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April 2008

Party of the Damned

Dan Froomkin shows us what the print Washington Post could be, if anybody working for it had any ovaries:

Party of the Damned: As the Bush presidency staggers to an end, it's hard to say who has less to brag about: the president or the journalists who cover him. So it's fitting that the last White House Correspondents' Association dinner of the Bush era -- the ultimate celebration of chumminess between the most powerful people in the world and those who are supposed to hold them accountable -- was a dispiriting, mostly humorless affair.

President Bush phoned in his appearance, uttering a few topical one-liners but leaning primarily on greatest-hits footage from previous performances -- and wrapping up with a cartoonish but crowd-pleasing "conducting" of the Marine band. Comedian Craig Ferguson essentially apologized in advance for his understated headlining performance -- a far cry from the withering diatribe delivered by Stephen Colbert two years ago.... [T]he only time he really showed teeth was to attack the no-show New York Times. "The New York Times unfortunately did not buy a table," he said. "They felt that this event 'undercuts the credibility of the press.' It's funny, you see, I thought that Jayson Blair and Judy Miller took care of that. What? . . . Did I go too far? Now let me try this: Shut the hell up, New York Times, you sanctimonious whining jerks!"...

Key members of the White House's torture-management team-- Cheney, Secretary of State Condoleezza Rice, former secretary of state Colin Powell -- along with leading torture apologists -- Attorney General Michael Mukasey, CIA Director Michael Hayden, former White House spokesman Tony Snow and current spokeswoman Dana Perino -- were fawned over as honored guests....

Watch it yourself if you dare. Here is video of the red carpet arrivals and the entire dinner. Here is the Bush performance and the Ferguson performance. Here is footage of the swampy hell that was the Bloomberg after-party.

Michael Scherer writes for Time that Bush "rose to offer C-SPAN viewers another reason to doubt political journalists' ability to be anything but cowardly suck-ups to presidential pomp. In recent years, this event has been known mainly for the fantastic performance in 2006 of Stephen Colbert, the Comedy Central host, who addressed the crowd with a withering critique of both the failures of President Bush and the media. . . . Neither the press nor the president had a rebuttal to Colbert, then or now, so he was simply not invited back and officially forgotten. Ever since, the dinner had been a far less newsworthy affair. As is tradition, the president stood to do a short stand up act, which included the retelling of an old joke about Vice President Dick Cheney watching Bush through a peephole in the Oval Office door while masturbating. Such is the state of Washington humor....

[W]hat did British actor Rupert Everett thinks about the dinner? "'Hideous,' he said flatly. 'One of the most hideous events I've ever been to.'"...

Meanwhile. . . . Mark Mazzetti writes in the New York Times: "The Justice Department has told Congress that American intelligence operatives attempting to thwart terrorist attacks can legally use interrogation methods that might otherwise be prohibited under international law. The legal interpretation, outlined in recent letters, sheds new light on the still-secret rules for interrogations by the Central Intelligence Agency. It shows that the administration is arguing that the boundaries for interrogations should be subject to some latitude, even under an executive order issued last summer that President Bush said meant that the C.I.A. would comply with international strictures against harsh treatment of detainees.

"While the Geneva Conventions prohibit 'outrages upon personal dignity,' a letter sent by the Justice Department to Congress on March 5 makes clear that the administration has not drawn a precise line in deciding which interrogation methods would violate that standard, and is reserving the right to make case-by-case judgments. 'The fact that an act is undertaken to prevent a threatened terrorist attack, rather than for the purpose of humiliation or abuse, would be relevant to a reasonable observer in measuring the outrageousness of the act,' said Brian A. Benczkowski, a deputy assistant attorney general, in the letter, which had not previously been made public. . . . Some legal experts critical of the Justice Department interpretation said the department seemed to be arguing that the prospect of thwarting a terror attack could be used to justify interrogation methods that would otherwise be illegal.

"'What they are saying is that if my intent is to defend the United States rather than to humiliate you, than I have not committed an offense,' said Scott L. Silliman, who teaches national security law at Duke University....

Legal blogger Sandy Levinson writes that there is "a certain logical paradox here: The very fact that the some US interrogator would suggest that some particular conduct is 'reasonable' in some situation would, by definition, mean that there is not 'universal' condemnation of the practice. This is especially true if one accepts the DOJ argument that 'The fact that an act is undertaken to prevent a threatened terrorist attack, rather than for the purpose of humiliation or abuse, would be relevant to a reasonable observer in measuring the outrageousness of the act.' Once one allows what might be termed 'purity of utilitarian motive' to dominate the analysis, the game is over, for there will always be those who will argue that it is worth doing practically anything to forestall any 'terrorist attack.'"

Phillip Carter blogs for "Among the more Kafkaesque arguments proffered by the Bush administration for its coercive interrogation (or torture) regime is this: Cruel, inhuman or degrading acts are not torture if they're done with good intentions."

Gitmo Watch

Jess Bravin writes in the Wall Street Journal (subscription required): "When military prosecutors enter Guantanamo's heavily guarded courtroom Monday, they can expect to face a spectacle: their former boss, in uniform, testifying against them. Col. Morris Davis, for two years the chief Guantanamo prosecutor, is expected to testify that the operation he once led has been infected with political agendas and corrupted by the Achilles' heel of military justice -- unlawful command influence. The Bush administration's military commissions plan has careered through internal disarray, administrative setbacks and legal debacles since the president announced it in November 2001, and still has yet to conduct a single trial. But Col. Davis's appearance may be the strangest twist yet. 'It's not that I'm sympathetic to the detainees or say they should get a free pass,' says Col. Davis, now director of the Air Force Judiciary. 'But I do think they are entitled to a fair trial.'"

Time for Hillary Rodham Clinton to Quit the Race

This is really embarrassing. Barack Obama needs to be the Democratic nominee.

Steve Benen writes:

Clinton, on the attack, takes to the airwaves on ‘gas-tax holiday’ - The Carpetbagger Report: It’s one thing for a good presidential candidate to embrace a bad idea. It’s worse when the candidate knows it’s a bad idea. It’s worse still when the candidate attacks her rival for failing to embrace a bad idea. And it’s the worst when the candidate feels so strongly about the bad idea that she starts running television commercials about it.

And that, unfortunately, is exactly what we have in the case of Hillary Clinton and the “gas-tax holiday.” Her campaign unveiled a new TV ad yesterday in North Carolina and Indiana attacking Obama for not supporting a temporary suspension of the 18.4-cent federal gas tax....

I don’t doubt that Clinton’s focus groups found all of this quite compelling.... But Clinton’s proposal has no merit, and would probably do nothing but boost the profits of oil companies. Clinton... no doubt knows this.... It’s rather transparent demagoguery. Worse, it’s crude and cheap demagoguery.

Harvard economist Greg Mankiw noted yesterday, “I don’t know any prominent economist who favors this McCain-Clinton proposal. More common is the reaction of a friend of mine (a veteran of the Clinton administration) who calls the idea ‘ludicrous.’”

Paul Krugman, usually a rather enthusiastic Clinton supporter, explains:

Why doesn’t cutting the gas tax this summer make sense? It’s Econ 101 tax incidence theory: if the supply of a good is more or less unresponsive to the price, the price to consumers will always rise until the quantity demanded falls to match the quantity supplied. Cut taxes, and all that happens is that the pretax price rises by the same amount. The McCain gas tax plan is a giveaway to oil companies, disguised as a gift to consumers.

Is the supply of gasoline really fixed? For this coming summer, it is. Refineries normally run flat out in the summer, the season of peak driving. Any elasticity in the supply comes earlier in the year, when refiners decide how much to put in inventories. The McCain/Clinton gas tax proposal comes too late for that. So it’s Econ 101: the tax cut really goes to the oil companies.

The Clinton twist is that she proposes paying for the revenue loss with an excess profits tax on oil companies. In one pocket, out the other. So it’s pointless, not evil. But it is pointless, and disappointing....

Good for Barack Obama for resisting this shameful pandering.

Alex Koppelman reminds me that “political campaigns are rarely about the actual merits of policy proposals.” That’s painfully true. Demagoguery works. Playing on voters’ fears and ignorance works. Confusing the public with bad ideas that sound good works. But I really don’t think Clinton wants to win this way. She’s smarter and better than cheap pandering.

Worse, all of this reinforces Obama’s argument that he’s more honest, principled, and willing to tell people the truth, even when they don’t want to hear it. Obama wants to present himself as a “different kind of politician,” and Clinton’s gas-tax attacks are making it easier for him to do so.

I’m absolutely certain that McCain and Clinton know full well this gimmick wouldn’t do anything to help consumers, and may actually make matters worse by encouraging consumption, pushing prices higher.

They know this, but are pushing the idea anyway, hoping, cynically, that it will pay political dividends anyway. What a shame.

Greg Anrig on Education Reform

Greg Anrig writes:

An Idea Whose Time Has Gone: The conservative infatuation with vouchers did contribute to one genuine accomplishment. The past thirty years have been a period of enormous innovation in American education.... In addition to charter schools, all kinds of strategies have taken root: public school choice, new approaches to standards and accountability, magnet schools, and open enrollment plans that allow low-income city kids to attend suburban public schools and participate in various curriculum-based experiments. To the extent that the threat of vouchers represented a "nuclear option" that educators would do anything to avoid, the voucher movement helped to prompt broader but less drastic reforms that offer parents and students greater educational choices.

Along the way, some success stories have emerged... strategies that combine school choice initiatives like magnet and charter schools with policies to integrate poor and middle-class students. Wake County, North Carolina, for instance, introduced a policy in 2000 mandating that no school could have more than 40 percent of its students eligible for free or reduced-price lunches. Because this program makes use of choice and incentives like magnet schools to integrate poor and middle-class kids, it avoids the political hazards of compulsory busing. So far, the results have been impressive. In 2006, 60.5 percent of low-income students in Wake County passed the high school End of Course exams, compared to 43 percent of low-income students in a nearby county of a comparable size.

Of course, the inherent limit to this idea is that many urban school districts are so uniformly poor that there are few, if any, middle-class communities with schools that low-income kids can attend. One way to get around this problem would be to amend the No Child Left Behind Act to give students in failing schools the ability to attend a school outside their own district.... [V]oucher proponents... motivated by a desire to help disadvantaged kids, and not merely an ideological urge to weaken public institutions... [should put] their prodigious energies and money behind choice programs like these that actually work.

DeLong and Eichengreen: Post-WWII Europe in the Argentine Mirror

What Barry Eichengtreen and I wrote back in 1991:

The 1930’s in Europe had seen not chronic bottlenecks but chronic deficiencies of aggregate demand. Production had fallen far below normal for the entire decade; market forces had failed to restore demand to normal levels. Circumstances during the Great Depression had been exceptional, but circumstances in the aftermath of World War II were exceptional as well. Many feared the return of the Depression.

