A grim world tour

How likely is that cap and trade revenue?

That sounds like roughly $100 billion per year.  Is that reasonable?  The United States produces about 7 billion tons of CO₂ equivalent a year right now, which means that Obama expects his cap-and-trade plan to generate a price of about $14 per ton in its first year -- assuming it covers every single molecule of carbon emitted in the U.S.  If only half of all emissions are covered at first, it means a price closer to $28 per ton.

For comparison, the European ETS cap-and-trade plan currently prices CO₂ at about 10 euros per ton.  That's roughly $13.  And that price has dropped considerably over the past few months thanks to the recession.  By 2012 it's likely to be back up in the range of $20 or more.

I'm going to disagree, for a couple of reasons.  First, spikes like the one we saw between 2004-8 have long lags.  I bought a tiny fuel efficient car, in part because of high prices.  I will now drive it into the ground.  It will be five or ten years before I even have an opportunity to increase my carbon footprint.  Ditto weatherproofing homes, replacing air conditioners, etc.  Moreover, when supply suddenly goes from tight to loose, oil prices tend to overshoot, because big producers, especially those in OPEC, have gotten dependent on the money.  They cheat on their quotas, and the price falls further--look at 1986 or 1998.

Second, I doubt economy-driven demand will have recovered by 2012.  The major economies are crashing so hard that it will take years of growth to get demand back where it was, and the big developing countries that drove demand past capacity are in worse shape than we are; they were depending on growing consumer demand in the US to drive their growth.

Third, I think it is decidedly iffy whether congress actually passes any cap and trade system with teeth.  For a cap and trade system to work, it will have to make energy more expensive at a time when incomes are declining.  This will be very, very, very unpopular.  I imagine the Democrats will try to get the Republicans to kill it for them, but they don't have much margin--one flipping Republican in the Senate and a few in the house should let them pass it.  If the Republicans are smart, they will provide three moderate Republicans in the Senate,  a few Republicans from safe seats in the House, and make the Democrats suffer the consequences of raising the price of gas and electricity.  But I doubt they'll be smart; they'll do Pelosi's dirty work for her.

Loan masters

Freedom isn't free

The rule prohibits recipients of federal money from discriminating against doctors, nurses and other health care workers who refuse to perform or assist in abortions or sterilization procedures because of their "religious beliefs or moral convictions." Its supporters included the United States Conference of Catholic Bishops and the Catholic Health Association, which represents Catholic hospitals.

In praising the Bush administration last fall, Sister Carol Keehan, president of the Catholic Health Association, said that in recent years "we have seen a variety of efforts to force Catholic and other health care providers to perform or refer for abortions and sterilizations."

But opponents of the regulation, including the American Medical Association, the National Association of Chain Drug Stores and Planned Parenthood, said it could have voided state laws requiring insurance plans to cover contraceptives and requiring hospitals to offer emergency contraception to rape victims. It could also allow drugstore employees to refuse to fill prescriptions for contraceptives, critics of the regulation have said.

Moreover, opponents of the regulation have said, the Civil Rights Act of 1964 already offers broad protection against discrimination based on religion, spelling out that an employer must make reasonable accommodations for an employee's practices and beliefs.

"Today's action by the Obama administration demonstrates that this president is not going to stand by and let women's health be placed in jeopardy," Cecile Richards, president of Planned Parenthood, said on Friday.

Rocky Mountain News: RIP

Geithner's gift

In many ways for those people who have a concern about nationalization, this announcement should put those concerns to rest.

GE cuts dividend

GDP fell <strike>3.8</strike> 6.2% in the fourth quarter

The administration predicted that the overall economy, as measured by the gross domestic product, will shrink by 1.2 percent this year but will grow by a solid 3.2 percent in 2010. That growth would be followed by even stronger increases of 4 percent in 2011, 4.6 percent in 2012 and 4.2 percent in 2013.

By contrast, the consensus of forecasters surveyed by Blue Chip Economic Indicators in February predicted that the GDP will fall by a larger 1.9 percent this year and then increase at weaker rates of 2.1 percent in 2010, 2.9 percent in 2011 and 2012 and 2.8 percent in 2013.

Nariman Behravesh, chief economist at IHS Global Insight, a major private forecasting firm, called the administration's forecasts "way too optimistic" and said it could represent a return to the overly optimistic forecasts of previous administrations confronted by surging budget deficits.

"They used to joke during the Reagan years that the highest ranking woman in the administration was Rosy Scenario," he said. "We may be seeing a return of Rosy Scenario."

If you take Ken Rogoff seriously, even that's far too optimistic; he says that the decline after a financial crisis generally lasts about two years, which means that growth won't resume until 2011.    The current deficit is stunning, but supposed to be temporary--that's presumably why Obama can ignore the deficits dedicated to stimulus and still propose hefty increases in government programs.  That's looking less likely by the day.

Obama's big-bath accounting

Lost

The guarantees that the US government has already extended to the banks in the last year, and the insufficient (though large) capital injections without government control or adequate conditionality also already given under TARP, closely mimic those given by the Japanese government in the mid-1990s to keep their major banks open without having to recognize specific failures and losses. The result then, and the emerging result now, is that the banks' top management simply burns through that cash, socializing the losses for the taxpayer, grabbing any rare gains for management payouts or shareholder dividends, and ending up still undercapitalized. Pretending that distressed assets are worth more than they actually are today for regulatory purposes persuades no one besides the regulators, and just gives the banks more taxpayer money to spend down, and more time to impose a credit crunch.

These kind of half-measures to keep banks open rather than disciplined are precisely what the Japanese Ministry of Finance engaged in from their bubble's burst in 1992 through to 1998 ...

Mental health break

Our house . . . in the middle of our street . . .

This misses the fact that, like any leveraged borrower, the homeowner has already taken substantial losses. Homeowners are no different from any other leveraged borrower. Is Cerberus on the hook for all of Chrysler's losses? Are bank shareholders liable for unlimited capital calls in the event their company loses lots of money? No. Most secured loans are non-recourse, and banks understand full well the concept of a non-recourse secured loan: if the value of the security falls below the value of the loan, they're liable to lose money.

Now legally, it's true, many US mortgages have recourse to the borrower. But it's equally true that in the real world, the overwhelming majority of mortgages are de facto non-recourse.

The standard deduction in 2009 for a married couple filing jointly is $11,400. That means you get to subtract $11,400 from your income even if you don't pay any mortgage interest at all. Now suppose that married couple bought a home for $200,000, put 20% down, and got a 6% mortgage. Then their annual interest payments are 6% of $180,000, or $10,800. They own your own home, but they get no benefit from the tax deduction: they're still better off taking the standard deduction.

Of course, if you own a home in Washington DC or in New York, you're likely to have a mortgage of much more than $180,000. But let's say that our married couple bought a $350,000 house instead, and have annual mortgage interest payments of $16,800. Then their taxable income will be reduced by $5,400 as a result of the mortgage-interest tax deduction, which means that their taxes will be reduced by about $1,900, or about $150 a month -- compared to $1,400 in mortgage interest payments. By contrast, refinancing from a 6% mortgage into a 4.5% mortgage will save them $350 in mortgage interest payments: movements in interest rates are much more important to homeowners than tax laws are.

It's true that the mortgage interest tax deduction doesn't really matter at the low end of the market, but this is as much because buyers there don't pay much in the way of income tax as it is due to the standard deduction.  But towards the middle of the range, things change because of course, the mortgage interest tax deduction is not the only potential deduction against income.  There are also things like state income taxes, childcare expenses and the dependant deduction. 

To flip Felix's formula around, this doesn't matter so much in pricey areas like DC and New York, because so few people can afford more than one or two children.  But add in state taxes and three or four children, especially if one or two are under the age of six, and the mortgage interest tax deduction starts to really matter in the house price again.  Perhaps not as much as changes in interest rates, but I don't think I claimed that the mortgage interest deduction did matter more than interest rates, and indeed, it seems mathematically impossible that it would.  But again, we aren't comparing the mortgage interest rate deduction to government controls on interest rates; we're comparing it to no deduction.

Mortgage interest deduction: a uniter or a divider?

Here's something, like trashing ag subsidies, you can get a lot of libertarians and liberals to agree on. It can be a bit disheartening to see just how little this kind of agreement amounts to when compared to the incentives of the politicans. (Iowa's extremely powerful Senators will die in the last ditch for our subsidies.) But I think this kind of wonk consensus building really matters over the medium-term. Democracy is not a mechanical cui bono machine and elite opinion can, when not coopted by the incentives of the parties, work as a countervailing force.

The power of government

Since I'm on a roll irritating the libertarians, I think I'm going to keep going.

David Brooks today writes that Obama is about begin in the world's biggest political engineering project with his economic stimulus package and other policy proposals. While liberals think that government can fix things, conservatives think that human society is way too complicated and anytime that government gets involved, it makes a right mess of things. Welfare=welfare queens.

While Brooks hopes that Obama is successful, he's worried that he won't be.

All in all, I can see why the markets are nervous and dropping. And it's also clear that we're on the cusp of the biggest political experiment of our lifetimes. If Obama is mostly successful, then the epistemological skepticism natural to conservatives will have been discredited. We will know that highly trained government experts are capable of quickly designing and executing top-down transformational change. If they mostly fail, then liberalism will suffer a grievous blow, and conservatives will be called upon to restore order and sanity.

It'll be interesting to see who's right.

The conservative model has already been discredited. The hands-off approach meant that government turned a blind eye as stock brokers sold crap, people bought cathedral ceilinged monstrosities, and greed raced on without some necessary speed bumps. Now, we are looking at nationalized banks. And the banks are begging for it. There are no libertarians on Wall Street.

I don't know if Obama is going to succeed or not. I have no idea how he's going to create the demand for rubber bands or plastic bags. But the death match between political models has already been fought. The decision has been made.

To put it in terms of economic models, the notion is that if Friedman wasn't right about everything, that must mean that Keynes was right about everything.  But of course, the universe is not obligated to follow a neat political bifurcation.  They could just as easily both be wrong.

(Or both be right--in some important ways, the disagreement between the two is exaggerated, although the disagreements between their followers often is not.  The central insight of Keynes, that prices are sticky and markets don't always clear, is, in fact, the reason that monetary policy matters.  But I digress.)

