The commodity-importing BRICs aren’t doing much better. India is slowing. And China is really slowing. Stephen Green of Standard Chartered has constructed an indicator of Chinese economic activity that isn’t based on the government’s reported GDP data. It suggests a far bigger fall in Chinese output than in 1998.*

Chinese output shrank in the fourth quarter. The first quarter isn’t going to be any better.

China isn’t alone. The fall in Korea’s output in the fourth quarter was quite large. Even larger than the fall in output in UK, or Japan. Yuka Hayashi of the Wall Street Journal:

South Korea’s economy last quarter shrank 5.6% from the July-September period, or an annualized rate of 20.8%, according to J.P. Morgan, the sharpest contraction since the Asian financial crisis a decade ago.

Singapore and Taiwan are also contracting sharply. Singapore’s economy contracted an annualized rate of 12.5% in q4, and the huge fall in Taiwan’s exports cannot be good for its economic performance. Japan isn’t an emerging economy, but it too saw a sharp fall in output. It isn’t a stretch to think that Asian output could fall more in 2009 than in the 1997-98 Asian crisis.

Emerging economies who thought that they had protected themselves from sudden swings in capital flows by maintaining large reserves and running large external surpluses are discovering that their efforts to reduce their exposure to volatile global capital flows added to their exposure to a global slump in trade.

Emerging economies were growing faster than the mature economies prior to the crisis. But at this stage I wouldn’t rule out the possibility of an outright contraction in the output of the emerging world in 2009. And that could imply that a crisis in the US and Europe could end up producing a bigger absolute swing in activity in the emerging world than in the world’s mature economies …

* This graph was reproduced with permission from Stephen Green.

Geither Confirmed

Taegan Goddard's Political Wire:

The U.S. Senate confirmed Timothy Geithner as President Obama's Treasury secretary by a 60-34 vote, "paving the way for the new administration to usher in its financial-rescue plan," the Wall Street Journal reports.

every like such as

Dissolution of the Euro? Not likely

As Barry Eichengreen notes:

[I]f a participating member state now decided to leave the euro area, no such precommitment would be possible. The very motivation for leaving would be to change the parity. And pressure from other member states would be ineffective by definition.

Market participants would be aware of this fact. Households and firms anticipating that domestic deposits would be redenominated into the lira, which would then lose value against the euro, would shift their deposits to other euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the Italian government would be redenominated into lira would shift into claims on other euro-area governments, leading to a bond-market crisis. If the precipitating factor was parliamentary debate over abandoning the lira, it would be unlikely that the ECB would provide extensive lender-of-last-resort support. And if the government was already in a weak fiscal position, it would not be able to borrow to bail out the banks and buy back its debt. This would be the mother of all financial crises.

If any state were to leave the Euro first my bet would be Spain or Italy. Italy especially.

Helicopters and money

This maybe misinformed, but would the 'money out of helicopters' solution help ease the currency crisis in the Eurozone? If there wasn't an ongoing credit crisis I would think yes. But adding that sort of monetary instability would probably worsen the credit crisis as much as it would ease the currency one.

Economist notes:

One thing you can probably get 99% of economists to agree on is that a global trade war in the middle of a global recession is a bad idea. If every country increases import tariffs, hoping to protect its domestic industry from foreign competition, global trade will fall in all directions, hurting everybody. Put another way, increased tariffs are a negative-sum game.

To date, we haven’t seen much in the way of higher trade barriers during this crisis… however, we are seeing friction over currency valuations… the other side of competitive currency devaluations is that not all countries are equally well armed. In particular, countries that use the euro cannot devalue their currencies, because they don’t control their monetary policy and they don’t have the scale to intervene significantly on the market for euros. In short, other countries can devalue their currencies at the expense of Eurozone members

This is fun

A prominent economist sent Professor Mankiw the following e-mail:

Discussion question.

Scenario 1. AmeriBank of Holland, Ohio, receives TARP funds and uses $20,000 to hire Joe the Plumber to remodel a bathroom in one of its banks.

Scenario 2. AmeriBank of Holland, Ohio, receives TARP funds and loans $20,000 to Bob the Baker to remodel a bathroom in his house.

Explain the difference in macroeconomic stimulus in these two scenarios.

I have a few guesses, but since I'm an amateur I'd rather refrain from embarrassment. When Greg posts a followup I will copy it here.

Trade data

Theres a lot of foreign trade data out right now.... hopefully I'll get around to sorting through it tomorrow afternoon. This is sort of a reminder, to myself.