In fact (aside from the possibility that fear of a renewed Great Depression would act as a self-fulfilling prophecy) the return of the Great Depression was a less likely possibility in the 1940’s than was generally feared. The memory of the Depression, and the greater strength and incorporation of social democratic political movements in government kept right-wing governments from adopting policies of out-and-out national deflation. The availability of the large United States market to European exports--especially with the coming of the Korean War Boom and NATO in the early 1950’s--prevented any large world aggregate demand shortfall as in the Great Depression. With the American locomotive under full steam, Western European economies were unlikely to suffer from prolonged Keynesian demand-shortfall depressions.

Nevertheless, a live possibility in the absence of the Marshall Plan was that governments would not stand aside and allow the market system to do its job. In the wake of the Great Depression, many still recalled the disastrous outcome of the laissez-faire policies then in effect. Politicians were predisposed toward intervention and regulation: no matter how damaging “government failure” might be to the economy, it had to be better than the “market failure” of the Depression. Had European political economy taken a different turn, post-World War II European recovery might have been stagnant. Governments might have been slow to dismantle wartime allocation controls, and so have severely constrained the market mechanism. In fact the Marshall Plan era saw a rapid dismantling of controls over product and factor markets in Western Europe, and the restoration of price and exchange rate stability. An alternative scenario would have seen the maintenance and expansion of wartime controls in order to guard against substantial shifts in income distribution. The late 1940’s and early 1950’s might have seen the creation in Western Europe of allocative bureaucracies to ration scarce foreign exchange, and the imposition of price controls on exportables in order to protect the living standards of urban working classes.

The likely consequences of such alternative policies for post-World war II Europe can be seen in the Argentine mirror. In response to the social and economic upheavals of the Depression, Argentina adopted demand stimulation and income redistribution. These policies were coupled with a distrust of foreign trade and capital, and an attraction to the use of controls instead of prices as allocative mechanisms. Argentina’s growth performance in the post-World War II period was very poor. Even in the 1950’s, and even relative relative to Britain, Argentine growth was slow.

Díaz Alejandro (1970) provides a standard analysis of Argentina’s post-World War II economic stagnation. According to his interpretation, the collapse of world trade in the Great Depression was a disaster of the first magnitude for an Argentina tightly integrated into the world division of labor. While Argentina continued to service its foreign debt, its trade partners took unilateral steps to shut it out of markets. The experience of the Depression justifiably undermined the nation’s commitment to free trade.

In this environment Juan Domingo Perón gained mass political support. Taxes were increased, agricultural marketing boards created, unions supported, urban real wages boosted, international trade regulated. Perón sought to generate rapid growth and to twist terms of trade against rural agriculture and redistribute wealth to urban workers who did not receive their fair share. The redistribution to urban workers and to firms that had to pay their newly increased wages required a redistribution away from exporters, agricultural oligarchs, foreigners, and entrepreneurs.

The Perónist program was not prima facie unreasonable given the memory of the Great Depression, and it produced almost half a decade of very rapid growth. Then exports fell sharply as a result of the international business cycle as the consequences of the enforced reduction in real prices of rural exportables made themselves felt. Agricultural production fell because of low prices offered by government marketing agencies. Domestic consumption rose. The rural sector found itself short of fertilizer and tractors. Squeezed between declining production and rising domestic consumption, Argentinian exports fell. By the first half of the 1950’s the real value of Argentine exports was only 60 percent of the depressed levels of the late 1930’s, and only 40 percent of 1920’s levels. Due to the twisting of terms of trade against agriculture and exportables, when the network of world trade was put back together, Argentina was by and large excluded.

The consequent foreign exchange shortage presented Perón with unattractive options. First, he could attempt to balance foreign payments by devaluing to bring imports and exports back into balance in the long run and in the short run by borrowing from abroad.29 But effective devaluation would have entailed raising the real price of imported goods and therefore cutting living standards of the urban workers who made up his political base. Foreign borrowing would have meant a betrayal of his strong nationalist position. Second, he could contract the economy, raising unemployment and reducing consumption, and expand incentives to produce for export by decontrolling agricultural prices.30 But once again this would have required a reversal of the distributional shifts that had been the central aim of his administration.

The remaining option was one of controlling and rationing imports. Not surprisingly, Perón and his advisors chose the second alternative, believing that a dash for growth and a reduction in dependence on the world economy was good for Argentina. Díaz Alejandro writes:

First priority was given to raw materials and intermediate goods imports needed to maintain existing capacity in operation. Machinery and equipment for new capacity could neither be imported nor produced domestically. A sharp decrease in the rate of real capital formation in new machinery and equipment followed. Hostility toward foreign capital, which could have provided a way out of this difficulty, aggravated the crisis...

Subsequent governments did not fully reverse these policies, for the political forces that Perón had mobilized still had to be appeased. Thus post-World War II Argentina saw foreign exchange allocated by the central government in order to, first, keep existing factories running and, second, keep home consumption high. Third and last priority under the controlled exchange régime went to imports of capital goods for investment and capacity expansion.

As a result, the early 1950’s saw a huge rise in the price of capital goods. Each percentage point of total product saved led to less than half a percentage point’s worth of investment. Díaz Alejandro found “[r]emarkably, the capital... in electricity and communications increased by a larger percentage during the depression years 1929-39 than… 1945- 55,” although the 1945–55 government boasted of encouraging industrialization. Given low and fixed agriculture prices, hence low exports, it was very expensive to sacrifice materials imports needed to keep industry running in order to import capital goods. Unable to invest, the Argentine economy stagnated.

In 1929 Argentina had appeared as rich as any large country in continental Europe. It was still as rich in 1950, when Western Europe had for the most part reattained pre-World War II levels of national product. But by 1960 Argentina was poorer than Italy and had less than two-thirds of the GDP per capita of France or West Germany. One way to think about post-World War II Argentina is that its mixed economy was poorly oriented: the government allocated goods, especially imports, among alternative uses; the controlled market redistributed income. Thus neither the private nor the public sector was used to its comparative advantage: in Western Europe market forces allocated resources--even, to a large extent, for nationalized industries--the government redistributed income, and the outcome was much more favorable.

In the absence of the Marshall Plan, might have Western Europe followed a similar trajectory? In Díaz Alejandro's estimation, four factors set the stage for Argentina’s relative decline: a politically-active and militant urban industrial working class, economic nationalism, sharp divisions between traditional elites and poorer strata, and a government used to exercising control over goods allocation that viewed the price system as a tool for redistributing wealth rather than for determining the pattern of economic activity.

From the perspective of 1947, the political economy of Western Europe would lead one to think that it was at least as vulnerable as Argentina to economic stagnation induced by populist overregulation. The war had given Europe more experience than Argentina with economic planning and rationing. Militant urban working classes calling for wealth redistribution voted in such numbers as to make Communists plausibly part of a permanent ruling political coalition in France and Italy. Economic nationalism had been nurtured by a decade and a half of Depression, autarky and war. European political parties had been divided substantially along economic class lines for a generation.

Yet post-World War II western Europe avoided this trap. After World War II Western Europe’s mixed economies built substantial redistributional systems, but they were built on top of and not as replacements for market allocations of goods and factors. Just as post-World War II Western Europe saw the avoidance of the political-economic “wars of attrition” that had put a brake on post-World War I European recovery, so post-World War II Western Europe avoided the tight web of controls that kept post-World War II Argentina from being able to adjust and grow...

Andrew Samwick on Spend-and-Borrow

He writes:

Taxing Our Way Out of a Problem: Greg Mankiw directs us to David Leonhardt's article on John McCain's chief economic advisor, Doug Holtz-Eakin.  I've known Doug for a number of years and admired his scholarship and his policy work.  It's got to be frustrating to be pushing the McCain economic agenda.  From the article, here's the crux of the problem:

In all, federal taxes now equal about 19 percent of the nation’s economic output, which is in line with the historical average. But the costs of Medicare and Medicaid, on their current path, would require that number to rise to an unmanageable 30 percent, and beyond, in coming decades.

“We as a nation cannot tax our way out of this problem,” Mr. Holtz-Eakin says. “It’s just not an option.” It is true that we cannot tax our way out of all of this problem.  But we could untax ourselves today into a bigger problem tomorrow.  As I've said before in the context of entitlement reform, all dollars matter:

If concern over tax burdens on future generations is what motivates you, then it is completely inconsistent with that motivation to pass a Medicare prescription drug bill that generates a projected unfunded obligation that is bigger than the projected unfunded obligation in Social Security. It is also completely inconsistent with that motivation to run General Fund deficits that are not balanced by later surpluses, raising the debt burden on future generations. This sort of inconsistency will doom any chance at prudent reform of any of the programs.

If I were a Republican, McCain's flunking the fiscal responsibility test is one of the many things that would make me a Democrat.

Felix Salmon Goes to the Milken Conference

He sees signs of increasing non-stupidity in the public discussion of economic policy:

Political Hacks: The Backlash: Macroeconomic discussions at the Milken Conference tend to feature a great deal of party-political Republican talking points... Steve Forbes... Paul Gigot... political speechifying and pandering to the assembled plutocrats tends to obscure any substantive points....

But when Tom Donohue, President and CEO of the US Chamber of Commerce, said this morning that "Nancy Pelosi is an agent for Chávez", he actually got booed.... The CBO's Peter Orszag, on the same panel, said that many of the free-trade types on the right were increasingly out of touch when it comes to the deep-felt anti-trade sentiments in most of the country; Donohue simply responded by saying that pro-trade proponents should work on their vocabulary.

Orszag touched on something real, not only in the nation but even at the conference. the mood... is one of pervasive worry and uncertainty. People are losing equity in their homes, they're scared of inflation, they fear the implications of a deep recession, they're more interested in not losing money than they are in making it.... [T]he kind of rah-rah rhetoric which went down well last year is increasingly sounding rather hollow. That's a good thing: it means that always-cut-taxes wing of the Republican Party is going to either moderate itself a bit or else become irrelevant. After the panel, one delegate came up to me and complained, apropos of nothing, that the panelists were "ideologues, when we're looking for objective analysis from an independent think tank"...

Washington Post Death Spiral Watch Watch: Tax Policy John-McCain-Wusses-Out 110% Edition

Why oh why can't we have a better press corps?

I have an email in my inbox from that practitioner of worthless "he said, she said" journalism, Jonathan Weisman of the Washington Post. Jonathan writes:

From: [email protected]
Subject: Hello Prof. DeLong
Date: April 29, 2008 6:56:56 AM PDT To: [email protected]

Haven't spoken to you in awhile, but I was compelled to write, seeing that you read an entire front page story on John McCain's curiously changed positions on tax policy, and out of all that, you fixated on a single word.