It can both be true that monetary policy will not keep the country from falling into a deep recession, and that massive fiscal stimulus will not get us out again.   It can be true that complacent regulators will let bankers get themselves into a bunch of trouble, and that capping CEO pay or nationalizing banks will not get us out again.  It can even be true that regulators have little power to keep us out of trouble when 2/3 of the world's savings is swamping our capital markets, short of very problematic measures like capital controls.

There are, clearly, central problems with "the Great Moderation", the until-recently-dominant explanation of the Great Depression, and the American banking system.  That doesn't mean that Obama can fix them.  It doesn't even mean he'll do a better job than John McCain would have, though we'll never know.  There is a very real possibility that in two or three years, America will be in worse shape than it is now--unemployment in the double digits, GDP down by same, corporate and government budgets peeling apart at the seams.  I will be curious to see whether the new armchair empiricists of the left see this as casting any doubt on their central theories, or whether they will simply argue the counterfactual.

Asymmetrical information

There really is plenty of blame to go around here. But I just don't see how more than a tiny fraction of it could possible adhere to our electrician or teacher or secretary who's decided, basically, that the financial services professionals and government regulators know what they're doing. Now could she have known better? Sure. She could have been reading Dean Baker and Paul Krugman and others. The idea that this lending was all being undertaken on a false premise that a nationwide housing bust was impossible wasn't a highly guarded secret. I was, for example, familiar with the chart above and with the analysis suggesting that a bust was, in fact, likely. And I believed that analysis. But at the same time, I write about U.S. public policy debates for a living. If there's a dissident line of thinking that, despite its general unpopularity, is popular among left-of-center economists--well, that's the kind of thing I know a lot about. But our nurse? Why would she know?

Think back to 2006. It's not as if CNBC and your paper's real estate section were rigorously probing this question. Alan Greenspan and Hank Paulson weren't saying "the economy seems dangerously vulnerable to the possibility of a nationwide decline in real estate prices, something that major financial institutions' models say is impossible but that history says is likely." And to be fair and non-partisan, it's not as if Harry Reid was saying it either.

This assumes, of course, that the primary risk is a decline in house prices.  The lenders should have known that house prices might decline, and therefore the lenders should bear the losses attached thereof.

The problem of experts

I think Roubini, Dodd and Greenspan haven't thought this one through. The U.S. isn't Sweden, and not just because our blondes aren't au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders' interests. To go further, however, and "haircut" senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.

Crunching credit

It used to be that credit-card companies lured customers with cash rewards. Now American Express Co. is paying to get rid of them. The card issuer is offering selected customers a $300 AmEx prepaid gift card if they pay off their balances and close their accounts.

The unusual move underscores how quickly conditions have deteriorated in the credit-card market. The current economic morass was provoked by spiking mortgage defaults. But as the economic crisis widens and unemployment climbs, there is growing concern that credit-card defaults will soar into the stratosphere as well.

"This is a huge paradigm shift," says Curtis Arnold, founder of CardRatings.com, a credit-card review Web site. He says he expects other large companies to follow suit with offers to entice consumers to pay off their balances, as card issuers cope with increasing defaults.

Selected members -- the company wouldn't disclose how many -- began receiving letters with the voluntary offer earlier this month, according to Molly Faust, an American Express spokeswoman. "It's a relatively small number of cardmembers who have sizeable balances and little spending and payment activity," she says.

AmEx declined to disclose the specific criteria used to determine who is eligible for the offer. However, Ms. Faust did say that it was offered only to retail credit-card holders, not corporate accounts. Customers who received the offer have until Feb. 28 to respond.

I am willing to bet that the names of the people who got this offer were selected the same way that Amex controversially recently picked people to have their credit lines cut.  They're just trying to be a little nicer about it now.  Anyone who has gotten this offer would be a fool not to take it, because it means that Amex has their eye on you.  They have always managed their credit risk extremely aggressively, and they're not going to stop just when it matters most.

I am also willing to bet that we see a whole lot more of this if Congress gives bankruptcy judges the ability to cram down mortgages in Chapter 13, as they almost certainly will.  The provision is going to attract a lot more people into bankruptcy, and those people are going to shed a lot of their unsecured (read:  credit card) debt.  I'd expect that credit card lenders are already desperately trying to weed out those most likely to enter Chapter 13.

I'm hearing a lot of discussion among friends and on finance shows about a new dilemma cash-strapped consumers are facing:  pay down credit card debt, or save cash?  The answer used to be a slam dunk:  with interest rates at 20%, you pay off the cards, and run them up again if you hit some desperate emergency.  But with credit lines being slashed, that's no longer a safe bet; you could pay off your cards, get laid off, and find yourself with no safety net.  Then again, if you don't pay off the cards, you're more likely to get your credit line cut.  No one I've talked to has a clear answer other than:  cut your spending to the bone and put half what you save thereby into a bank account, the other half into paying down your cards.  Which is why all the restaurants in DC seem unusually spacious these days--when I walk by them.  Even with no crushing credit card debt, we, too, are eating at home.

False positives

Set aside the states' right argument for now.  I'm more interested in the question of whether constitutional protections for DNA testing would, in fact, result in lots of frivolous demands and endless appeals.

If there were, literally, no restrictions at all, maybe that's what would happen.  Maybe every con with time on his hands would demand test after test just for the hell of it.  Maybe.  But if the court required even a minimal showing of cause, wouldn't frivolous requests dry up?  What's the point, after all?  If you're guilty, then you know perfectly well that DNA isn't going to get you off the hook.  So why bother?

That's why I've never found this argument very persuasive.  Prisoners who know they're guilty have little incentive to demand DNA tests.  Conversely, though, prosecutors have loads of incentive to deny DNA tests, even -- or maybe especially -- in cases where it might well prove wrongful conviction. 

The renter/owner divide

AIG goes back to the well

The American International Group, the battered insurance giant that is now effectively majority-owned by the federal government, is in talks to receive more government aid as it prepares to record another giant loss.

A.I.G. could take as much as another multi-billion dollar hit when it reports earnings during the next week. It expects to disclose losses across a wide variety of holdings, from commercial real estate to credit default swaps, the private contracts that helped lead it to the brink last fall. A loss of that magnitude could lead to another sweep of credit rating downgrades, prompting a fresh round of capital demands that could again pose a serious risk to the firm and its trading partners.

The problem of administrative costs

Anyone who thinks that the mortgage plan should have a way to determine whether the people it's trying to help sent their kids to private schools or took expensive vacations or put in marble countertops is presumably willing to spend the large sums of money it would take to find that sort of thing out about the 3-4 million people the loan modification program is designed to reach. Moreover, s/he should be willing to accept the serious intrusion into people's privacy that this sort of investigation into people's past spending would entail. And s/he should also be prepared to reach many fewer people, since presumably a number of people would not be able to document that all their spending fell within whatever guidelines we deem acceptable. 

Back in the Reagan era, I used to marvel at people who would first rail about the excessive size of government bureaucracies and then complain about, say, welfare fraud. (I was all for managing bureaucracies more effectively; it was the people who seemed to resent their very existence who puzzled me.) If you want a program to be able to distinguish the people who actually qualify for welfare from those who don't, I thought, someone needs to be going through their casefiles. And if you fire all those government bureaucrats, is it any wonder that the people who remain don't do as good a job making those distinctions?

Same here. If we base decisions about who qualifies for the loan modification program on relatively simple criteria -- income, size of loan, other debts and assets -- then we can carry it out relatively simply. But if we insist on figuring out whether each and every applicant spent too much on their vacation in the recent past, or renovated their bathroom without a government-approved reason, or violated the Guidelines on Acceptable Countertop Materials that the Department of Housing would need to draw up, or sent their kids to private schools, we should be willing to pay for the army of bureaucrats who will need to pore over people's financial histories in order to make that kind of determination.

Personally, I'm not willing to pay for any such thing. I'd rather keep my money, or else spend it on something worthwhile, like upgrading the electricity grid or providing better medical care for vets. That means that I need to accept the fact that some deserving people will not be helped, and some undeserving people will be. The best we can do is try to design the best simple way of deciding who will be eligible that we can, while accepting that any simple criterion will get things wrong, and then try to figure out which side we think we should err on.

Festina lente

If I were a Minnesotan, I think I'd be pretty angry about the way that Norm Coleman and his friends in the national Republican Party have deprived the state of half its representation in the Senate. It's now clear that Coleman can't win, but the Republicans are happy to spend a few million bucks to make Obama find two Republican votes rather than only one to break filibusters and do other things for which Senate rules impose a super-majority.

This prompts a question and a suggestion:

1. Has there been any polling on this?
2. Democrats ought to do everything they can to whip up outrage, especially in Minnesota. Start a "Minnesota Held Hostage" clock with the number of days the state has been deprived of its equal representation in the Senate by what amounts at this point to vexatious litigation.

To state the obvious, of course he'd be pretty angry.  He'd have voted for Franken.  Hell, he's angry now, and it's not his state.

To state even more obvious facts, the reason that this is in litigation is that half of Minnesotans did not vote for Franken--indeed, the measurement error being what it is, there is a decent chance that more Minnesotan voters desired Norm Coleman in the senatorial seat.

Given that, it is not good politics to get snippy at people because they're not giving up soon enough to suit you.  Moreover, I seem to recall that the Gore campaign's endless new plans for lengthy recounts polled pretty well.  As, of course, does divided government.  The state Democrats would be very, very foolish to complain that Norm Coleman needs to knock off these challenges because Obama now has to get two whole Republican votes to pass legislation and we deserve to have the whole Senate to ourselves, waaaaaaaaaaaaaaaaaaaaa!

Everything you always wanted to know about the banking bailouts but were afraid to ask

the government here seems to be coming up with ever-more-obscure forms of capital which it can inject into the banks.

Post-finance New York

Government seeks bankruptcy financing for automakers

The initial discussions call for private banks to provide the financing -- known as a debtor-in-possession, or DIP, loan -- with the government guaranteeing or backstopping the loan. In this scenario, some of the financing would be used to pay back the $17.4 billion the government lent GM and Chrysler late last year.

Treasury advisers are handling the effort and keeping GM and Chrysler informed of the steps through back-door channels, said the people familiar with the matter. The interplay between the government, auto makers and the markets is proving to be complicated.

Lenders are reluctant to commit funding to GM or Chrysler for several reasons -- mostly concern they won't get all their money back. Recently, the government advisers have begun aggressively courting big lenders Citigroup Inc. and J.P. Morgan Chase & Co. -- themselves government-aid recipients -- to participate in any bankruptcy financing, said people familiar with the matter.