Of money and air

Found this fascinating exchange over at Bronte Capital:

It seems to me that what we are seeing is simply the balance sheet consequences of the Fed's decision to take the wholesale money market onto its own balance sheet. Banks (and other entities) that used to lend to one another, are now lending and borrowing through the intermediation of the Fed. This is so not just domestically but also internationally (the huge swap line), since foreign banks used to fund dollar asset holdings in the dollar money market.

In this view, inflation seems much less likely. Why not? If the original wholesale money market borrowing and lending was not inflationary, then why should its substitute be inflationary? Indeed, the real question is whether the expansion of the Fed's balance sheet is keeping pace with the contraction of money market credit more generally. If not, then the consequence may be deflationary.

Posted by: Perry Mehrling at December 22, 2008 05:12 AM

To which Bronte responds:

This is of course correct – as far as it goes. To the extent that Fed balance sheet expansion simply offsets private balance sheet contraction there is no net increase in money and near substitutes – and so the Fed balance sheet expansion cannot be inflationary. We are – to that end – stuck in our deflationary spiral.

The situation has a name in the economic jargon - a liquidity trap. An American – not a Japanese version of a liquidity trap – but a liquidity trap nonetheless. No matter how much “money” the Fed supplies the public will want to hold it. Monetary policy is thus useless.

This is usually made out (by Krugman et al) as an excuse for massive fiscal policy. And I am not averse to that.

However there is another approach which I detailed in my lessons from shorting JGBs post. The argument: if you can’t fix the problem with increasing money supply then maybe you can fix the problem with decreasing money demand.

You need to convince people not to hold money. You need to convince them that cash is trash.

And to do that you need to convince the public that there will be inflation (the above gross leverage argument notwithstanding).

To do that the Federal Reserve has to be credibly irresponsible. It is not enough to print a couple of trillion dollars (which they have) because everyone thinks (with some justification) that they will suck back the money supply when the crisis is over.

No – you have to be more visibly reckless than that. You have to really convince people that there will be inflation.

So the suggestion in my title is literal. The Federal Reserve should hire a couple of hundred helicopters and load each one 10 million dollars in neatly bound parcels of $1000 each. Total cost $2 billion plus trivial helicopter hire.

It should fly them over 200 randomly picked American cities and throw the money out the window. It should press release this – but press coverage will be excessive. Indeed I suspect that the press coverage would give the Fed’s inflation policy greater awareness than the Coca Cola Company. (The Coca Cola Company’s annual advertising budget is $2.8 billion – so this is already cheap compared to some private sector alternatives.)

The press release should be simple. We are doing this to induce inflation. If there is no inflation as a result we will simply do it again.

Of course people will fall of roofs after searching for money that might have landed on their house. They might die. Of course people might get trampled in the crush. They might die too.

All of this increases the visible recklessness of the policy.

But the charm of this. It may actually induce mass spending of American dollars for (self-fulfilling fear of inflation)– a massive stimulus. And it will do it all for $2 billon. Obama has a stimulus package of $1.2 trillion – or about 600 times as large. This is relatively cheap.

The real case for throwing money out of helicopters is that it looks like it will work better than anything else that anyone has come up with yet.

And it will be cheap. Much cheaper than alternatives that are actually being implemented.

The secondary benefit is that most of the losses from inflation will be in the hands of the Chinese who have built huge reserves of soon-to-be-deflated US dollars.

Hey what better – lets kick start the economy and get the Chinese to pay.

I am serious. At least serious until I can get a credible explanation as to why this won't work at least as well as any of the alternatives being mooted.

John Hempton

Credit Crisis deconstructed

Ricardo Caballero recent paper is probably one of the best analysis I've seen on the credit crisis yet.

know self-defense

Everything weekend break

Funny

what some people mistake for prosperity:

"China Knows"

Gregor:

When it comes to public infrastructure spending, China knows exactly what to do: build rail. Lots of rail. Today’s NY Times has a great piece on China’s next round of public works:

A $17.6 billion passenger rail line across the deserts of northwest China, a $22 billion web of freight rail lines in Shanxi province in north-central China and a $24 billion high-speed passenger rail line from Beijing to Guangzhou here in southeastern China are among the biggest projects. But extra spending is being planned in practically every town, city and county across the country.

Hey Barack Obama, did you read that? China’s spending more than six times your pittance of 10 billion on their own rail. And a billion in China goes alot farther than it does in the US. Even better, China is building all four types of Rail. Heavy Rail for goods. Commuter Rail for workers. Light Rail for mobility. And then High Speed Rail.