I find that remarkable, but I did want to thank you for reading so attentively.

Jonathan Weisman
Washington Post congressional writer
[email protected]
(202)689-9134 (cell)

What's Weisman talking about? Weisman had written:

McCain Offers Tax Policies He Once Opposed: To supporters, McCain has simply seen the light and now understands.... Said J.D. Foster, a former Bush White House and Treasury tax policy expert, now at the Heritage Foundation: "It's logical that he wouldn't be repeating the arguments he made then. We all learn from experience"...

Upon which I had snickered, commenting:

Jonathan Weisman Strikes Again!: Ah. Page A1 of the [Washington] Post. The [Washington Post's] death spiral continues.... First time I have ever seen anybody describe J.D. Foster as a tax policy "expert." Lobbyist, yes. Apparatchik, yes. Ideologue, yes. But expert? Never seen that before...

Why oh why can't we have a better press corps?

I note that Jonathan Weisman does not say a word defending his claim that the statement J.D. Foster is in any sense the view of tax policy "experts" who support McCain.

The natural questions for Weisman--that he has never tried to answer--are two:

  • If Weisman isn't willing to defend what he writes, why write it in the first place?
  • Why not go do something useful?

The natural questions for the Post management are three:

  • Why does it retain and promote a reporter who doesn't even try to tell it straight?
  • Who does it think will be reading it in five years if it doesn't try a lot harder than it is to regain its lost credibility as a news source?
  • How stupid does it think its readers are?

If Weisman felt himself allowed to say what he really believes, and said it on the record, he would presumably say something like the following about how he and his fellow reporters at the Washington Post view their jobs:

Look, I know that the overwhelming opinion of McCain-supporting tax-policy experts--people like Greg Mankiw, Andrew Samwick, and Doug Holtz-Eakin--is that tax cuts don't raise revenue, that unfunded tax cuts are bad public policy, that McCain has caved to the ideological tax-cut lobby for the duration of the campaign, and that the tax-policy experts hope to recoup the ground they have given up and restore fiscal-policy sanity to the McCain operation after the election. I know that very well. I know that McCain has wussed out 110%. But I can't report it. I can't find McCain tax-policy expert supporters willing to say it on the record. And Len Downie won't allow me to print the story without a quote high up in the article making McCain look good.

Calling J.D. Foster a tax-policy "expert," and implying that the view that McCain has seen the light is a respectable view among the broader community of tax-policy experts is misleading, but only in a very minor way. I got a lot of good stuff out in that article, and I couldn't have gotten the article printed on page A1 without calling J.D. Foster a tax-policy expert. It was a very small price to pay.

But Weisman won't say anything like that on the record. The closest thing about the culture of reporting at the Washington Post was said by Weisman's colleague Mike Allen, who once traveled to Virginia Beach to say, as Matthew Yglesias reported:

Matthew Yglesias: He Said / She Said: I went down to Norfolk to be on a panel discussion with The Washington Post's Mike Allen.... Mike had something to say on the topic of "he said, she said" journalism that provided me with some valuable perspective.... Somebody from the audience asked a question which seemed to take as its premise that there was a strict dichotomy between "factual" writing, which is what you see on news pages, and "opinion" writing, which is what you see on editorial pages.... I took some issue with that characterization. News pages, I said, aren't so much giving a "just the facts, ma'am" approach to reporting. Rather, they're trying to act as neutral arbiters between contending parties. Oftentimes this means there will be political controversy about a basically factual subject ("what's the effect of X on the deficit?") that goes unresolved by a news writer. Instead of giving us the facts, the news writer gives us a set of meta-facts -- "Joe says 'X' but Same says 'Y.'"...

People... become partisans in large part because they think the facts are partisan. When I say that the Bush Social Security plan involves a huge quantity of transition debt that risks provoking a fiscal crisis, I'm trying to state some facts, as I see them. Others who disagree are likewise trying to argue facts. We're not offering "opinions" as such....

Allen took issue with that characterization of what news writers are doing. He said that news writers are trying to present both sides' points-of-view, hence the "he said, she said" quality to it, but that they're trying to present these points-of-view in such a way so that a discerning reader can tell who's right based on reading the story.

I tried then to revise my statement of the situation. A good news reporter, on my revised view, tries to "lead a horse to water."... He seemed happier with that restatement...

On my view, misleading "he said, she said"-lead-a-horse-to-water journalism--where what is really going on is apparent only to discerning readers willing to pay a lot of time and attention and who already know a lot about the issue--is not something that any reporter should be craven enough to practice or any reader willing to pay for. Jonathan Weisman and his bosses think differently.

What I don't understand is why Jonathan Weisman thinks that what he does has some right to my approval. I don't understand that at all.

Twenty First-Century Central Banking

The problem of dealing with moral hazard in twenty first-century central banking has taken an interesting twist. Twice in the past decade the Federal Reserve has intervened in cases in which specific institutions have gotten into serious trouble--specific institutions that the Federal Reserve, or at least the New York Federal Reserve Bank (lines of authority are somewhat unclear) has concluded are too big to be allowed to fail through standard processes. The two institutions are the hedge fund Long Term Capital Management--LTCM--in 1998, and the bank Bear-Stearns in 2008.

In 1998 LTCM had suffered major losses on a mark-to-current-market basis (although its long-term prospects in the event of global financial recovery from the crisis looked correspondingly good), and appeared both illiquid and--if forced to liquidate its positions at then-current values, especially if liquidation induced significant price pressure against it--insolvent. Alan Greenspan and Peter Fisher at the New York Fed gathered all of the Federal Reserve's major creditors in a room, told them that they had a problem, and told them that they should solve it: that systemic risk would be created by an LTCM bankruptcy and liquidation and that the Fed did not want to go there. The creditors agreed to cooperate and split both the liability and the upside (with the exception of Bear Stearns, that declined), and they made LTCM an offer. The only alternative bidder was said to be Warren Buffett, who claims to have not been focused on the situation because he was fishing in Alaska. With only one potential bidder, the equity of LTCM's principals and investors was confiscated--to the dismay of LTCM's principals and investors, some of whom believe that they would have been able to get a much better split of the upside had they been allowed to play their creditors off against each other.

In 2008 Bear Stearns had suffered major losses on a mark-to-current-market basis (although its long-term prospects in the event of global financial recovery from the crisis looked correspondingly good), and appeared both illiquid and--if forced to liquidate its positions at then-current values, especially if liquidation induced significant price pressure against it--insolvent. Ben Bernanke and Tim Geithner at the New York Fed declared that systemic risk would be created by a Bear Stearns bankruptcy and liquidation, that the Fed did not want to go there, and that the only deal they would fund and support would be a deal that sold Bear Stearns to J.P. MorganChase at $2 (later raised to $10) a share, and the Federal Reserve kicked into the deal a put on Bear Stearns assets that one might speculate had a full-information liquid-market value of perhaps $3 billion. Various speakers for principals and investors in Bear Stearns protested that this effective confiscation of their equity value was unfair and inappropriate, and that a better split of the upside or at least a payment of more than $2 a share was appropriate.

We now have two precedents. If the Federal Reserve judges that a major financial institution:

  • is too big to fail in that its failure will generate systemic risk
  • has followed portfolio strategies that have produced inappropriate and excessive leverage
  • requires immediate action

then the Federal Reserve will intervene to structure and support a deal that leaves principals and investors in the offending systemic risk-creating institution with effectively zero equity. Counterparties will be rescued. Principals and investors will not--even if normal more lengthy legal and bargaining processes would give principals and investors a share of the equity value on the table.

This is not the arms-length equal-treatment impersonal-rule-of-law ideal to which a government should aspire. This does, however, seem to get the incentives about right.

Charlie Kindleberger once wrote, in Manias, Panics, and Crashes, that the key to avoiding both depression and moral hazard was for the lender-of-last-resort to always show up in a crisis but for its appearance to always be doubted until the very last moment. These two precedents suggest that the Federal Reserve is evolving a case-law-of-twenty-first-financial-crisis that is somewhat different: in a crisis the lender-of-last-resort will always show up, but investors and principals in individual institutions that need to be specially rescued will discover that the lender of last resort is not their friend.

Why Oh Why Can't We Have a Better Press Corps?

A correspondent emails me:

Gmail - [JournoList] WSJ: Newspaper Circulation Drop Sharpens: ANDREW LAVALLEE: April 29, 2008; Page B1: Most of the nation's biggest newspapers saw circulation tumble at an increased rate, a sign that the migration of readers online may be picking up speed.... [A]verage weekday circulation at 534 daily newspapers fell 3.6% for the six months ended March 31, compared with the year-earlier period.... Sunday circulation fell even more, losing 4.6% on average....

Nearly all of the 10 biggest newspapers in the U.S. posted circulation declines.... The New York Times' average weekday circulation fell 3.9% to 1.08 million. It saw an even steeper drop in Sunday circulation, which was down 9.3% to 1.48 million. "This was a decline that we planned and budgeted for," said New York Times spokeswoman Diane McNulty. The company has eliminated "bonus days," in which the Sunday paper was delivered to weekday subscribers, and has cut back on discounted and advertiser-paid distribution as it attempts to grow more-profitable circulation, she said. In that shift, she added, "We do expect to see some copy decline"...

The New York Times--between David Brooks, Tom Friedman, William Kristol, Ben Stein, Judy Miller, Elizabeth Bumiller, Larry Rohter, Michael Cooper, and a host of others, I know that I feel icky every time I pick up my New York Times and realize that my money is helping to feed them.

Perhaps the scariest person around is New York Times spokeswoman Diane McNulty, whose claim that a 9.3% decline in Sunday circulation was a decline "that we planned and budgeted for."

links for 2008-04-29

Methinks Fareed Zakaria Will Vote for Barack Obama

He writes:

Mccain Vs. Mccain | Print Article | On March 26, McCain gave a speech on foreign policy... the most radical idea put forward by a major candidate for the presidency in 25 years. Yet almost no one noticed... McCain proposed that the United States expel Russia from the G8.... McCain also proposed that the United States should expand the G8 by taking in India and Brazil--but pointedly excluded China from the councils of power.

We have spent months debating Barack Obama's suggestion that he might, under some circumstances, meet with Iranians and Venezuelans. It is a sign of what is wrong with the foreign-policy debate that this idea is treated as a revolution in U.S. policy while McCain's proposal has barely registered. What McCain has announced is momentous--that the United States should adopt a policy of active exclusion and hostility toward two major global powers. It would reverse a decades-old bipartisan American policy of integrating these two countries into the global order... would alienate many countries in Europe and Asia who would see it as an attempt by Washington to begin a new cold war.