The government advisers also are looking at ways the Treasury could "prime" other banks making DIP loans, so the government could be paid back before private creditors. Banks are deeply resistant to such steps. Both GM and Chrysler insist they can avoid bankruptcy, warning that option could cost the government as much as $125 billion in rescue financing. Bankruptcy experts say the sum isn't likely to be that high.

Even so, the estimated total of $40 billion in DIP financing GM and Chrysler would need would be five times as large as the previous record for such financing, which is used to fund day-to-day operations while companies sort out their debt. To fill such a large hole, Treasury's advisers are trying to corral as many as 70 lenders to participate in what is now informally called the "bank steering committee."

Law for law's sake

Washington has slowly sunk into an ocean of law, rules, and processes, most created in the past forty years--over 100 million words of binding federal statutes and rules, with more added every year and almost none ever taken away.  You may like the idea of tight legal controls over bureaucrats--no official can do anything without swimming through years of legal processes.  But inertia in government is costly.  It's hard to change priorities, or fix what doesn't work.  The legal detail perpetuates failure while also insulating Washington from democratic accountability . . .

People in Washington like the culture of rules.  All the law is a barrier to entry to outsiders.  Rules appeal to teh risk-averse side of human nature.  Rules provide almost foolproof cover--who can blame you if you're following the rule?  Rules relieve people of the need to think. . . [t]hey can relax in the caverns of rules instead of worrying about results.  People are "mightily addicted to rules", the Scottish philosopher David Hume noted.

Periodic efforts to control government with more laws just make the problem worse.  Trying to control bureaucracy usually creates more bureaucracy.  Professor Paul Light calculated that there are now as many as thirty-two layers of federal officials between the person doing the job and the person on top.  (The rule of thumb for well-run companies, by contrast, is five layers.()  Laws designed to prevent corruption have the effect of thickening the cover of bureaucracy in which corruption can thrive. . . The problem is in the premise--that law should tell people how to do things.  Making detailed laws is like pointing a car in one direction and leaving the passengers in it without the power to turn the wheel when they hit a curve.  Sooner or later the car drives off a cliff. . .

For decades we have been working feverishly to create a legal regime that minimizes official flexibility--detailed rules, and then rules to explain the rules; open-ended rights, and then litigation to keep expanding the scope of the rights.

More on housing

Sign of the Times

The small business I work for had a nightmare day yesterday. Their AMEX card is frozen. Their bank accounts are frozen. They can't do payroll (payday was last Thursday). They owe hundreds of thousands to various shady suppliers. And one character owes the store money, but his last check bounced, in what might have been a retaliation for checks that bounced in the other direction.

So I ask a veteran salesman here when was the last time he was successfully paid (without the check bouncing). He told me five weeks. He explained that he was patient because he considers himself close friends with the family the owns the businesses.

. . .

Now if a corporation missed payroll, it would be finished. But small businesses can cheat a little. And then there's the unemployment insurance issue. If I go on 'strike' I can't resume collecting NY State unemployment insurance. The company has to go under first.

So here I am, working for free at a small company that seems to be on the edge of Chapter 11, wondering if I can continue to hold on until either my next paycheck or the closing of the store.

A for effort

I'm not terribly consistent in my internal understanding of what I'm doing when I grade. In general, I tend to imagine the B as the default grade, and an A as a grade that says, "You did something considerably better than ordinary". The C means, "This is really not as good as ordinary work". Failures are either, "This is dramatically worse than the norm" or "You blew this off, and I can see that you did".

I freely confess that I tend to have a slightly different understanding of how this scaling works out based on my understanding of what a student is capable of. The more I've graded a student, the more I form an expectation about what they can do. A student who has done consistently excellent, original work for me is likely to draw a much more negative reaction from me for doing ordinary work than a student who has done fine, decent but undistinguished work consistently. If I graded blind, I suspect I'd still have some pretty good guesses over time about the identity of writers, but maybe that would help shake up some of my assumptions. I'm weighing trying to do that next year for the first time.

I'm of two minds on this.  The purpose of a grade is to show mastery (or not) of some volume of material.  Is it fair to set the bar higher for me than for someone who isn't as capable?  Or vice versa?  Is it fair to send the signal to employers that I wasn't up to scratch even when I did objectively better work than some other student?

Maybe.  After all, one of the things that employers and graduate schools are presumably looking for is ability to exert oneself consistently.  Still, doesn't this penalize students who develop a relationship with a professor?

Thought for the day

What do you mean by "New Deal"?

A tale of two theories

Do you mind if I rant a minute?

Continue reading "Do you mind if I rant a minute?" »

Damning with faint praise

I have to say I like the look of Obama's housing-bailout plan. It's quite elegant, and makes full use of the fact that Fannie and Freddie are now owned by the US government -- which means they can be forced to offer 105% loan-to-value mortgages even when the borrower isn't creditworthy at all.

Obviously, all of this comes at a cost to the US government: the figures being bandied around today range from $75 billion in the NYT to $275 billion at Bloomberg. But really nobody has a clue how much it will cost: that's entirely dependent on whether or not the plan succeeds in arresting the fall of house prices.

I especially like the idea of offering loan servicers $500 if they modify a loan before it becomes delinquent, especially if it's accompanied by an easy and streamlined mechanism for getting such modification requests into the Fannie and Freddie systems.
This plan isn't designed to directly help borrowers who are massively underwater: if your first mortgage is more than 105% of the value of your house, you're ineligible. That will help reduce some of the costs to the government, and move them over to the lenders, who now look as though they will be bailed in to bankruptcy proceedings -- a long-overdue development.

Incidentally, this plan is certain to increase the astonishingly high delinquency rates on non-agency mortgages, since it's basically designed to take most of the remotely viable non-agency mortgages and refinance them into agency mortgages, leaving only the complete and utter nuclear waste behind.

Sign of the Times

There's the rub. My company's bank loan officer has called frequently asking if we need to borrow. They are begging to lend money. For what? We could buy a nice new machine tool at a good price, but why do that when sales are falling? Put an extension on our building? Buy some failing competitor and strap oneself with debt? Unless you absolutely need a new car or a new television or a new roof, the big ticket discretionary purchases paid for by loans aren't going to be made. The loans the banks are making now are companies rolling over existing debt, not new debt. Given the "stuff" out there that is discretionary purchases, I wouldn't be at all surprised to see unemployment hit 20% before a bottom is reached.

Home sweet home

Thoughts on Geithner

Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday. Lawmakers, investors and analysts expressed dismay over the lack of specifics. Markets tanked, and fresh doubts arose about the hand now steering the country's financial policy.

Public acceptance of the plan suffered from several missteps, said sources involved in the decision-making or in close contact with those who were.

The Obama administration, they said, failed to rein in the grand expectations built for the plan on Wall Street and in Washington, concluding that they would rather disappoint the markets with vagueness than lay out a lot of details they might have to change later -- a failing they saw in the Bush administration's handling of the crisis.

The longer I think about it, the more shocked I am at how badly Treasury has handled this.  First, they refused to consult with banks or, apparently, too many Bush administration officials, because they didn't want the plan "tainted" by such seedy associations.  Since as far as I can tell these two sources have custody of, to a first approximation, 90% of the information needed to make a plan work, this was moronic.  It was a classic technocratic error, thinking that a pure planner should operate without regard to the desires of the grubby, greedy people they're supposed to regulate.

Treasury didn't just fail to deliver a plan; it actively made things worse.  At this point, the uncertainty in the markets about the uncertainty of various financial institutions is making it more likely that those institutions will have problem--no one wants to invest in a bank that might be nationalized, and no one wants to deposit substantial funds in a bank that might not.  A plan would at least have shown some committment in a specific direction, even if its details had to be changed at a later date.  Right now, Geithner has implicitly left all options on the table.

I recognize that the Obama administration is in a really difficult spot:  the two main alternatives, giving banks a ton of money to recapitalize, or nationalizing them, are both politically unpopular and possibly technically infeasible.  But they haven't even done obvious things, like making it a priority to get Geithner's undersecretaries and deputies appointed.  Moreover, they've known that this was coming for months.  That's enough time to come up with something better than a vague desire to get private investors to kick some money into the pot.  I supported Geithner's appointment enthusiastically.  But he has sorely failed at his first major project.

Sign of the times

Agricultural leaders in Thailand, the world's biggest rice exporter, are asking Vietnamese counterparts to help them stabilize the tumbling price of rice -- the latest indication of how dramatically circumstances have changed since food riots gripped the developing world a few months ago.

Industry experts aren't expecting any major price-fixing accords between the two countries, which together control roughly 45% of global rice exports. A Thai participant in the meetings, held with industry representatives in Vietnam this week, stressed the two countries are only speaking in general terms about how to keep prices from falling further from their current levels.

But he said the two sides hoped to announce some form of increased coordination at an upcoming summit of heads of state from the Association of Southeast Asian Nations later this month in Thailand. One idea already on the table is the creation of a regional rice reserve that could be used to prevent food shortages and absorb excess stocks during periods of oversupply, analysts say.

"We have to stabilize the world price," said the participant, Chookiat Ophaswongse, president of the Thai Rice Exporters Association. If not, "it's going to hurt the overall market."

Good luck.  Attempts to fix the prices of agricultural commodities at artificially high levels were one of FDR's ideas that probably prolonged the Great Depression.  In deflationary times, the last thing you want to do is keep the staple food commodity of your nation's poor at artificially high levels, even if that does help the farmers.

A living wage

Look, there have always been people who could command a wage that could support a family, and people who could not.

In the old days, the people who could not were called women. And various other names related to skin color that I will not include here. That whole notion of earning a family wage with no specialized education or skills only applied to a subset of the population, and the organizations protecting their interests worked to keep it that way.

Nowadays, white men have no special protections. If they want to buy a house and raise a family, they need to learn a trade better than Walmart clerk. And they may need to move away from depressed rural economies.

The gain is that a lot of people who never had a shot at the good jobs in the past do have that shot now. White men are competing with everyone now, and they can't coast.

They are even competing with the entire populations of China and India. Terrifying thought, but you can't get around it.

The 50s were fake, so we can't really use them as our baseline. And even that fake only applied to some people.

It's also worth remembering that companies were not only legally allowed, but expected, to pay married men more that anyone else, and that ordinary people lived much, much more modestly than they do now.  Many workers lived with other family members, or in rooming houses--the houses in television and movies from the era are, just as now, abnormally large because average-sized houses would be too small to film.  In the popular mind, every blue collar worker in 1950 was pulling down a hefty wage at GM, but union membership peaked at about a third of workers, and most of those jobs were at companies that didn't have the profits, or the freedom from competition, to support those kinds of wages.  A lot more blue collar workers were people like the mechanics and pump operators at my grandfather's gas station, who raised families on . . . the kind of money you could generate working at a gas station.