China, like the US, is an importer of oil. Accordingly, China has concentrated on electrification. Hydro, yes. And lots of horribly polluting coal. But China is also going heavily for wind, and solar. China gets it. China knows. Howcome we don’t get it? Howcome we don’t know?

kanye break

Diminishing returns south of the border

Gregor: "You Peaked, Babe"

Mexican oil production is now declining at a rate of 9.2% per year. That’s a decline rate very close to the IEA Paris’ “scary rate” of 9.7%, which is how much global oil production would fall without any investment.


The problem in Mexico is with their largest field, Cantarell. Equally, it doesn’t help that the national oil company is constitutionally mandated to be part of the government, and that the entire country lives off of these revenues (after they’ve passed through the hands of the politicians). With oil production in decline for both geological and political reasons, it’s not surprising a growing number of observers have become worried about Mexican political stability.

Pity the role of the Mexican Energy Secretary, whose job it is to maintain the facade that Mexican oil production can rise once again, thus protecting the status quo and the Mexican way of life. This month, Georgina Kessel said that Mexico will develop new oil fields to boost output to 3 million barrels a day by 2015. But that is highly unlikely.

The history of oil production in all regions, states and countries is clear: once your largest field has peaked, you have peaked. And no amount of small discoveries can make up the difference. You can cobble together hundreds of these, but it’s just too hard to overcome the loss of the largest field. Best estimates suggest Cantarell peaked in 2004. Well, that’s just about the same year overal Mexican production peaked, above 3.8 Mb/day.

There’s nothing Ms Kessel can do to change that. Now that annual production has fallen to 2.80 Mb/day, I just want to say: You peaked, babe.

Do as I say, not as I do...

Says the economist "The Dollar is Special":

DO NOT do as America does, unless you are a very big country (or economic bloc). That seems to be the lesson Britain is learning as the pound weakens and confidence in the credit worthiness of the country slips. If you have a global reserve currency, if private demand for your debt is strong, if the flight to safety means that government borrowing costs remain low no matter how profligate the central bank, well, then you can do as America has done. If not, better prepare to have your capital dubbed "Reykjavik-on-Thames".

paranoia

By XKCD. Found via Leonardo Monasterio's Blog.

"A pittance for rail"

Gregor MacDonald laments:

The United States produces about 25% of its oil. We import the other 75%. However, in the provisional Obama Stimulus plan, spending on roads and bridges is at 75% and spending on rail is at 25% of a total transport-spend of 40 billion. Proposing to spend only 1.2% of the total 825 billion dollar package on rail is almost comical. In truth, it’s tragicomical.

If you begin your administration with fundamental policy problems such as this from the outset, then you're on track towards wishing that eight years from now you might be as popular as George W. Bush is now. This is not the change we need, want, or have any use for.

dance break

Look, but don't touch

FreeExchange:

TYLER COWEN passes along interesting new research on the power of the endowment effect:

A new study suggests that just fingering an item on a store shelf can create an attachment that makes you willing to pay more for it.
Previous studies have shown that many people begin to feel ownership of an item - that it "is theirs" - before they even buy it. But this study, conducted by researchers at Ohio State University, is the first to show "mine, mine, mine" feelings can begin in as little as 30 seconds after first touching an object.

This, of course, is why we recommend that our readers pick up and peruse the latest print edition of The Economist whenever possible. It's also why parents must be careful to keep their child's hands firmly in his pockets when passing through the toy aisle. As the write-up of the story makes clear, this is another economic truth of which retailers were already well aware. Everything from test drives at car dealerships to toy packaging designed to allow children to play with an unopened item relies on the principle.

I'd also be interested to see if the effect varies based on the number of similar items left, or on whether someone else has just handled the product. One might also assume that online purchases are more reflective of consumer tastes, given the imposed distance between buyer and product. Presumably, the mere act of placing something in an e-tail "shopping cart" doesn't have quite the same effect.

WSJ Evaluates Bush

Krugman:

So, there’s a WSJ editorial on the Bush economy, which just cries out for a capsule summary.

Shorter WSJ I: Everything good that happened during the Bush years was due to Bush; everything bad was due to Alan Greenspan, who fostered the housing bubble whose existence we and our friends denied again and again.

Shorter WSJ II: The decline in the unemployment rate in the middle Bush years, after Bush cut taxes, proves that tax cuts work — and had nothing to do with the housing bubble. The much larger, much more sustained decline in unemployment through the whole Clinton administration, which followed a tax increase, proves that tax increases are a terrible thing. Honest!

Shorter WSJ III: Fannie and Freddie! And did we mention Alan Greenspan?

Shorter WSJ IV: Who you gonna believe, us or your lying eyes?