I write this with sadness because I greatly admire John McCain, a man of intelligence, honor and enormous personal and political courage.... McCain has turned into a foreign-policy schizophrenic.... His speech reads like it was written by two very different people, each one given an allotment of a few paragraphs on every topic. The neoconservative vision within the speech is essentially an affirmation of ideology. Not only does it declare war on Russia and China, it places the United States in active opposition to all nondemocracies.... What would be the gain from so alienating two great powers? How would the League of Democracies fight terrorism while excluding countries like Jordan, Morocco, Egypt and Singapore? What would be the gain to the average American to lessen our influence with Saudi Arabia...?

The single most important security problem that the United States faces is securing loose nuclear materials. A terrorist group can pose an existential threat to the global order only by getting hold of such material. We also have an interest in stopping proliferation, particularly by rogue regimes like Iran and North Korea. To achieve both of these core objectives--which would make American safe and the world more secure—--need Russian cooperation. How fulsome is that likely to be if we gratuitously initiate hostilities with Moscow? Dissing dictators might make for a stirring speech, but ordinary Americans will have to live with the complications after the applause dies down.

To reorder the G8 without China would be particularly bizarre. The G8 was created to help coordinate problems of the emerging global economy....

McCain appears to think that he can magically unite the two main strands in the Republican foreign-policy establishment. But he can't.... We have watched an American president unable to choose between his ideologically driven vice president and his pragmatic secretary of State--and the result was the catastrophe of George W. Bush's first term...

Did Hedge Funds Help Stabilize the Mortgage Market? II

The intelligent and thoughtful Felix Salmon answers "no" to the question: Did Hedge Funds Help Stabilize the Mortgage Market?

His answer, if I am interpreting it right, is that hedge funds betting that mortgage-backed securities were overpriced did not help correct the excesses of irrational exuberant because there were not enough of them: not enough hedge funds, not enough investors to capitalize them, not enough derivatives to make deep pools for them toswin in. Thus hedge fund portfolio managers who went short MBS, Salmon argues, made fortunes to themselves, their bosses, and their investors, but did little to push MBS prices--and thus the incentives to make dodgy subprime loans-- to where they always should have been.

I think that Felix may be wrong because of one of the peculiar things about financial as opposed to other markets. In most markets--the one in which I am participating at the moment, for example, the market for bagels on the Q level of the Johns Hopkins University Library--buyers and sellers know what their valuations are. I know that after the red-eye my valuation of a whole-wheat bagels with a triple helping of cream cheese on it is well-nigh infinite. I compare the price to my stomach-driven valuation. I buy.

But finance is different. If your valuation is different from--say it is greater than--the valuation of smart people who know more than you do, you should not buy. You should change your valuation. In a normal situation you can read some but not necessarily a lot of information about what SPWKMtYD think off of the current market price. In this context, extra markets--options markets, other derivatives markets, et cetera--are potentially valuable as additional channels of information about what the smart, or at least the technically sophisticated, money is thinking.

This was Sandy Grossman's argument about 1987: that if portfolio insurance had been an actual market-traded option rather than a synthetic option synthesized by a dynamic trading strategy, peple would have understood the shape of the demand curve. I think his argument is a strong one. And it seems quite likely to me that it applies in this case as well.

Doug Henwood on Naomi Klein

Doug writes, apropos of Naomi Klein:

History, but not exactly a secret: As is often the case with arguments organized around a conceit, Klein works hard to squeeze events into her model’s form. There’s the problem mentioned above—that Cameron and Pinochet cannot explain Ronald Reagan’s 59-41 victory over Walter Mondale in 1984. But there are also problems with many of Klein’s case studies.

In her chapter on post-apartheid South Africa, Klein notes how the hope generated by the ANC’s taking power was dashed by the orthodox economic policy the party pursued once in power. She explains that the country was “outnegotiated” by the World Bank and IMF. That is not how many on the South African left see the problem. Their analysis is that the ANC was never anti-capitalist, and was quite eager to join the world system and get its own piece of the action. As no less than Mandela himself put it: “The ANC has never...advocated a revolutionary change in the economic structure of the country, nor has it...ever condemned capitalist society.”

She also asserts that Israel is in the midst of a Chinese-style boom, which has been occurring because, not in spite of, the country’s constant state of war. The boom, she asserts, is being driven by the production and export of military and surveillance equipment. But in fact Israel’s economy isn’t booming, the military share of GDP is way down from its 1970s peaks and has been flat in recent years, and arms represent only a fraction of Israeli exports. Israel’s per capita GDP has been growing at about a quarter of the Chinese rate over the last couple of years; over the last seven years, it’s more like a tenth the Chinese rate. Electronics, including military–surveillance goods, have been declining as a share of Israeli exports, while that of drugs and chemicals has been rising. Israel’s share of the world’s arms trade is just over 1%, behind Sweden’s.

For Klein, the invasion of Iraq wasn’t a geopolitical adventure so much as an economically rational attempt to complete the Chicago-school counterrevolution that began in Chile in 1973: to bring the “Friedmanite” model to the Middle East. “The ‘fiasco’ of Iraq is one created by a careful and faithful application of unrestrained Chicago School ideology.” It was, in a phrase she likes, “Friedmanite to the core.” Among the problems with this reading are that things haven’t worked out as planned—Iraq barely has an economy to impose any policy on, though privatization decrees were certainly issued—and that Friedman himself opposed the invasion of Iraq. He told the Wall Street Journal’s Tunku Varadarajan in July 2006: “What's really killed the Republican Party isn't spending, it's Iraq. As it happens, I was opposed to going into Iraq from the beginning. I think it was a mistake, for the simple reason that I do not believe the United States of America ought to be involved in aggression.”


Klein’s use of a one-dimensional caricature of Friedman as an all-purpose whipping boy may play to the choir, but he deserves more serious attention than this. His economics was in many ways wrong and vile, but over the course of a fifty-year career, he helped reshape not only his discipline, but the way politicians and regular people think and talk about the economy. He was an extremely effective popular writer; if only the left could have produced a book as persuasive as Capitalism and Freedom, the world might be a better place. (Yes, yes, his argument was nicely aligned with the needs of capital in the 1970s, but on the other hand, capital also needed some degree of popular assent, which Friedman helped produce—and, on the third hand, polemic doesn’t count for nothing, and material interest isn’t everything.)

One reason that Friedman became popular both within his own profession and in the larger world was that there were real economic problems in the 1970s. In the richer countries, Keynesian/welfare-state capitalism was in crisis because of stagflation. According to the economic consensus of the time, weak growth was supposed to mean low inflation—but weak growth coexisted with persistently high inflation throughout the 1970s. Friedman offered an explanation for that: monetary stimulus beyond a certain point results in inflation, not additional growth. Growth was being held back by unions and regulations, which were interfering with the magic self-adjusting powers of the market. The solution was tight money and deregulation. It worked, at least for a while, on its own terms, though at great human cost.

But there’s a radical way of expressing the insights of Friedman and the others who came to power and influence in the late 1970s. Capitalism simply cannot live with low unemployment rates. Workers gain confidence, resist the direction of the boss, and wages are forced up. Add to that a welfare state, which cushions workers against the risk of job loss, and things are even worse from the bosses’ point of view. Their plight was evident in the depressed profit rates of the leisure-suit decade.

Sure enough, the application of the Friedman agenda raised profit rates and ended the great inflation—though it put the working class into a semipermanent state of anxiety, which was part of the point. That does suggest a permanent shock strategy is part of the system’s normal operating procedure, not an extraordinary event.

Limits and beyond

An honest evaluation of this history would have to recognize that the Keynesian model in the northern hemisphere had reached an impasse in the 1970s. Either things had to break in the Friedmanite direction or a more anticapitalist direction. And in the southern hemisphere, import substitution was running into similar problems: rising inflation and low levels of productivity. Many governments borrowed heavily abroad in an attempt to keep things going, laying the groundwork for the debt crisis of the 1980s. Obviously Friedman, Pinochet, and Reagan do not represent the full range of possibilities, but something had to give, and the left worldwide was too weak to win the battle.

Though the analysis may be problematic, Klein’s closing chapter does inspire hope even in a skeptical reader. Shocks wear off, and some of the most inspiring agitation is coming from the region that suffered some of the worst abuses of the 1970s and 1980s, Latin America. The word “socialism” is even being dusted off in Venezuela and Bolivia. But the emphasis on shock as the organizing principle of the book even constrains the inspiration. Those recovering from shock, whether in the Southern Cone or in New Orleans, see themselves as “repair people, taking what’s there and fixing it, reinforcing it, making it better and more equal. Most of all, they are building in resistance—for when the next shock hits.” These are the concluding words of the book. Is this really all we can do? Tinker while the weather’s fair, and get ready to duck and cover on a moment’s notice?

The Subprime Market and Derivatives Once Again...

A correspondent makes three points:

  • First, Moody's response to requests to rate highly complex structured mortgage derivatives should have been: "We don't have enough historical data on securities like this in a housing price environment where rent-versus-buy ratios are this low. We cannot rate them to our usual standards."
  • Second, if you are collecting a fee for rating things, and if your fee is based on your past reputation for providing good ratings based on long-term historical data, and if you use the same classification scheme to make ratings that are not based on sufficient historical data--then you do have a problem.
  • Third, the fact that there was an ABX index and thus an easy way for people to bet that the mortage-backed securities market would crash probably cut short the bubble--the true hedge funds were stabilizing speculators; the destabilizing speculators were (i) the funds that were long CDOs and (ii) the banks and other issuers who retained the CDOs because their portfolio managers believed their marketeers. A world without derivatives but with mortgage-backed securities would probably be a world in which we have a bigger problem than we have now.

This third point is very much Sandy Grossman's point about the 1987 crash: that the problem with "portfolio insurance" was that it was a trading strategy rather than a derivative security traded by a market, and so nobody knew how large the demand for it was, and so those planning to implement the trading strategy in a market downturn had no way of assessing how expensive implementing it was going to be. On Black Monday everybody found out.

Roger Lowenstein on the Subprime Blowup

Roger Lowenstein almost makes me sorry for Moody's.

First: God! What a lousy lead!

Moody's - Credit Rating - Mortgages - Investments - Subprime Mortgages: In 1996, Thomas Friedman, the New York Times columnist, remarked on “The NewsHour With Jim Lehrer” that there were two superpowers in the world — the United States and Moody’s bond-rating service — and it was sometimes unclear which was more powerful. Moody’s was then a private company that rated corporate bonds, but it was, already, spreading its wings into the exotic business of rating securities backed by pools of residential mortgages...