Our memories are distorted by two things:  first, the tendency of all cultures to focus on their own outliers (many fewer people work for silicon valley startups in real life than in either our entertainment, or the popular imagination), and second, the fact that the people who have written about the period are abnormally likely to have come from successful families who pushed them through an education.  Their memory of a well-appointed blue-collar childhood in a nice suburb on Dad's generous steelworker wages endures; few memories of a straggling blue-collar childhood as the child of a factory janitor do, because those kids were less likely to go to college and become people of letters.  The successful and educated are disproportionately likely to be represented in all parts of our written and spoken culture, from man on the street interviews to letters to the editor.  History really is written by the winners.

For shame

Conservatives regularly overestimate the beneficial effects of shame. Shame provokes response in the form of impulse, not long term planning. A person who is ashamed isn't going to think, "I'd better get a degree" or "I'd better get married," they're going to think in the short term about what they can do to rectify their sense of self-worth.

How do you see people--men in particular--act when they're ashamed? You rarely see them do something like get married or get a fantastic job; usually they're going to hurt or exploit someone, make them feel as low as they do--this is the lesson learned by the shamed from the shamer, regardless of the lesson the shamer thinks they're teaching the shamed.

There's something weird about the way conservatives approach social problems like out of wedlock birth or poverty, as if the people with such problems glean some kind of orgasmic pleasure for struggling for cash, or raising a child as a single parent. These things are hard enough without shame, and while I agree with Dreher and Peggy Noonan that what "you applaud, you encourage," I'm very skeptical about the idea that shame can produce productive behavior. Dreher's argument assumes that the people in question aren't already ashamed, or have failed somehow to internalize society's larger values about family. I generally find that the opposite is true, they've internalized them to a fault. It's one thing to encourage marriage through positive reinforcement, it's another entirely to punish people for being unmarried and think that has a beneficial effect on society.

Serwer is right that shame makes a hard lot harder.  But I don't think he is right about the value of shame.  Without shame, what are you left with?  It's accepting that you have no way to regulate peoples' behavior within the social network short of brute force or bribery.

More on unemployment

Did World War II end the Great Depression?

Sign of the Times

Japan's economy goes from doldrums to despair

Already, data point to further deterioration in the economy. Industrial output is expected to drop by around 20% during the first quarter, a government survey says. After tumbling by a record 35% in December, exports sank 46% from a year earlier during the first 20 days of January. In this environment, the jobless rate could climb to an all-time high of 6% or so later this year, from 4.4% in December, economists say.

What is "unemployment" she said, and washed her hands . . .

Time to short Jenny Craig?

Deal me out

The Virginia General Assembly is well known nationwide for how badly they can mess things up and make themselves public laughingstocks (abuser fees, anyone?).  Well, it appears they are at it again- on an even bigger scale- this time jeopardizing the entire $25,000,000,000 (BILLION) national auto bailout.

SB1410 doesn't look that harmful on its face.  But dive into the bill, and you will be shocked at what one "Republican" is proposing to do to the free market.  Basically, the bill requires that if an auto manufacturer decides to stop producing a line of cars, they are required to buy back all of the unsold inventory that dealers have.  This bill eliminates all risk for auto dealers- and puts the entire risk on the manufacturers.  Why would anyone want to make any business totally risk free?  This makes no sense.

So, why introduce this bill now in 2009?  That answer is easy.  Car makers just received $25,000,000,000 (BILLION) in cash from the federal government.  The point of this cash outlay was to give them time to reorganize without declaring bankruptcy (i.e. possibly eliminate some lines of under-performing brands).  So this bill is basically a money transfer from the auto makers to the auto dealers should a line of cars be done away with.  If every state did this, the entire federal auto bailout would go to car dealerships instead of the manufacturers!!

Euro-area growth falls fast

Showing your work

I wrote about this during the election, but white people are far less concerned about racism than they are about accusations of racism, because racism isn't really a part of their experience, but being accused of being racist is. So this is a pretty self-serving argument: Kling's racism isn't problematic, because it doesn't "shut down the discourse" but Walcott calling out Kling is out of line because it might hurt some delicate feelings. Note that this is a reactive form of speech policing, the sort McArdle is criticizing: I can say what I want, but you can't criticize it because it "shuts down the discourse." Oh, and criticizing Kling is "McCarthyism" and tantamount to telling all libertarians to "shut up."

I'm really less concerned with whether a person is "a racist" because I think everyone's racist. I can remember getting lectures from teachers in high school about how if we were a class of white kids, we'd know how to behave. I'm much more concerned with calling out individual actions as racist, and if you want to complain about that, well you're just shutting down the discourse.

As for my "hiding" the context of the quotation from Kling about reparations, I thought it was fairly obvious that Kling had produced a flimsy pretext simply to use the word. In fact, I explained that in a later post, and if one wants to "hide" something on the internet, one generally doesn't link to it.

Oh, Canada!

Drum and Zakaria are busy applauding us Canadians for our financial foresight. While it is true that the relative lack of leverage in the financial system was a good thing, it is also true that the Canadian economy tends to follow the course of the US economy with a 2-3 quarter lag. In short, does this (Canada's trade balance, released Tuesday, attached) look like the chart of a healthy economy? We are a leveraged play on the US and Asian economies.

Canada is now being held up as a regulatory example to us, but Canada has always been an odd duck--it was also the only major economy in the Great Depression not to have a banking crisis.  You can tell a lot of stories about why this is so, but most of them--like nationwide banking, big downpayments on mortgages, and banks keeping substantial portions of the loans they originated, are found elsewhere.  Moreover, it doesn't explain why they didn't have a banking crisis the first time around, when both their banking system and ours looked very different.  Another Canadian of my acquaintance credits some deep resistence in the Canadian soul to get-rich-quick schemes, or even get-rich-slow schemes, but I couldn't comment.

It is quite true, however, that if the American economy really tanks, it won't matter much how great the Canadian banking system is; they'll have a nasty depression just the same.  Their GDP is by now so dependent on exports, particularly to the US, that a downturn in the US means massive job losses in our neighbor to the north.

What they do indisputably have is a government in a much better position to deal with a crisis, because they've been running surpluses and paying down debt for over a decade.  If only we'd had similar prudence.

What do we mean by nationalization?

If, by nationalization, we mean that depositors get their contractual insurance and the banks get carved up and liquidated like they have been done in the past, then nationalization is the answer.

However, that is clearly not what is being discussed. We are discussing nationalization in the context of propping the presently insolvent banks. All these calls for the wiping out of the shareholders is missing the forest for the trees- the market has already wiped them out. People that loaned money to these banks need to be wiped out also, but this is not in any of the plans being discussed.

If nationalization is just a way to take control of the downsizing and ensure that equity shareholders and creditors don't profit at the expense of the taxpayer, all well and good.  If it is a way to avoid recognizing the full extent of the losses as quickly as possible, not so much.

Perhaps the thing to do is triage the banks:  identify (and certify) those that can get along without capital; liquidate and sell off the no-hopers to group one; and laying out clear steps for getting the banks in the middle group back onto solid ground.  This is approximately what FDR did, and while the certification process was jerry-rigged and probably more than occasionally wrong, the restoration of confidence in the banks that stayed open was very helpful.

It's just like a gang of white thugs are ransacking my house

Why is the stimulus bill so filled with non-stimulus while it omits real stimulus measures, such as cutting payroll taxes?

I think the answer is that it is a reparations bill, not a stimulus bill. People who pay income taxes tend to vote Republican. People who live off taxes tend to vote Democratic. To the Democrats, the Bush tax cuts were a heinous evil, comparable to Germany's violation of Belgian neutrality in World War I. Now, they are demanding reparations, with hundreds of billions of dollars to be paid into teachers unions and other members of the coalition that won the election.

Most of the bill makes no sense from a stimulus perspective. But all of it makes sense from a reparations perspective.

I mean, okay, it's not exactly nice to compare a person to the French government, but I wouldn't go so far as to call it racist.

The other heinous quotation:

Barack Obama is destroying my daughter's future. It is like sitting there watching my house ransacked by a gang of thugs.

James Wolcott snarked:

Now if Kling can't comprehend the implication of racial menace encoded in daughter-gang-thugs/home invasion, he's either fatuously clueless--too innocent for this wicked world--or weaselly disingenuous, and a drama queen either way. Did he feel the sanctity of his home was being violated when the costs of the Iraq war shot into outer space? Did he picture marauders smashing cherished mementoes when Hank Paulson introduced TARP? Anytime Obama's name and "thug" are thrown in close proximity, it's a pretty sure bet that the speaker or author intends to fan the anxiety and animosity of those who think Obama's presidency represents black grievance gloved with the iron fist of the state--and out to punish whitey.

Only, it turns out that . . . er. . . the "thugs" quote was referring to Paulson.  Kling added that he felt like those thugs had just been replaced with a new gang, which a liveblogger at Heritage trimmed down to the politically punchier version.

This is why it's a bad idea to turn the volume on the racism charges up to 11; if you're wrong, it turns out that you were self-righteously . . . slandering someone.

Oddly enough, no one in the daisy chain except our own Andrew Sullivan has been interested enough in Kling's racism to post a correction when it turned out to be mostly imaginary.

Unbanking

But as Jared Bernstein was explaining on a call with progressive bloggers earlier today, stimulus and financial system recovery go hand in hand. Bernstein described the relationship in terms of a "chain." The technical term involves something I've mentioned previously, the "velocity of money" -- the speed through which economic activity moves through the system. The idea of a stimulus plan is that the government isn't just engaging in economic activity directly, but that the beneficiaries of that activity will spur additional activity. In other words, you get money via a tax cut or a job on an infrastructure program and you use some of that money to buy groceries, creating jobs for farmers and checkout people who spend their money, etc., etc.

You want the money to circulate smoothly and efficiently from those who have it to those who need it. That doesn't mean everyone needs to spend the money instantly. But it means that when people want to park their money, those funds should come available to other people who have good business opportunities that could be exploited with the assistance of a little credit. That's where a healthy financial system comes in.