I find it hard to imagine how anybody could think that this is an informative way to begin an article.

The body of Lowenstein's article is pretty good:

[S]uppose the security had a rating. If it were rated triple-A by a firm like Moody’s, then the investor... wouldn’t need to know what properties were in the pool, only that the pool was triple-A — it was just as safe, in theory, as other triple-A securities. Over the last decade, Moody’s and its two principal competitors, Standard & Poor’s and Fitch, played this game to perfection — putting what amounted to gold seals on mortgage securities that investors swept up with increasing élan.... By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and — their capital thus replenished — wrote new loans at a much quicker pace....

But who was evaluating these securities? Who was passing judgment on the quality of the mortgages, on the equity behind them and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating. Thus the agencies became the de facto watchdog over the mortgage industry....

Moody’s and S&P... they reject the notion that they should have been more vigilant. Instead, they lay the blame on the mortgage holders who turned out to be deadbeats, many of whom lied to obtain their loans.... Moody’s recently was willing to walk me through an actual mortgage-backed security step by step. I was led down a carpeted hallway to a well-appointed conference room to meet with three specialists in mortgage-backed paper... the case they showed me, which they masked with the name “Subprime XYZ,” was a pool of.... All the mortgages in the pool were subprime.... In an earlier era, such people would have been restricted from borrowing more than 75 percent or so of the value of their homes, but during the great bubble, no such limits applied.

Moody’s did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided.... “We aren’t loan officers,” Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody’s, told me. “Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?” The loans in Subprime XYZ were issued in early spring 2006.... The investment bank provided an enormous spreadsheet chock with data on the borrowers’ credit histories and much else that might, at very least, have given Moody’s pause. Three-quarters of the borrowers had adjustable-rate mortgages, or ARMs... 43 percent... did not provide written verification of their incomes... 12 percent of the mortgages were for properties in Southern California, including a half-percent in a single ZIP code, in Riverside.... 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences... all of the ARM loans in the pool were first mortgages (as distinct from, say, home-equity loans). Nearly half of the borrowers, however, took out a simultaneous second loan. Most often, their two loans added up to all of their property’s presumed resale value....

[T]he Moody’s analyst had only a single day to process the credit data from the bank. The analyst wasn’t evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them.... [T]he S.P.V. would float 12 classes of bonds, from triple-A to a lowly Ba1.... It was this segregation of payments that protected the bonds at the top of the structure and enabled Moody’s to classify them as triple-A....

However elegant its models, forecasting the behavior of 2,393 mortgage holders is an uncertain business. “Everyone assumed the credit agencies knew what they were doing,” says Joseph Mason, a credit expert at Drexel University.... Mortgage-backed securities like those in Subprime XYZ were not the terminus... were, in fact, building blocks for even more esoteric vehicles known as collateralized debt obligations, or C.D.O.’s.... Miscalculations that were damaging at the level of Subprime XYZ were devastating at the C.D.O. level....

When a bank proposes a rating structure on a pool of debt, the rating agency will insist on a cushion of extra capital, known as an “enhancement.” The bank inevitably lobbies for a thin cushion (the thinner the capitalization, the fatter the bank’s profits).... [I]n structured finance, the agencies face pressures that did not exist when John Moody was rating railroads. On the traditional side of the business, Moody’s has thousands of clients (virtually every corporation and municipality that sells bonds). No one of them has much clout. But in structured finance, a handful of banks return again and again, paying much bigger fees. A deal the size of XYZ can bring Moody’s $200,000 and more for complicated deals. And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-’90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as “ratings shopping.”...

[T]he analyst forecast losses for XYZ at only 4.9 percent of the underlying mortgage pool. Since even the lowest-rated bonds in XYZ would be covered up to a loss level of 7.25 percent, the bonds seemed safe. XYZ now became the responsibility of a Moody’s team that monitors securities and changes the ratings if need be.... [A] sliver of folks in XYZ fell behind within 90 days of signing their papers. After six months, an alarming 6 percent of the mortgages were seriously delinquent.... By the spring of 2007, 13 percent of Subprime XYZ was delinquent — and it was worsening by the month.... Poring over the data, Moody’s discovered that the size of people’s first mortgages was no longer a good predictor of whether they would default; rather, it was the size of their first and second loans — that is, their total debt — combined... credit scores, long a mainstay of its analyses, had not proved to be a “strong predictor” of defaults this time.... Amy Tobey, leader of the team that monitored XYZ, told me, “It seems there was a shift in mentality; people are treating homes as investment assets.” Indeed. And homeowners without equity were making what economists call a rational choice; they were abandoning properties rather than make payments on them.... By early this year, when I met with Moody’s, an astonishing 27 percent of the mortgage holders in Subprime XYZ were delinquent. Losses on the pool were now estimated at 14 percent to 16 percent — three times the original estimate. Seemingly high-quality bonds rated A3 by Moody’s had been downgraded five notches to Ba2....

Many of the lower-rated bonds issued by XYZ, and by mortgage pools like it, were purchased by C.D.O.’s, the second-order mortgage vehicles, which were eager to buy lower-rated mortgage paper because it paid a higher yield.... In 2006 and 2007, the banks created more than $200 billion of C.D.O.’s backed by lower-rated mortgage paper. Moody’s assigned a different team to rate C.D.O.’s. This team knew far less about the underlying mortgages than did the committee that evaluated Subprime XYZ.... [A]gencies rate pools with assets that are perpetually shifting. They base their ratings on an extensive set of guidelines or covenants that limit the C.D.O. manager’s discretion.

Late in 2006, Moody’s rated a C.D.O. with $750 million worth of securities. The covenants, which act as a template, restricted the C.D.O. to, at most, an 80 percent exposure to subprime assets, and many other such conditions.... Moody’s rated three-quarters of this C.D.O.’s bonds triple-A.... Moody’s had underestimated the extent to which underwriting standards had weakened everywhere. When one mortgage bond failed, the odds were that others would, too. Moody’s estimated that this C.D.O. could potentially incur losses of 2 percent. It has since revised its estimate to 27 percent.... A triple-A layer of bonds has been downgraded 16 notches, all the way to B....

However, the conclusion is very, very weak indeed:

[I]f the Fed or other regulators wanted to restrict what sorts of bonds could be owned by banks, or by pension funds or by anyone else in need of protection, they would have to do it themselves — not farm the job out to Moody’s.... Moody’s itself... like S&P, embraces the idea that investors should not “rely” on ratings for buy-and-sell decisions. This leaves an awkward question, with respect to insanely complex structured securities: What can they rely on? The agencies seem utterly too involved to serve as a neutral arbiter, and the banks are sure to invent new and equally hard-to-assess vehicles in the future. Vickie Tillman, the executive vice president of S&P, told Congress last fall that in addition to the housing slump, “ahistorical behavorial modes” by homeowners were to blame for the wave of downgrades. She cited S&P’s data going back to the 1970s, as if consumers were at fault for not living up to the past. The real problem is that the agencies’ mathematical formulas look backward while life is lived forward. That is unlikely to change.

The problem is not that the rating agencies' formulas look backward while life is lived forward. Rating agencies' business is to look backward: to say that this bond looks, historically, like that class of bonds which have in the past defaulted at such-and-such a rate. The proper business of investment is to take the rating agencies' work as a guide and ask two of the three standard questions:

  • What is there in the situation that could make things different this time--that could generate "ahistorical behavioral modes"?
  • How much of the risk that things are different this time are we willing to bear?

And then there is the third standard question:

  • If this is such a good deal for me to buy it at this price, why is the seller selling--why isn't it a equally good deal for the seller to hold on to it?

Without satisfactory answers to these three questions, you are not investing: you are gambling in Las Vegas and you are not the house--you are, indeed, on a blind date with destiny and she has just ordered the lobster.

Lowenstein's lament in his last paragraph is implicitly a demand that investors not only not have to have answers to these three standard questions, but that they not even be expected to ask them--that investors find somebody else to "rely" on in the cases of "insanely complex structured securities" and of "new and equally hard-to-assess vehicles in the future" that "banks are sure to invent," somebody else who can predict the future. That seems completely wrongheaded. If you truly do not want to ask the three standard questions and evaluate credit risk you should be in U.S. Treasuries (and even there you have to assess inflation risk and, unless you are planning to hold to maturity, monetary policy risk). And if you want higher yields than Treasuries offer--well, then you are back to asking your three standard questions again.

In my view, there seem to be six problems here, rather different than one would think from reading Lowenstein's last paragraphs:

  • First, the problem of private organizations where the higher-ups let their CFOs and their subordinates game them by letting them say "it's triple A" when they didn't have answers to any of the three standard questions. This seems to be a problem for shareholders and trustees to deal with.
  • Second, the problem of local government officials who were reaching for yield and saying "it's all in triple-A." This seems to be a problem for voters to deal with, or perhaps it's time to require that local governments use the Treasury as some form of fiscal agent.
  • Third, the problem of highly-leveraged large financial firms where the traders and portfolio managers asked the three standard questions with respect to CDOs and went ahead otherwise--either because they misjudged the risks, because they correctly concluded that the risks were acceptable but this time got caught, or because they correctly assessed the risks but indulged in moral hazard while thinking that they would have collected their bonuses and moved on by the time the thing blew up. This is a much more serious problem--but it has little to do with the rating agencies.
  • Fourth, the problem of the systemic risk--the fact that millions of jobs are now at risk--because of the fallout from problem three. The Fed and the Treasury are now trying to deal with this problem.
  • Fifth, the problem that a good many people who could afford to pay their mortgages and stay in their homes will not be able to do so because of crisis risk and default premia loaded onto their mortgage payments--a problem that Frank and Dodd are trying to deal with, that Obama and Clinton would deal with, and that McCain is trying to ignore.


  • Sixth, the problem that bond salesmen throughout the world have been deflecting customers' attempts to ask for answers to the three standard questions by saying, "it's triple A! And it offers you a higher yield than other triple A!" and that the rating agencies have been too eager to increase their business by making the fine print in their descriptions of what they do even finer.

Lowenstein's article is written as if problem six is in some sense the problem. And this seems to me to be badly misleading.

Helium Mines

My problem--actually one of my many problems, but that's a long story--is that I don't understand where our supply of helium comes from. How is there helium trapped in the earth's crust that we can mine? Is it all from the decay of uranium?

Ah. Wikipedia comes through once again:

Helium - Wikipedia, the free encyclopedia: After an oil drilling operation in 1903 in Dexter, Kansas, U.S. produced a gas geyser that would not burn, Kansas state geologist Erasmus Haworth collected samples of the escaping gas and took them back to the University of Kansas at Lawrence where, with the help of chemists Hamilton Cady and David McFarland, he discovered that... 1.84% of the gas sample was helium. Far from being a rare element, helium was present in vast quantities under the American Great Plains, available for extraction from natural gas. This put the United States in an excellent position to become the world's leading supplier of helium.... World War I... 200 thousand cubic feet (5,700 m3) of 92% helium was produced in the program even though only a few cubic feet (less than 100 liters) of the gas had previously been obtained... the world's first helium-filled airship, the U.S. Navy's C-7, which flew its maiden voyage from Hampton Roads, Virginia to Bolling Field in Washington, D.C. on 1 December 1921.... National Helium Reserve in 1925 at Amarillo, Texas with the goal of supplying military airships in time of war and commercial airships in peacetime. Due to a US military embargo against Germany that restricted helium supplies, the Hindenburg was forced to use hydrogen... the reserve was expanded in the 1950s to ensure a supply of liquid helium as a coolant....

By 1995, a billion cubic metres of the gas had been collected... "Helium Privatization Act of 1996."...

For many years the United States produced over 90% of commercially usable helium in the world. Extraction plants created in Canada, Poland, Russia, and other nations produced the remaining helium. In the mid 1990s, A new plant in Arzew, Algeria producing 600 million cubic feet (1.7×107 m3) came on stream, with enough production to cover all of Europe's demand. Subsequently, in 2004–2006 two additional plants, one in Ras Laffen, Qatar and the other in Skikda, Algeria were built, but as of early 2007, Ras Laffen is functioning at 50%, and Skikda has yet to start up. Algeria quickly became the second leading producer of helium....

Nearly all helium on Earth is a result of radioactive decay. The decay product is primarily found in minerals of uranium and thorium, including cleveites, pitchblende, carnotite and monazite, because they emit alpha particles, which consist of helium nuclei (He2+) to which electrons readily combine. In this way an estimated 3.4 litres of helium per year are generated per cubic kilometer of the Earth's crust....

The world's helium supply may be in danger, according to Washington University in St. Louis chemist Lee Sobotka. The largest reserve is in Texas and would run out in eight years if consumed at the current pace.... [H]elium is extracted by fractional distillation from natural gas, which contains up to 7% helium.... 2005, approximately one hundred and sixty million cubic meters of helium were extracted from natural gas or withdrawn from helium reserves, with approximately 83% from the United States, 11% from Algeria, and most of the remainder from Russia and Poland. In the United States, most helium is extracted from natural gas in Kansas and Texas...

links for 2008-04-26

Asset Price Deflation

George Soros on the financial crisi:

The Financial Crisis: George Soros: I think it was, but it would have required recognition that the system, as it currently operates, is built on false premises. Unfortunately, we have an idea of market fundamentalism, which is now the dominant ideology, holding that markets are self-correcting; and this is false because it's generally the intervention of the authorities that saves the markets when they get into trouble. Since 1980, we have had about five or six crises: the international banking crisis in 1982, the bankruptcy of Continental Illinois in 1984, and the failure of Long-Term Capital Management in 1998, to name only three.

Each time, it's the authorities that bail out the market, or organize companies to do so. So the regulators have precedents they should be aware of. But somehow this idea that markets tend to equilibrium and that deviations are random has gained acceptance and all of these fancy instruments for investment have been built on them.... The large potential risks of such investments are not being acknowledged....

The authorities, the regulators--the Federal Reserve and the Treasury--really failed to see what was happening. One Fed governor, Edward Gramlich, warned of a coming crisis in subprime mortgages in a speech published in 2004 and a book published in 2007, among other statements. So a number of people could see it coming. And somehow, the authorities didn't want to see it coming. So it came as a surprise.... [Y]ou have a whole establishment involved. The economics profession has developed theories of "random walks" and "rational expectations" that are supposed to account for market movements. That's what you learn in college. Now, when you come into the market, you tend to forget it because you realize that that's not how the markets work. But nevertheless, it's in some way the basis of your thinking....

[T]he situation is definitely much worse than is currently recognized. You have had a general disruption of the financial markets, much more pervasive than any we have had so far. And on top of it, you have the housing crisis, which is likely to get a lot worse than currently anticipated because markets do overshoot.... I'm sure that it will be necessary to arrest the decline [in housing] because the decline, I think, will be much faster and much deeper than currently anticipated.... [F]oreclosures are going to add to the supply of housing a very large number of properties.... There are about six million subprime mortgages outstanding, 40 percent of which will likely go into default in the next two years.... Problems with... adjustable-rate mortgages are going to be of about the same magnitude as with subprime mortgages. So you'll have maybe five million more defaults facing you over the next several years....

[Y]ou need to reduce the number of foreclosures. You need to keep as many people as possible in their houses so that they don't come onto the market. You need to arrest the decline in house prices, but you also need to prevent human suffering and social disruption because it's going to be very, very severe....

[Rescue] is their [the Federal Reserve's] job, whether unhealthy or not... to save the system when it is in danger. However, because that is their job, it ought to be their job also to prevent asset bubbles from developing. And that task has not been recognized. Greenspan once spoke about the "irrational exuberance" of the market.... [I]t's generally accepted that the Fed tries to control core inflation, but not asset prices. I think that control of asset prices has to be an objective in order to prevent asset bubbles because they are so frequent.... You have to recognize that just controlling money doesn't control credit.... [Y]ou have to take into account the willingness to lend. And if it's too great—if borrowers can obtain large loans on the basis of inadequate security--you really have to introduce margin requirements for such borrowing and try to discourage it....

[W]e are close to a tipping point [for the dollar] where, in my view, the willingness of banks and countries to hold dollars is definitely impaired. But there is no suitable alternative so central banks are diversifying into other currencies; but there is a general flight from these currencies. So the countries with big surpluses—Abu Dhabi, China, Norway, and Saudi Arabia, for example—have all set up sovereign wealth funds, state-owned investment funds held by central banks that aim to diversify their assets from monetary assets to real assets. That's one of the major developments currently and those sovereign wealth funds are growing. They're already equal in size to all of the hedge funds in the world combined. Of course, they don't use their capital as intensively as hedge funds, but they are going to grow to about five times the size of hedge funds in the next twenty years.

I must say, these days when I read my backlist I feel like a genius--for example, back in 1998 I tried to convince the Brookings Panel that:

Why We Should Fear Deflation: Economies may well have more to fear than declines in broad goods-and-services price indices alone. If securities and real estate holdings have been pledged as collateral for debt contracts, then large-scale asset price declines also trigger the confusion of macroeconomic events with entrepreneurial failure that makes deflation feared.

Is the United States today potentially vulnerable to large-scale asset price declines in this way? In real estate no [this was written in 1999]. In the stock market yes [ditto]. Perhaps fundamental patterns of equity valuation have truly changed, as investors have recognized that the equity premium over the past century was much too large--in which case stock prices have reached a permanent and high plateau. But it seems more likely that there are substantial risks of stock market declines on the order of fifty percent back to Campbell-Shiller fundamentals...

Why Oh Why Can't We Have a Better Press Corps? (Ramesh Ponnuru Edition) (January 08, 2007) - Watch that Passive Voice! (Domestic Policy)

A number of people--people who I regard as suffering from Stockholm Syndrome--have other the years claimed that Ramesh Ponnuru is a reasonable person, unlike the bulk of the ignorant and corrupt hacks who write and have always written for National Review.

Can this please stop?

Nobody with any non-hackish tendencies would side with Larry Kudlow against John Podhoretz on this one.

Outsourced to Matthew Yglesias:

Watch that Passive Voice!: John Podhoretz offers the observation that "If Democrats offer a genuinely serious AMT reform that manages to cut taxes for tens of millions of middle-class people, the constituency for vetoing such a reform on the grounds that it would involve a tax-rate increase on those making more than $150,000 a year could fit comfortably into a Tokyo hotel room."

Larry Kudlow responds that "Using $150K as a threshold means a school teacher and a cop. Not exactly rich people." J-Pod with a help from some readers notes in response that "Only 5 percent of American households report earnings higher than $157,000 a year" and follows up arguing that precise salaries for cops and teachers is irrelevant, the point is that "Five percent is a lot of households, true — 5 million or so. But to write as though a $150,000 salary in America puts you smack dab in the middle of the middle class, which was Larry's rhetorical purpose, just doesn't jibe with the way lives are lived in America."

Kudlow doesn't seem to have an answer to that, but Ramesh Ponnuru manages to weigh-in on Kudlow's side with a further observation:

The Clintonites thought that they were raising taxes only on the top 2 percent of Americans and cutting taxes for a lot of people (by expanding the earned income credit). They got branded as tax hikers anyway. (And it would have been a tough vote for them even if they hadn't raised the gas tax as part of the deal.)

Advice to always eschew the passive voice can be abused, but Ponnuru should consider the lack of agency in that story. Who branded the Clinton administration as "tax hikers" for their plan to raise taxes on a tiny minority of wealthy Americans while cutting taxes for a larger class of working poor people? Could that have been conservative politicians? And how well would that campaign have worked had the conservative politicians not been assisted by conservative pundits? These things don't just happen.

Econ 101b: April 25: Long-Run Growth Revisited: Endogenous Growth

April 25: Long-Run Growth Revisited: Endogenous Growth

Notes: Lecture Audio; “Infant Industries,” Industrial Policy, and Development in a Model of Productive Variety


Jonathan Weisman Strikes Again!

Ah. Page A1 of the Post. The death spiral continues:

McCain Offers Tax Policies He Once Opposed: Now that he is the presumptive Republican presidential nominee, however, McCain is marching straight down the party line. The economic package he has laid out embraces many of the tax policies he once decried: extending Bush's tax cuts he voted against, offering investment tax breaks he once believed would have little economic benefit and granting the long-held wishes of tax lobbyists he has often mocked....

To supporters, McCain has simply seen the light and now understands the power that business tax relief has to spur economic growth and innovation. Said J.D. Foster, a former Bush White House and Treasury tax policy expert, now at the Heritage Foundation: "It's logical that he wouldn't be repeating the arguments he made then. We all learn from experience."

To critics, it is political pandering. "It's just part of the new John McCain that's taking on the conventional wisdom that in tight races, you have to energize the base and win by 50.000001 percent," Chafee said. "I was frankly surprised that he's kept it up after securing the nomination. I thought he'd move to the center, and I haven't seen it"...

First time I have ever seen anybody describe J.D. Foster as a tax policy "expert." Lobbyist, yes. Apparatchik, yes. Ideologue, yes. But expert? Never seen that before...

Why oh why can't we have a better press corps?