You may have heard tales from Japan's "lost decade" in which stimulus measures failed to actually get the economy moving. Part of the problem was somewhat ill-conceived and ill-executed stimulus. But perhaps a bigger issue is that the didn't actually clean up their banking system. Instead, they put it on life support. And then they used fiscal stimulus to put employment on life support. But we don't want life support, we want stimulus that actually brings us back to life. And that requires a financial rescue package. Of course it also requires a financial rescue package that works and the jury's still out as to whether that's what the administration's come up with.

This is essentially the argument made by Hoshi and Kashyap in several papers on Japan, and now us.  As long as the banking system is broken, stimulus has limited effect, because the money you inject hits the banking system and just sort of stops moving. 

We're now making many of the mistakes that Japan did.  I know, I know--I supported TARP I.  But I did so because at the time, there seemed to be a reasonable possibility that the funds could stop a liquidity crisis from turning into a solvency crisis.  But if liquidity crises go on long enough, they become solvency crises, so whatever we had then, we now have a badly crippled banking system.  More of the same isn't going to help.

We need a plan that is going to force the banks to recognize and write down their bad loans, restructure dysfunctional borrowers, shut down the banks that are too far gone, and inject substantial capital into the banks that are strong enough to pull through.  But that kind of radical action is scary.  And whether they decide to do it by nationalizing bad banks, or by injecting capital into good ones, the political cost is going to be very high.  So we get baby steps and vague promises of major leaps forward down the road.

Another political problem is that recapitalizing the banking system involves, in the intial stage, conserving capital (read: cutting credit limits), and writing down bad loans means unpopular actions like restructuring failing companies (read:  layoffs) and foreclosing on hopeless borrowers.  One of the major arguments against bank nationalization is that a government-owned bank will find it harder, not easier, to do those things.  The temptation to keep large employers on life support will be large, and every congressman will have a list of firms in their district that can't be allowed to go bust.

Doesn't this sound familiar?

the Japanese banking sector had begun the 1990s having rapidly expanded lending during the boom years of the late 1980s, even though loan demand by large firms was falling due to financial deregulation that made bond financing easier for them.12 Thus, the Japanese banks had more loans on their books than would be desired by their customers over the medium term. Hoshi and Kashyap (2005) argue that consolidation was therefore inevitable and that the government could have exploited this inevitability to lower the costs to the taxpayer by concentrating the capital injections on the better capitalized banks. Doing so would have avoided putting capital into failing institutions and would have rewarded better run banks. To the extent that reorganizations were needed they could be led by the private sector rather than the government. The recapitalization programs, however, did not realize the problem of overbanking.

Instead, the only objective that was pursued forcefully as part of the recapitalization was that
banks were required to increase their lending, especially to small and medium firms. The recapitalized banks were required to report the amount of loans to small and medium firms every six months. The FSA periodically requested the recapitalized banks to increase lending to small and medium firms.13 When some banks substantially cut back the lending to small and medium firms, the FSA started to issue business improvement orders. From 2001 to 2004, five banks received business improvement orders because they reduced lending to small and medium firms (Shinsei Bank in 2001, UFJ Holdings and Asahi Bank in 2002, Mizuho Holdings in 2003, and UFJ Holdings again in 2004). These orders required the banks to increase lending or be subject to fines.

This preference for directed lending created some high profile conflicts. Tett (2003) provides
many examples regarding the experience of Shinsei Bank, the successor to LTCB. When LTCB emerged from nationalization and was up for sale, the government insisted that all bidders promise to accept all the loans on the books that a government committee deemed to be performing. The winning bidder, an American-led consortium, determined that many of their existing customers were not profitable and should not objectively receive credit. The government contested this assessment and pressed the bank to maintain lending.1

The good news is that we're going through this cycle more rapidly than Japan--dithering faster, you might say.  The bad news is that it's hard to see how the banking system is going to be in any shape to support the stimulus unless we get a good plan much faster than is likely.

Libertarians better shut up for the next four years

Out of control

But seriously, folks

Market failure

Link of the day

Weirdest quote of the hearings

"Basically you come to us today on your bicycles after buying girl scout cookies and helping out Mother Teresa, telling us 'We're sorry, we didn't mean it, we won't do it again, trust us' . . . . I don't really have a question, but I was told that I can use my five minutes."

How do you feel?

• Clothes that don't fit, and no money to replace them
• Something broken you can't afford to fix
• Going without protein because it's too expensive
• Regularly attending events solely because they offer free food
• Having to tell friends that you can't afford to hang out with them (not "Can't go to Cancun" or "No" to a Broadway show, but "I can't meet you for a drink, because I can't afford a drink".

Poor little rich boys

Maxine Waters brings the crazy

Is Ruth Madoff psychic, or what?

The evidence is piling up that innocent-old Ruth may have known a little more than she let on. There are multiple stories that she helped keep the books, there are the timely home transfers and now this:

WSJ: Ruth Madoff, the wife of Bernard Madoff, withdrew $15.5 million from a Madoff-related brokerage firm in the weeks before Mr. Madoff's arrest, according to the Massachusetts Secretary of State. A complaint filed Wednesday by Secretary William Galvin's office said Ruth Madoff withdrew $5.5 million on Nov. 25 and $10 million on Dec. 10, according to documents from Cohmad Securities, which was co-owned by Mr. Madoff and which the Massachusetts office is investigating. Mr. Madoff was arrested Dec. 11 on allegations of perpetrating a massive Ponzi scheme.

That's not suspicious or anything.

Tracking TARP

Krugman and Barro, revisited

How to interpret an economist

I'm not sure if Larry is being disingenuous. What I'm pretty sure of, which is why I wrote my original statement, is that he probably doesn't much like the "stimulus" bill. Notice that I used the word "doubt," rather than claiming that I know. I haven't talked to Larry since 1993 or 1994. How could I claim to know what he thinks?

In response to Charlie, I wrote:

Have you noticed that we haven't heard any strong endorsement of the bill by Summers? The standard way a political appointee deals with the situation when he/she doesn't like what his/her boss is doing is to be quiet or, if asked his/her opinion, to say, "the President believes."

Responding to me, Charlie wrote:

I don't recall seeing the "the president believes quotes" from Romer and Summers either.

Take a look at the transcript of Larry Summers's appearance on "This Week" yesterday. Countless times, Larry talks about the President's wants and beliefs. When he states an opinion as his own, it's typically about the state of the economy, not the merits of the "stimulus" bill.

One sample:

There are crucial areas, support for higher education, that are things that are in the House bill that are very, very important to the president.

Another:

There are certain priorities -- education, health care, infrastructure investment -- that the president is certainly not going to want to lose sight of.

The Way of the Business Writer

Don't let the perfect be the enemy of nothing at all

I'm from the government, and I'm here to help you

The plan, which would ideally involve a mix of government and private capital, aims to stabilize the U.S. financial system by injecting capital into banks, helping to determine prices of toxic assets weighing on firms' balance sheets and stemming foreclosures.

"We believe that the policy response has to be comprehensive and forceful," Treasury Secretary Timothy Geithner said in his speech Tuesday. "Instead of catalyzing recovery, the financial system is working against recovery. And at the same time, the recession is putting greater pressure on banks. This is a dangerous dynamic, and we need to arrest it."

The Wall Street Journal adds that "critical details of the plan remained unanswered, despite the weeks of planning leading up to Tuesday's announcement."  Plan?  That's not a plan, it's a fervent wish.  No details at all on the foreclosure program, and precious few beyond platitudes about the mechanisms for dealing with toxic assets.   The only real new information is the amount:  $1 trillion total, $500 billion to start.

I don't envy Geithner his position.  But he's known this was coming for months.  I expected a little more than telling us that he wanted to spend a lot of money to help banks clean up their balance sheets.  We knew that much already.

Sign of the Times

The fine art of expectation

Putting aside the methodological worries about Weitzman's study, I was rather unnerved to figure out on the spot that the women she studied were in the generation of my students' grandparents. I wouldn't want to draw conclusions about my own life course from studies of my grandparent's generation either, especially if I had had it drummed into me both by parents and teachers that my own circumstances were entirely different from those of my grandparents, and even more if I were aware (as some of the girls are) that so soon after admitting girls as equal participants universities now have to practice affirmative action for boys in admissions to get close to equal sex-ratios. I pointed this out, and then, again on the spot, tried to figure out a way of showing that the issues, if not the figures, probably are relevant to my students nevertheless. I was pretty happy that in 5 minutes I had them convinced that at least it might be relevant. Here is a slightly refined version of the exercise.

1. Are you male, or female. (If you're not sure, just pick one, if you reject the question, sit out the exercise).
2. During your teen years did you get paid to do babysitting more than 10 times?
3. Do you anticipate having children? If not, sit this out.

Here are three kinds of parenting arrangement.
A)Father led parenting: the father spends substantially more time than the mother looking after the children and thinking about their wellbeing over the course of their childhoods
B)Mother led parenting: the mother spends substantially more time than the father looking after the children and thinking about their wellbeing over the course of their childhoods
C)Egalitarian parenting: the mother and father spend roughly the same amount of time looking after the children and thinking about their wellbeing.

4. Think just about yourself for the moment. Which of A, B, and C best characterizes your expectations for your prospective family life.
5. Now think about your FIVE best friends. Which of A, B, and C best characterizes your expectations for most of their family lives? (eg, you expect 3 or more of them to be Father-led, answer A).

I get my TA to collate the answers, and then read back the answers to the students.

I only recently added question 2), so I have less confidence about the answers to that one than the others. The one time I've done that in a large class, about 5% of the boys answered "yes", whereas about 65% of the girls did. (The point of that question is abut socialisation, which has a key role in Okin's argument).

But for 4 and 5 I get almost exactly the same numbers almost every time. Here they are.

4. Boys: A 0%; B 85%; C 15% Girls A 10%; B 25%; C 65%
5. Boys: A 0%; B 85%; C 15% Girls A 0%; B 75%; C 25%

When I present the answers to question 4 I point out that if they want to marry each other they might think about discussing these issues beforehand. When I present the answers to 5 most of the girls seem convinced that the gendered division of labour might possibly be an issue for their generation and, possibly, for them.

Even the men I know who say they might like to stay home with the kids seem to be saying it because they have absolutely no idea what's involved.  Many journalists, for example, say they'd like to stay home with the baby and have their wife support them so that they can really get some writing done.  I don't know of any female journalist who is under the impression that caring for an infant affords extensive leisure time in which to produce that novel you've been dreaming about for ten years.