Paul Krugman Tells Us to Go Read Joe Klein from 2005

Here's Klein. The occasion is that he recycled the title of his column. The Democrats, you see, are always shrinking:

The Incredible Shrinking Democrats: There was a cheap metaphor to be had in the remarkable moment when Safia al-Souhail, who had just voted in the Iraqi elections, and Janet Norwood, whose U.S. Marine son was killed in Iraq, embraced during the President's State of the Union speech last week.... [N]othing should detract from the emotional truth of the moment, the magnitude of Norwood's loss, the exhilaration of al-Souhail's ballot. Yes, disentanglement will be difficult. And, yes, we shouldn't "overhype" the election, as John Kerry clumsily suggested. But this is not a moment for caveats. It is a moment for solemn appreciation of the Iraqi achievement--however it may turn out--and for hope.

The Democrats are having trouble with graciousness these days....

This was a symptom of a larger disease: most Democrats seemed as reluctant as Kerry to express the slightest hint of optimism about the [Iraqi] elections. Congressional leaders Harry Reid and Nancy Pelosi diminished themselves....

Reid's claim that George W. Bush would reduce Social Security benefits 40% was hogwash. The President has merely stated the obvious, that reductions will be necessary. Reid also made the absurd comparison between Bush's very conservative investment-account proposal and Las Vegas gaming tables. Finally, there was the boorish and possibly unprecedented hooting of the President....

The day after the President's speech, the party's congressional leaders gathered at the Franklin D. Roosevelt memorial to carp. How 70 years ago! "Progressive" Dems—-and I use the term advisedly, since liberals seem more interested in preserving the past than in discovering the future—-are right to admire Roosevelt. But the Roosevelt they worship is a bronze sculpture, frozen in time. The real F.D.R. was a gutsy innovator. The current Democrats resemble nothing so much as the Republicans during the 25 years after Roosevelt's death-—negative, defensive, intellectually feeble, a permanent minority... undifferentiated opposition [to Bush] is obtuse and most likely counterproductive. The Democrats' current crudeness is a function of their desperation, and the imminent ratification of Howard Dean, the least charming presidential candidate in recent memory, as their party chairman only serves to punctuate the problem.

All of which leaves Bush with a lot of room to lead. His speech last week was striking... with the exceptions of his empty call for a constitutional amendment banning gay marriage--a congressional nonstarter, but a sop to religious conservatives--and his continued refusal to support federal funding for new stem-cell-research lines.... There is... a profitable discussion to be had between "ownership" Republicans and "third-way" Democrats about transforming the stagnant bureaucracies of the Industrial Age... the stunned and churlish Democrats are refusing...

Why oh why can't we have a better press corps?

Elsby and Shapiro: Stepping Off the Wage Escalator: A Theory of the Equilibrium Employment Rate

Michael W. L. Elsby and Matthew D. Shapiro (2008), "Stepping Off the Wage Escalator: A Theory of the Equilibrium Employment Rate"

Abstract: This paper develops a theory of equilibrium labor supply based on the lifelong return to work. This lifelong return to work is the product of the general wage level and the return to experience. The paper shows how the return to experience has different effects from general wage growth because it creates a wedge between the return to work and not working. The model of the paper thereby generates a powerful relationship between employment rates and productivity growth. Calculations based on the model are able to replicate the comovements in employment rates and productivity growth for low-skill workers in the United States.

  • Blanchard surveys various approaches to mapping productivity growth into wages. He concludes that these approaches “deliver, to a first order, long run neutrality of unemployment to productivity growth.” He points out that existing theories may have different implications for the short and medium run effects of productivity growth, but concludes our understanding of the link between productivity and employment is weak. “The truth is we do not know. And this is a serious hole in knowledge” (Blanchard, 2007, p.416)...

Washington Post Death Spiral Watch

Outsourced to Roy Edroso:

alicublog: THE OVERCLASS STRIKES BACK. George F.---ing Will today:

After 1962, when New York City signed the nation's first collective bargaining contract with teachers, teachers began changing from members of a respected profession into just another muscular faction fighting for more government money.

August 1, 2007: "Firefighters, Scientists And Teachers Top List As 'Most Prestigious Occupations,' According To Latest Harris Poll."

Will, forever the callow young lord whose noblesse oblige turns to viciousness when the servants ask for a raise, probably never knew what normal people still (thank God) remember: disrespect for the nobler enterprises of society is one of the real signs of social collapse.

Listening to Iraq

Ann Friedman:

Listening to Iraq: The news outlets that still report from Iraq rarely publish accounts of daily life there. Rarer still are narratives from outside the confines of the Green Zone. Sure, we get snippets of information from Iraqi reporters working with Western journalists, but most of the time, Iraqis' voices come to us in the form of react-quotes after a marketplace bombing or sectarian uprising. We don't see what it's like for Iraqis to walk home from the scene of the violence, then make dinner, then put their kids to bed. We lack the humanizing power of detail....

Blogs used to fill some of this void. Widely read Iraqi bloggers like Riverbend, the 26-year-old pseudonymous woman who wrote a daily account of life in Baghdad, and Raed Jarrar, whose entire family blogged the first three years of the occupation, gave international readers important insights into the real impact of the war -- in the form of long, winding narratives, not fleeting quotes.

But between 2006 and 2007, almost all of those bloggers, Riverbend included, left Iraq out of fear for their safety.... When I asked Zangana which English-language Iraqi blogs are still active and written from Iraq, the only one she could name (though there are probably more) was A Star from Mosul. In it, a 20-year-old engineering student writes under the pseudonym "Najma" about her stress-inducing course load, drama with her friends, and her adorable niece and nephew. Intertwined with those details, she writes about how the war has intruded on her daily life.... Najma doesn't identify her classmate as Sunni or Shiite or pigeonhole him in any way. He is a young man who used to laugh and is now depressed. And while Najma has also written about U.S. soldiers searching her house and assassination attempts on her university campus, the most striking thing about her blog is how quietly sad many of its details are...

And, of course, why oh why can't we have a better press corps?

Except, also of course, for McClatchy: Inside Iraq:

April 23: Econ 210a: WWI and the Great Depression [DeLong]

April 23: WWI and the Great Depression [DeLong]

Memo Question for April 30: "Thirty Glorious Years": A growing literature develops explanations for 'Europe's golden age' (the European economy's fast growth in the third quarter of the 20th century). Is this effort misguided? In other words, do we really need fancy explanations for a straightforward phenomenon that is easily explained in terms of convergence and delayed structural change?

Memo Question for April 23: The Great Depression: What do our readings tell us about the answers to the following two questions?

  • Why was the Great Depression so great?
  • Why has there been only one Great Depression in the long span between the commercial revolution and today?

World War I and the Task of Rebuilding:

John Maynard Keynes (1920), The Economic Consequences of the Peace, chapters 1, 2, and 6

The Coming of the Great Depression:

Christina Romer (1990), "The Great Crash and the Onset of the Great Depression," Quarterly Journal of Economics 104, pp.719-736,

Ben Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression" American Economic Review 73, pp. 257-276,

Understanding the Great Depression:

John Maynard Keynes (1932), "The World's Economic Outlook," Atlantic

Paul Krugman, "Introduction" to John Maynard Keynes, The General Theory of Employment, Interest and Money

Consequences of the Great Depression:

Margaret Weir and Theda Skocpol, "State Structures and Social Keynesianism: Responses to the Great Depression in Sweden and the United States," International Journal of Comparative Sociology pp. 4-29,+%22State+Structures+and+Social+Keynesianism&ots=P2iXGFkFfu&sig=APmY6D1P2QkJ0l28RRWX5YxjBmg#PPA29,M1

World War I and the Task of Rebuilding:

John Maynard Keynes (1920), The Economic Consequneces of the Peace, chapters 1, 2, and 6

  • Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization by which Western Europe has lived for the last half century. We assume some of the most peculiar and temporary of our late advantages as natural, permanent, and to be depended on, and we lay our plans accordingly. On this sandy and false foundation we scheme for social improvement and dress our political platforms, pursue our animosities and particular ambitions, and feel ourselves with enough margin in hand to foster, not assuage, civil conflict in the European family. Moved by insane delusion and reckless self-regard, the German people overturned the foundations on which we all lived and built. But the spokesmen of the French and British peoples have run the risk of completing the ruin, which Germany began, by a Peace which, if it is carried into effect, must impair yet further, when it might have restored, the delicate, complicated organization, already shaken and broken by war, through which alone the European peoples can employ themselves and live.... What an extraordinary episode in the economic progress of man that age was which came to an end in August, 1914! The greater part of the population, it is true, worked hard and lived at a low standard of comfort, yet were, to all appearances, reasonably contented with this lot. But escape was possible, for any man of capacity or character at all exceeding the average, into the middle and upper classes, for whom life offered, at a low cost and with the least trouble, conveniences, comforts, and amenities beyond the compass of the richest and most powerful monarchs of other ages. The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages; or be could decide to couple the security of his fortunes with the good faith of the townspeople of any substantial municipality in any continent that fancy or information might recommend. He could secure forthwith, if he wished it, cheap and comfortable means of transit to any country or climate without passport or other formality, could despatch his servant to the neighboring office of a bank for such supply of the precious metals as might seem convenient, and could then proceed abroad to foreign quarters, without knowledge of their religion, language, or customs, bearing coined wealth upon his person, and would consider himself greatly aggrieved and much surprised at the least interference. But, most important of all, he regarded this state of affairs as normal, certain, and permanent, except in the direction of further improvement, and any deviation from it as aberrant, scandalous, and avoidable. The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice...

  • This chapter must be one of pessimism. The Treaty includes no provisions for the economic rehabilitation of Europe,—nothing to make the defeated Central Empires into good neighbors, nothing to stabilize the new States of Europe, nothing to reclaim Russia; nor does it promote in any way a compact of economic solidarity amongst the Allies themselves; no arrangement was reached at Paris for restoring the disordered finances of France and Italy, or to adjust the systems of the Old World and the New. The Council of Four paid no attention to these issues, being preoccupied with others,—Clemenceau to crush the economic life of his enemy, Lloyd George to do a deal and bring home something which would pass muster for a week, the President to do nothing that was not just and right. It is an extraordinary fact that the fundamental economic problems of a Europe starving and disintegrating before their eyes, was the one question in which it was impossible to arouse the interest of the Four. Reparation was their main excursion into the economic field, and they settled it as a problem of theology, of polities, of electoral chicane, from every point of view except that of the economic future of the States whose destiny they were handling...

  • If we take the view that for at least a generation to come Germany cannot be trusted with even a modicum of prosperity, that while all our recent Allies are angels of light, all our recent enemies, Germans, Austrians, Hungarians, and the rest, are children of the devil, that year by year Germany must be kept impoverished and her children starved and crippled, and that she must be ringed round by enemies; then we shall reject all the proposals of this chapter.... But if this view of nations and of their relation to one another is adopted... heaven help us all. If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilization and the progress of our generation. Even though the result disappoint us, must we not base our actions on better expectations, and believe that the prosperity and happiness of one country promotes that of others, that the solidarity of man is not a fiction, and that nations can still afford to treat other nations as fellow-creatures?...