Here's a question that bothers me, though:  most women I know actively participate in sacrificing their careers to care for the children.  They do this, for example, by setting standards higher than the men would, which makes them de facto the supervisor of family life.  They also sometimes do it because for most upper middle class women (not journalists, usually), mommying is a career option.  With the exception of a few parents of special needs kids, most of my school friends who are home caring for children share two characteristics:  their husbands make a good living, and they hated their jobs before they quit.  In my anecdotal sample, law firm associates are especially prone to leaving the workforce.  Caring for children can be a way of not either slogging away at an unrewarding job, or grappling with the epic failure of your original life plan.  I'm not saying that this is why all, or most, mothers stay home with their kids.  But it's definitely one reason that some do.

Triumph of Will

The deeper problem, I think, is that the textbook theory doesn't have any politics in it. In macroeconomics textbooks, government is a benevolent central planner beyond politics. It is assumed, for simplicity's sake, that governments can act in perfect compliance with theory. It is also assumed that theory is settled before coming to a policy problem, that motivated disagreement over theory is not an essential element of democratic policymaking. But of course, there is politics, which trashes hope of either consensus on or compliance with theory. And that's how we ended up with the legislative monstrosity actually under consideration in Congress. As Harvard's Robert Barro puts it:

This is probably the worst bill that has been put forward since the 1930s. I don't know what to say. I mean it's wasting a tremendous amount of money. It has some simplistic theory that I don't think will work, so I don't think the expenditure stuff is going to have the intended effect. I don't think it will expand the economy. And the tax cutting isn't really geared toward incentives. It's not really geared to lowering tax rates; it's more along the lines of throwing money at people. On both sides I think it's garbage. So in terms of balance between the two it doesn't really matter that much.

The economists can duke it out over the possibility of successful fiscal stimulus. But is there any reason based in up-to-date economic theory to believe that this trillion dollar deficit-spending bill is not, as Barro says, garbage?

Krugman is plumping for it anyway. Hard. So what can one say about Krugman? That he is a creature of extraordinary double consciousness. Perhaps more than any economist of his caliber, Krugman understands that policy is largely determined by the outcome of the public opinion shoutfest. Yet this recognition seems to have no effect on Krugman's ideas. Rather than bring inside his models disagreement over economic theory and the lack of political incentive to faithfully apply them, which would lead him to radically revise his prescriptions, Krugman leaves his textbook theory untouched and simply tries to win the shoutfest. Krugman's often unbearable stridency seems to reflect an attempt to overcome the problems of democratic disagreement and incentive compatibility through sheer force of will-as if the deep reality of politics is no match for the rhetorical gifts and gold-plated reputation of Paul Freaking Krugman. It is as if his own imagined ability to singehandedly overwhelm the opposition is part of Krugman's implicit model of how a politics-free macoeconomic theory can be made politically relevant in a time of perceived crisis, which is to say, a time of rank political opportunism.  

One can see this attitude reflected in Krugman's advice to Obama, who he says "made a big mistake" by failing to mercilessly bully his opponents into submission: 

It's time for Mr. Obama to go on the offensive. Above all, he must not shy away from pointing out that those who stand in the way of his plan, in the name of a discredited economic philosophy, are putting the nation's future at risk.

As Krugman sees it, the big problem here is Obama, who lacks Krugman's intransigent will to mercilessly crush any who would dare keep cartoon Keynesianism from coming to life.

As Ross Douthat notes, the stimulus bill we ended up with is the worst of both worlds:

In this world, centrist Senators exist to take politics as usual - whether it's tax cuts in Republican eras, or spending splurges in Democratic ones - and make it ever so slightly more fiscally responsible. So if the GOP wants, say, $500 billion in tax cuts, the country clearly needs $400 billion in tax cuts - but not a penny more! And if the Democrats want $900 billion in stimulus, then the best possible policy outcome must be ... $800 billion in stimulus! To read this Arlen Specter op-ed, justifying both the stimulus package and the cuts the "gang of moderates" have attempted to impose, is to encounter a mind incapable of thinking about policy in any terms save these: Take what the party in power wants, subtract as much money as you can without infuriating them, vote yes, and declare victory.

. . .

There's a case to be made for a stimulus that's radically different than the one we have now; there's a case to be made for a stimulus that's like the one we have now, but a great deal smaller and more targeted; and there's a case to be made for a stimulus that's absolutely gargantuan. But thanks to the centrists, we're getting the cheapskate version of the gargantuan version: They've done absolutely nothing to widen the terms of debate about what should go into the bill, and they've shaved off just enough money to reduce its effectiveness if Paul Krugman is right - but not nearly enough to make it fiscally prudent if the stimulus skeptics are right. 

This means that if the damn thing doesn't work, we won't even know whom to blame. But it wouldn't be crazy to start by blaming the centrists.

My liberal friends pay lip service to the fact that bills have to be negotiated through the political process.  And they're certainly willing to trim their suggestions to things that are politically possible, rather than, say proposing that we ban the automobile.  But this knowledge rarely penetrates as far as acknowledging that the political process sometimes means that we will get a bill that is worse than simply doing nothing, even if there is some theoretical bill out there in the ether that would be simply smokin'.

It reminds me of an apocraphyl story about an ad guy who meets a producer in a bar, and demands that said producer hire him as a writer, on the grounds that even he can write better than that drivel.

"Anyone can write better than that drivel," sighs the producer.  "Can you write a script that's better than that drivel after everyone from the extras to the wife of the studio head have all put their two cents in?"

Rather than focusing on crafting policy prescriptions that will best survive the sausage grinder, Democrats and Republicans alike spend a lot of time fantasizing about what life would be like if the other party disagreed, or stopped being a different party.  The problem is not that the bill can't win enough support--it's that intransigent [Democrats/Republicans] are refusing to rubberstamp the president's initiatives.

But if the Republican Party disappeared, the Democrats would be no closer to their goals, because the Republican Party represents real interests that would continue to exist, and would elect other people who would also oppose the bill.  And at the point when you're fantasizing about the mass disappearance of a large number of voters, I'd suggest that your political philosophy needs a rethink.  And if the stimulus package were really as 100% guaranteed to make America better off as its proponents claim, you can bet that sensible Republicans would be falling all over themselves to get on board.

The joys of unemployment (insurance)

Internet accountability

More love for Big Labor

Auto woes

Nissan Motor Co. Monday announced plans to slash more than 20,000 jobs world-wide, shift production out of Japan and seek government assistance from Japan, the U.S. and elsewhere, part of a broad new effort by the Japanese car maker to weather the economic downturn.

Japan's third-largest car maker by sales also is suspending its goal of 5% annual revenue growth until 2012, which had been a key commitment of its current management plan.

Nissan's broad, new recovery program comes as the car maker -- reeling from falling demand world-wide, a global credit crunch and a soaring yen -- swung to a net loss of ¥83.2 billion ($904.2 million) in its fiscal third quarter ended Dec. 31, sharply down from ¥132.22 billion in profit in the same period a year earlier.

For this fiscal year, the car maker forecast a net loss of ¥265 billion -- its first net loss since President and Chief Executive Carlos Ghosn took the helm in 1999 and led Nissan's revival from the brink of collapse.

Openly moving production from Japan to save money is a pretty astonishing move in a highly nationalistic business and political culture. GM's supporters had a shred of a point when they noted that the entire worldwide auto industry was in a downturn--no carmaker is immune from the need for credit to finance auto purchases. Though only a shred of a point, because the Big Three's legacy of management and labor screw-ups have left it in little shape to survive the downturn, and unless excess capacity goes somewhere, the global auto industry will continue to suffer for the indefinite future.

 Perhaps suspecting this, the government is considering putting GM and Chrysler into bankruptcy.  That's because Debtor-in-Possession financing (DIP) is the first thing that gets paid back as the company emerges from bankruptcy.  The US government is making sure it doesn't get stiffed to pay other creditors.

I expect that this is just a threat to get banks like JP Morgan and Goldman Sachs to let the government cut in line for whatever cash the automakers generate.  The government doesn't really want to hand over the automakers to a bankruptcy judge, who will, among other things, void the company's contracts with the unions and start over from a baseline of zero.  Since this is exactly what the $18 billion was supposed to prevent, it's hard to see them turning around and making it happen themselves.

The real question is what the banks do.  Even if the judge did make government debt senior to theirs, it's possible they'd be better off in a bankruptcy.  Unless things turn around soon, continuing operations just mean burning cash.  As long as they're fairly senior, they might be better off taking the money and running.

The coming of Kindle 2.0

Amazon.com Inc. is announcing a new version of its Kindle e-book reader on Monday. And, in a sign that the electronic book is gaining clout in the publishing world, Amazon is also expected to say it has acquired a new work by best-selling novelist Stephen King that will be available exclusively, at least for a time, on Kindle.

Many publishers have long feared that Amazon would persuade a major author to write for its Kindle on an exclusive basis. Although retailers such as Barnes & Noble Inc. have long published their own books, they have struggled to find distribution outside their own stores. But Amazon has already proven that it can sell as many Kindles as it can manufacture. Indeed, Amazon is working to overcome the supply problems that have plagued the device.

A lot of people in top management must have been biting their fingernails trying to decide how many of the new units to produce.  The major problem with Kindle 1.0 turned out to be too much demand; Amazon kept running out of the units, even over the crucial Christmas season.  This is the kind of problem you want to have--but if Amazon wants to decisively win the ebook wars, it needs to have (duh!) a lot of readers.

On the other hand, the market for luxury gadgets, no matter how useful and money-saving in the long run (for its target market, anyway), is not exactly robust right now.  They don't want to have a glut of the things either.

Starbucks tries to scoot downmarket

Starbucks Corp., which built a coffee empire on its premium image, wants to convince customers that its drinks aren't that expensive.

The company said Monday that it's selling discounted pairings of coffee and breakfast food for $3.95, a type of promotion long used at fast-food chains. It's the first move in an aggressive campaign to counter the widespread perception that Starbucks is the home of the $4 cup of coffee.

The Seattle-based company is training its baristas to tell customers that the average price of a Starbucks beverage is less than $3, and that 90% of Starbucks drinks cost under $4.

. . .

Few companies embody the consumer spending boom of the 1990s and 2000s like Starbucks. Mr. Schultz helped Starbucks grow from four stores to a global chain of nearly 17,000 outlets by transforming coffee from a commodity drink into what he billed as an affordable luxury. But Starbucks's sales have been in steep decline during the recessionary era of penny-pinching.

Color me skeptical that Starbucks can reverse its downward trajectory by getting baristas to pull some "Who you gonna believe--me, or your own lyin' receipt?" move.  No matter how you slice it, Starbucks has a high cost delivery model for coffee that isn't very good.  If I'm going to pay $3.50 for a barista to hand-pull me a cup of coffee, I want them to pull me a cup of good espresso, not throw some charcoal-fired mulch into an espresso machine and drown the resulting mess with milk.  Otherwise, I'll brew my own, or hop down the street to Dunkin' Donuts, where an automatic machine delivers a very drinkable cappucino.  About the only time I drink Starbucks is on long drives where they're the only game in town.

I give Starbucks full credit for revolutionizing America's coffee culture.  In a way, they are the victims of their own success--the competition that grew up in the wake of their success has taught many Americans that burned != sophisticated.  With money tight, they're looking for better value than that.

Niche marketing

SELLER Eleven Adar is SEVERELY inflating the price!!!,

February 4, 2009

By	Shanlyn858 (Cape Cod, MA USA) - See all my reviews

Buyers, make sure you are an informed consumer when purchasing items. Amazon cannot regulate the price that its sellers are listing for products. The seller Eleven Adar has a trend of severely inflating prices on items that are out of stock on Amazon. Take a look at their negative comments!!! They have done this numerous times in their history as a seller.

I was actively looking to purchase the Hamilton Beach Set n' Forget Slow cooker, model number 33967. The manufacturer lists this item for $59.99. Eleven Adar jack their price to $199.99 when they were the only seller with the item in stock. I went to Sears last night and bought it for $60!!

I am appalled that Amazon cannot or will not regulate the sellers. I wanted to pass this on to other buyers to alert them, so they won't be taken advantage of, just so a seller can make more $$. I consider this an insult and the markings of a shady business. Please beware and DO NOT purchase from Eleven Adar or any other merchant that does this.

The Slow Cooker is amazing. The construction is sturdy and appears that it will wear well.

Worst sentence ever written in journalism?

And as his aspiration of putting aside petty politics has met the necessity of winning legislative votes -- no more than two or three Senate Republicans are expected to support him, which is two or three more than did so in the House -- he has gone through a public evolution that has left him showing sharper edges when it comes to the ways of Washington.

Pioneer may exit TV business

What causes personal bankruptcy?

This paper utilizes the population of personal bankruptcy filings in the state of Delaware during 2003 and finds that household expenditures on durable consumptions, such as houses and automobiles, contribute significantly to personal bankruptcy. Adverse medical conditions also lead to personal bankruptcy filings, but other adverse events such as divorce and unemployment have marginal effects. Over-consumption makes households financially over-stretched and more susceptible to adverse events, which reconcile the strategic filing and adverse event explanations.

Good afternoon, readers

Let's start with the good news. Financial crises, even very deep ones, do not last forever. Really. In fact, negative growth episodes typically subside in just under two years. If one accepts the NBER's judgment that the recession began in December 2007, then the U.S. economy should stop contracting toward the end of 2009. Of course, if one dates the start of the real recession from September 2008, as many on Wall Street do, the case for an end in 2009 is less compelling.

On other fronts the news is similarly grim, although perhaps not out of bounds of market expectations. In the typical severe financial crisis, the real (inflation-adjusted) price of housing tends to decline 36%, with the duration of peak to trough lasting five to six years. Given that U.S. housing prices peaked at the end of 2005, this means that the bottom won't come before the end of 2010, with real housing prices falling perhaps another 8%-10% from current levels.

Equity prices tend to bottom out somewhat more quickly, taking only three and a half years from peak to trough -- dropping an average of 55% in real terms, a mark the S&P has already touched. However, given that most stock indices peaked only around mid-2007, equity prices could still take a couple more years for a sustained rebound, at least by historical benchmarks.

Turning to unemployment, where the new administration is concentrating its focus, pain seems likely to worsen for a minimum of two more years. Over past crises, the duration of the period of rising unemployment averaged nearly five years, with a mean increase in the unemployment rate of seven percentage points, which would bring the U.S. to double digits.

To me, the unemployment figures are the dark heart of the recession.  It is not, of course, fun to lose a huge chunk of your stock portfolio and your home equity, and for a small number of people who need to monetize sizeable housing and securities assets for retirement, it is close to a catastrophe.  But unemployment puts the largest number of people into the deepest trouble.  Those who are overextended are forced into bankrupty; those who aren't are subject to total financial uncertainty.  Moreover, it hits hardest those least able to plan for it--low skilled workers who have little margin in their budgets for savings.

We are not even close to the bottom of the job market, much less the return to the halcyon days of low single-digits.  And with the contraction of the credit markets, American consumers have lost the last safety line between them and disaster.

Your morning conspiracy theory

The problem with dream teams

Paul Volcker has grown increasingly frustrated over delays in setting up the economic advisory group President Barack Obama picked the former Federal Reserve chairman to lead, people familiar with the matter said.

Volcker, 81, blames Obama's National Economic Council Director Lawrence Summers for slowing down the effort to organize the panel of outside advisers, the people said. Summers isn't regularly inviting Volcker to White House meetings and hasn't shown interest in collaborating on policy or sharing potential solutions to the economic crisis, they said.

I've heard some argue that Obama would be off with one brilliant economist, rather than the five or more he's got--it would clarify the policymaking process, and cut down on the time wasted on internicene squabbles.  The problem is, which one?

Justice is served

The client class members were to receive only gift cards, not cash, in the settlement with Windsor Fashions, a clothing retailer, so Los Angeles Superior Court Judge Brett Klein thought it only fair to provide that Yorba Linda attorney Neil B. Fineman be paid his fee with "12,500 ten-dollar Windsor Fashions gift cards." (Metropolitan News-Enterprise via California Civil Justice Blog).

DTV in never-neverland

More on Burnham

The IFHS results for trends and distribution of deaths according to province are consistent with what has been reported from the scanning of press reports for civilian casualties through the Iraq Body Count project. The estimated number of deathsin the IFHS is about three times as high as that reported by the Iraq Body Count. Both sources indicate that the 2006 study by Burnham et al. considerably overestimated the number of violent deaths. For instance, to reach the 925 violent deaths per day reported by Burnham et al. for June 2005 through June 2006, as many as 87% of violent deaths would have been missed in the IFHS and more than 90% in the Iraq Body Count. This level of underreporting is highly improbable, given the internal and external consistency of the data and the much larger sample size and quality-control measures taken in the implementation of the IFHS.

A parable for modern times

A modest proposal

Productivity, and unit labor costs, rise

Wal-Mart reports that same-store sales grew 2.1% in January

1. People are cutting back on everything they don't HAVE to have
2. People are trying hard to save money on the things they do need

More trouble for Mike Harvey of the Times

Is Obama losing control of his message?

Austerity begins at home

The House Democratic Caucus spent more than $500,000 in taxpayer money over the past five years for its annual retreats at resorts in Pennsylvania and Virginia.

On Thursday, Democrats will head to the Kingsmill Resort and Spa in historic Williamsburg, Va., for the three-day planning powwow. The resort boasts multiple championship golf courses, a full-service spa and six restaurants.

ndividual lawmakers pay for most of the expenses related to retreat lodging through their campaign committees, but the Democratic Caucus subsidizes some of the costs for what aides consider "official business" -- to the tune of nearly $100,000 each year, according to a Democratic aide involved in retreat planning.
 

For instance, the caucus picks up the hefty transportation tab, as well as the thousands of dollars in expenses each year for guest speakers, food and entertainment, according to financial disbursement records.

Democratic leadership sources were reluctant to talk about any aspect of the trip, but they defended it as an important planning session for the entire country.

The Costco model

Author of Iraq body count study censured by a group he doesn't belong to

Tim,

I have read your entry and would note that the links you provided did not supply the questionnaire items but rather a simple template (as noted in the heading). The Johns Hopkins report provides only superficial information about methods and significantly more detail would be needed to determine the scientific integrity of those methods -- hence our formal request to Dr. Burhnam. The Hopkins website refers to data release but, in fact, no data were provided in response to our formal requests. Included in our request were full sampling information, full protocols regarding household selection, and full case dispositions -- Dr. Burnham explicitly refused to provide that information for review.

We do not provide public reports of the investigations but if there are other specific questions that I could answer, I would be happy to try to do so.

I also asked Losch why AAPOR considers the "template" of questions posted online to be something less than "the wording of the questions used." She replied that they "requested the survey instrument, (including consent information) and it was not provided. The template did not appear to be much beyond an outline and certainly was not the instrument in its entirety."

Still no word on why the AAPOR got involved in the first place.  But I don't see any reason to think that they're part of the scientifically illiterate and politically motivated conspiracy against Burnham et al. that the team's supporters have alleged.

Update 2  Just to be clear:  I have no reason to think that Burnham or any of the Hopkins team committed knowing fraud, as some have alleged.  I don't know that there is anything wrong with their data.  But the secrecy seems bizarre and wholly unnecessary, which makes it harder to trust their results. 

How effective are tax cuts as stimulus?

In truth, the best place to look for nonpartisan expert analysis is the Congressional Research Service. The CRS is Congress' private think tank; it's staffed with experts on every conceivable area of policy, both substantive and procedural. CRS analysts are true experts in their field, and they do a great job sifting through the academic research and highlighting the most reliable results. Congress is fiercely protective of the CRS--the CRS's memoranda to Congressmen and Senators are confidential, and, amazingly, CRS reports aren't free to the public. (OpenCRS.com usually has slightly older versions of CRS reports, which are updated frequently.)

So to cut through all the partisanship surrounding the stimulus debate, I went to the CRS reports (which my firm bizzarely pays for). The one thing that surprised me in reading over all the relevant CRS reports is that the recent evidence on tax rebates shows that they're actually quite effective as stimulus.

Will falling gas prices cut into Visa and Mastercard's earnings?

When saving becomes dissaving

Yesterday's report on consumer incomes, spending, and saving showed a sharp rise in the personal savings rate; it also showed a decline in nominal personal incomes, the third in a row, reflecting the weakening economy.

I don't know who else has made this point, but it's quite clear that we're in serious paradox of thrift territory here. Or perhaps more accurately, we're in a paradox of debt.

Consumers are pulling back because they've realized that they're too far in debt. The economy is shrinking in large part because consumers are pulling back. And the result, almost surely, is to leave household balance sheets worse than ever. I can't do this accurately until the Federal Reserve's flow of funds data have been updated, but almost without question the ratio of household debt to personal income has been rising, not falling, as consumers try to save more.

What does this mean for the stimulative effects of tax cuts, transfer payments, or any other kind of government spending?  What does it mean for the savings rate--savings could conceivably go up as a fraction of income at the same time it goes down in absolute terms. I don't know--I'm not even sure how we could know.  Has any other country ever had this level of personal debt before?

Quote of the day

"That is pretty draconian -- $500,000 is not a lot of money, particularly if there is no bonus," said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. "And you know these companies that are in trouble are not going to pay much of an annual dividend."

Wall Street jobs no longer a license to print money

President Barack Obama will unveil a series of pay curbs on Wednesday, including a strict new limit on executive salaries for companies that receive "exceptional assistance."

The rules represent the White House's attempt to ensure that financial institutions receiving government money are held accountable for spending it responsibly, an administration official said.

Under the new rules, companies that receive "exceptional assistance" from taxpayers may not pay any top executive more than $500,000 a year, an administration official said. Any additional compensation would have to be in restricted stock that will not vest until taxpayers have been repaid, the official said.

A reader writes to ask whether this is a good idea.  Won't it mean executives will leave these firms in droves?

Under ordinary circumstances, perhaps.  But executives are already leaving these firms in droves, supervised by security guards who carefully watch them clean out their desks.  The market for used investment bankers is, as they might say, extremely illiquid.

Under those circumstances, I think this is reasonable.  And while I am not particularly offended by the size of investment banking paychecks--though why they persisted in an allegedly competitive market is still something of a mystery to me--I don't think the taxpayer ought to be funding Swiss skiing chalets and Palm Beach Mansions.  Get a house in Scarsdale and take the train like everyone else.  If they don't like it . . . well, there's precious little evidence that any of them are the sole indispensible genius who can save their firm from the economic crisis, now, is there?

I do wonder what the term "executive" includes.  The people who run investment banks often make less than their star performers.  Are the traders also limited to $500K in total compensation?  Because there is actually a risk there, I think--that all the traders who are really good at their jobs will strike out on their own.  But with capital extremely tight, I'm not sure how big a risk that is.

Continue reading "Wall Street jobs no longer a license to print money" »

Nonfarm payrolls declined in January

Nonfarm private employment decreased 522,000 from December 2008 to January 2009 on a seasonally adjusted basis, according to the ADP National Employment Report^®. The estimated change of employment from November to December 2008 was revised up by 34,000, from a decline of 693,000 to a decline of 659,000.

$900 billion stimulus package runs aground

Senate Democratic leaders conceded yesterday that they do not have the votes to pass the stimulus bill as currently written and said that to gain bipartisan support, they will seek to cut provisions that would not provide an immediate boost to the economy.

This is your head, blogging

Department of non-leading indicators

Liar, liar pants on fire

A brief history of macroeconomics . . .

5. Certified macroeconomists were taken by surprise by what has happened. A lot of people saw the boulder of the housing bubble ready to roll down the mountain. Hardly anybody foresaw the financial avalanche that would ensue.

6. Certified macroeconomists were badly polarized in the early 1970's, with Chicago types essentially denying the idea of involuntary unemployment and the MIT types clinging to macroeconometric models. By the late 1970's, the arguments were over. The models had all sorts of problems, and everybody gave up on them, although people had different reasons for doing so. Methodologically, everyone agreed to work on irrelevant math probems, and substantively everyone agreed that reasonably stable money growth would lead to a reasonably stable economy.

7. We had reasonably stable money growth under Greenspan and Bernanke (at least that is what most people would have said at the time), but look what happened.

8. So now, it's back to the early 1970's, with Chicago denying reality and MIT back to thinking in terms of macroeconometric models.

History may not repeat itself, but it stutters like hell.

40% of Japanese investors think there is a risk of a US default

Forty percent of Japanese investors said there is a risk that the U.S. government will default on its debt, a survey published by Barclays Capital showed.

Almost 34 percent of the 66 respondents in the poll sent to Japanese institutional investors from Jan. 26 to Jan. 28 said there is a "significant" or "slight" risk that the U.S. will lose its AAA sovereign debt rating this year. Twenty-two percent said they were concerned about the credit risk of German government bonds. China surpassed Japan in September to become the biggest foreign holder of U.S. Treasuries.

A data gold mine

The burden of proof

All stimulus, all the time

Tyler's latest on temporary versus permanent government consumption clarifies what the confusion is over my very simple point. I don't think Tyler understands what I (and everybody else) means by government spending. I don't mean the government handing someone a rebate check; I mean the government actually, you know, buying something -- say, building a bridge.

When Tyler says

The Keynesian boost to aggregate demand arises because people consider the resulting bonds to be "net wealth" even when they are not,

the only way that makes sense is if he's thinking of a rebate check. If the government builds a bridge, the boost to aggregate demand comes not because people are "tricked" into feeling wealthier but because the government is building a bridge. The question then is how much of that direct increase in government demand is offset by a fall in private consumption because people expect their future taxes to be higher; obviously that offset is smaller if they think the bridge is a one-time expense than if they think there will be a bridge built every year. That's why temporary government spending has a bigger effect.

OK, I guess there's an alternative theory of what Tyler is talking about -- maybe he doesn't consider the wages of the bridge-builders count, that only what they do with those wages matters. But that's not the way either employment numbers or GDP are calculated: bridge construction is part of GDP.

So what Krugman is saying is this: We have two programs. Program one is people receive some money from the government. Call this program 'tax cut'. Program two is people receive some money from the government but before they receive the money they need to dig a whole and fill it back in again. Call this 'infrastructure spending'. Krugman is saying that program one is not stimulative where as program two is. I say I don't see a relevant difference between the two and Krugman has no empirical proof that there is a difference.

The madness of crowds

Damned if they do, damned if they don't

Here's the latest reason to hate credit card companies: Shop at Wal-Mart, obviously a sign of financial distress, and your credit limit gets lowered. Hallelujah!

This is from American Express, which has now decided to hunker down and simply lie about their habit of doing this.  Compare and contrast the following news accounts. When Kevin Johnson returned from his honeymoon last year he got a letter from Amex saying, "Other customers who have used their card at establishments where you recently shopped have a poor repayment history with American Express." 

This is what credit management looks like:  you try to shut off access to the poor.  Poor people have less financial cushion than wealthier people, and they are therefore much more likely to default on their debt. 

(Yes, I know, there are a lot of affluent people who live up to--and beyond--their means.  But it's easier to pull Emily and Silas out of Sidwell Friends and sell the second car than it is to send little Maria to PS 187 without shoes; 90-95% of people who declare bankruptcy are below the median income for their area.)

You can't have it both ways.  Either you want credit card companies and mortgage originators to do everything they can to keep credit risks out of their system--which means identifying people whose shopping patterns indicate financial trouble--or you want them to extend too much credit.  The sad fact is that becoming a more responsible lender is largely synonymous with discriminating against the poor.

I never bought into the notion that expanding credit was bad for poor people (though I now realize it wasn't good for the economy as a whole).  So the cutbacks make me uncomfortable and sad.  But that's one reason I can't get too mad at banks for extending the loans in the first place.

The Madoff fallout continues

The problems at Brandeis are exacerbated, said French, by the fact that "we have historically relied on gifts to support our operations more than other institutions" -- or, to put it another way, donations are a very important source of income for Brandeis, as opposed to simply being a way to boost the endowment, as they are elsewhere. Clearly Brandeis has seen a large part of its expected future donations disappear, thanks to Bernie Madoff: the promised and expected gifts didn't "ripen" in time, to use the euphemistic phrase of the philanthropic world, which means that the donor has finally dropped dead.

Neither French nor Reinharz ever quite came out and said that they needed future cashflow to replace the gifts which have been nuked by Bernie Madoff and the recession, but that was the clear message all the same. And in the absence of any other way of getting money, they've decided to start raiding their art closet, otherwise known as the Rose Art Museum.

They're still no doubt better of than Yeshiva, which lost $110 million to Madoff.  But this puts their decision to sell of the art from the Rose Museum in a different light.

Update  Daily Beast:  "Did Bernie Bankrupt Brandeis?"

How forward looking are we?

Good as gelt

The problem with bonuses

I can't believe I'm typing this but the $18 billion in bonuses paid to Wall Street executives makes the industry almost completely analogous to US automakers. Both are dependent on government largesse to create an artificial microeconomic environment mimicking a previous era - the 1970s for the Big 3 and the decade ending mid-2007 for finance. Moreover, the points of similarity extend to an unconflicted sense of entitlement that this be so.

I write business every day and I doubt that I have ever written anything more difficult and repellent to my (maybe previous) sensibilities than that. God is dead and I hate this.

Corrections and amplifications

Megan McArdle writes:

All you have to do is believe . . . - Megan McArdle: The real question, I think, is how close the permanent income hypothesis is to being true.   The basic idea is that people are forward looking, and they try to smooth their consumption over time.  So if you give them a "temporary tax cut", they save most of it, knowing that eventually they will have to give the money back. But of course, this should also be true of "temporary government spending"--if people think the money won't be there next year, they'll salt as much of the money away as possible.  This is a topic very underexplored in the various estimates of the stimulus multiplier...

No it isn't. This is a topic that economists have been exploring for fifty-five years. It is a topic that has been very thoroughly explored in all of the estimates of multipliers.

Indeed--and I see that I have been unclear.  All I meant was that I would like to see more economists talking about how consumer savings affects their current estimates of the multiplier for Obama's stimulus plan.  It seems to me that the rather extraordinary credit binge American consumers have been on for the last seven years has got to affect the knock-on effects of direct government spending--the marginal propensity to consume seems to be dropping rapidly as people focus more on their future income stream.  Perhaps my intuition is wrong, but if so, I long to have better heads than mine explain why.

Professor DeLong's misunderstanding was my fault for not being clear--the penalty of a form that is written quickly.  But I confess to being purely puzzled as to Professor Krugman's addendum:

Which is extremely interesting and informative--but it has nothing to do with the content of my post, which did not address the relative virtues of permanent and temporary spending increases or tax cuts.  I was simply interested in how much of the spending people will save to cover the future taxes needed to pay for it.

It does make me wonder, though:  if Professor Krugman believes this to be true, why isn't he making more fuss about the likely-to-be-permanent components of the stimulus package, like the new Cobra provision to pay for many of the health care costs of laid-off workers over 55?

Continue reading "Corrections and amplifications" »