The Coming of the Great Depression:

Christina Romer (1990), "The Great Crash and the Onset of the Great Depression," Quarterly Journal of Economics 104, pp.719-736,

Ben Bernanke (1983), "Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression" American Economic Review 73, pp. 257-276,



Understanding the Great Depression:

John Maynard Keynes (1932), "The World's Economic Outlook," Atlantic

Paul Krugman, "Introduction" to John Maynard Keynes, The General Theory of Employment, Interest and Money

  • Keynes: The immediate causes of the world financial panic -- for that is what it is -- are obvious. They are to be found in a catastrophic fall in the money value, not only of commodities, but of practically every kind of asset. The 'margins,' as we call them, upon confidence in the maintenance of which the debt and credit structure of the modern world depends, have 'run off.'... Debtors of all kinds find that their securities are no longer the equal of their debts. Few governments still have revenues sufficient to cover the fixed money charges for which they have made themselves liable. Moreover, a collapse of this kind feeds on itself. We are now in the phase where the risk of carrying assets with borrowed money is so great that there is a competitive panic to get liquid. And each individual who succeeds in getting more liquid forces down the price of assets in the process of getting liquid, with the result that the margins of other individuals are impaired and their courage undermined. And so the process continues.... We have here an extreme example of the disharmony of general and particular interest.... Practically all the remedies popularly advocated to-day are of this... beggar-my-neighbor description. For one man's expenditure is another man's income. Thus, while we undoubtedly increase our own margin, we diminish that of someone else; and if the practice is universally followed everyone will be worse off. An individual may be forced by his private circumstances to curtail his normal expenditure, and no one can blame him. But let no one suppose that he is performing a public duty in behaving in such a way. The modern capitalist is a fair-weather sailor. As soon as a storm rises, he abandons the duties of navigation and even sinks the boats which might carry him to safety by his haste to push his neighbor off and himself in. Unfortunately the popular mind has been educated away from the truth, away from common sense. The average man has been taught to believe what his own common sense, if he relied on it, would tell him was absurd.... Meanwhile the problem of reparations and war debts darkens the whole scene...

  • Krugman: The message of Keynes: It’s probably safe to assume that the “conservative scholars and policy leaders” who pronounced The General Theory one of the most dangerous books of the past two centuries haven’t read it. But they’re sure it’s a leftist tract, a call for big government and high taxes. That’s what people on the right, and some on the left, too, have said about The General Theory from the beginning. In fact, the arrival of Keynesian economics in American classrooms was delayed by a nasty case of academic McCarthyism. The first introductory textbook to present Keynesian thinking, written by the Canadian economist Lorie Tarshis, was targeted by a right-wing pressure campaign aimed at university trustees. As a result of this campaign, many universities that had planned to adopt the book for their courses cancelled their orders, and sales of the book, which was initially very successful, collapsed. Professors at Yale University, to their credit, continued to assign the book; their reward was to be attacked by the young William F. Buckley for propounding “evil ideas.”

  • But Keynes was no socialist – he came to save capitalism, not to bury it. And there’s a sense in which The General Theory was, given the time it was written, a conservative book. (Keynes himself declared that in some respects his theory had “moderately conservative implications.” [377]) Keynes wrote during a time of mass unemployment, of waste and suffering on an incredible scale. A reasonable man might well have concluded that capitalism had failed, and that only huge institutional changes – perhaps the nationalization of the means of production – could restore economic sanity. Many reasonable people did, in fact, reach that conclusion: large numbers of British and American intellectuals who had no particular antipathy toward markets and private property became socialists during the depression years simply because they saw no other way to remedy capitalism’s colossal failures.

  • Yet Keynes argued that these failures had surprisingly narrow, technical causes. “We have magneto [alternator] trouble” he wrote in 1930, as the world was plunging into depression. And because Keynes saw the causes of mass unemployment as narrow and technical, he argued that the problem’s solution could also be narrow and technical: the system needed a new alternator, but there was no need to replace the whole car. In particular, “no obvious case is made out for a system of State Socialism which would embrace most of the economic life of the community.” [378] While many of his contemporaries were calling for government takeover of the whole economy, Keynes argued that much less intrusive government policies could ensure adequate effective demand, allowing the market economy to go on as before. Still, there is a sense in which free-market fundamentalists are right to hate Keynes. If your doctrine says that free markets, left to their own devices, produce the best of all possible worlds, and that government intervention in the economy always makes things worse, Keynes is your enemy. And he is an especially dangerous enemy because his ideas have been vindicated so thoroughly by experience. Stripped down, the conclusions of The General Theory might be expressed as four bullet points:

    • Economies can and often do suffer from an overall lack of demand, which leads to involuntary unemployment
    • The economy’s automatic tendency to correct shortfalls in demand, if it exists at all, operates slowly and painfully
    • Government policies to increase demand, by contrast, can reduce unemployment quickly
    • Sometimes increasing the money supply won’t be enough to persuade the private sector to spend more, and government spending must step into the breach
  • To a modern practitioner of economic policy, none of this – except, possibly, the last point – sounds startling or even especially controversial. But these ideas weren’t just radical when Keynes proposed them; they were very nearly unthinkable. And the great achievement of The General Theory was precisely to make them thinkable.

Consequences of the Great Depression:

Margaret Weir and Theda Skocpol, "State Structures and Social Keynesianism: Responses to the Great Depression in Sweden and the United States," International Journal of Comparative Sociology pp. 4-29,+%22State+Structures+and+Social+Keynesianism&ots=P2iXGFkFfu&sig=APmY6D1P2QkJ0l28RRWX5YxjBmg#PPA29,M1

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"Vengeance, I Dare Predict, Will Not Limp"

John Maynard Keynes on the 1919 Treaty of Versailles that ended WWI. From The Economic Consequence of the Peace: If we take the view that for at least a generation to come Germany cannot be trusted with even a modicum of prosperity, that while all our recent Allies are angels of light, all our recent enemies, Germans, Austrians, Hungarians, and the rest, are children of the devil, that year by year Germany must be kept impoverished and her children starved and crippled, and that she must be ringed round by enemies; then we shall reject all the proposals of this chapter.... But if this view of nations and of their relation to one another is adopted... heaven help us all. If we aim deliberately at the impoverishment of Central Europe, vengeance, I dare predict, will not limp. Nothing can then delay for very long that final civil war between the forces of Reaction and the despairing convulsions of Revolution, before which the horrors of the late German war will fade into nothing, and which will destroy, whoever is victor, the civilization and the progress of our generation. Even though the result disappoint us, must we not base our actions on better expectations, and believe that the prosperity and happiness of one country promotes that of others, that the solidarity of man is not a fiction, and that nations can still afford to treat other nations as fellow-creatures?...

Where Oh Where Is Our Synfuels Industry?

Paul Krugman recycles his work as an undergraduate RA for Bill Nordhaus:

Energy futures of the past: Whee! I’m getting some violent reactions to my suggestion that energy technology has been a disappointment. So I went back to the old Nordhaus Brookings Paper to see what the future used to look like.... [S]ynfuels were expected to be fairly cheap. Oil from shale was supposed to cost around $5 a barrel, which would be about $30 in today’s prices.... [H]ere’s the actual price of oil, in March 2008 dollars. Oil prices were at levels that “should” have justified synfuels for about a dozen years.

Energy futures of the past - Paul Krugman - Op-Ed Columnist - New York Times Blog

Now, to be fair, Athabasca tar sands are coming in now, and it’s claimed that they’re worth exploiting even at $50 a barrel.... But... alternatives to crude have proved much harder to produce than expected.

That doesn’t mean oil prices will always rise... the long-run price elasticity of demand for oil is much higher than the short run elasticity, because in the long run you can switch to less gas-guzzling cars and stuff. But my point remains: alternatives to conventional oil have consistently proved harder to work than people expected.

Washington Post Death Spiral Watch (Richard Cohen Edition)

Outsourced to Matthew Yglesias:

Cohen on McCain: He Can Do Know Wrong : Via Somerby and Lemieux, Richard Cohen has a war is peace moment:

And so it will be the job, the obligation, the solemn task of the next president to restore that trust. John McCain could do it. He's an honorable man who has fudged and ducked and swallowed the truth on occasion—about the acceptability of the Confederate flag, for instance—but always, I think, for understandable although not necessarily admirable reasons.

To be simplistic about this, you're looking here at a press that's hopelessly in the tank for John McCain.

To try to be a bit more charitable, you're looking here at a press that's hopelessly invested in the doomed epistemology of character. We can't know what lurks in the hearts of pols, but we can make inferences based on their behavior. But all politicians' behavior is mixed. So we (and by "we" here I mean "Richard Cohen") read that behavior through our preexisting beliefs about their character. And since we "know" that McCain is honorable, he fudges and ducks and swallows etc. for "understandable" reasons, whereas other, lesser politicians are just soulless scumbags. Of course McCain's reasons are understandable -- he wants to win! -- but they're just the same reasons everyone else has. They pander, he's understandable. They lie, he fudges. It's all senseless.

Which is, I suppose, just another way of observing that we're looking at a press corps that's hopelessly in the tank for John McCain.

Why oh why can't we have a better press corps?

Econ 101b: April 23: The Chinese Economy

April 23: The Chinese Economy

Notes: Slides:; Lecture Audio:


Econ 101b: April 23: The Chinese Economy

April 23: The Chinese Economy

Notes: Slides:; Lecture Audio:


McCain Lacks the Character to Be a Good President (Support Our Troops Edition)

Mirabile visu, a Washington Post editorial that isn't an affront to decency and sanity:

Thanking Our GIs: TO DATE, 56 senators and more than 200 representatives have signed on to legislation to revamp GI educational benefits. They recognize that the men and women fighting today's wars in Iraq and Afghanistan are not getting their due. But if Congress is serious about doing right by America's veterans, it has to do more than come up with a list of names....

Impetus for the bill comes from Sen. James Webb (D-Va.)... [who] rightly argue[s] that post-Sept. 11 veterans are being shortchanged by a system... that has not kept pace with increased college costs.... [Webb's] bill... would be true to the original GI bill... in providing a cost-free education to those who serve in the military....

Disappointingly, Sen. John McCain... declines to back the measure... responding to concerns of the military brass that enhanced educational opportunities could negatively affect retention rates....

The bill is not cheap; cost estimates range from $2 billion to $4 billion a year. But... this should be considered part of the cost of war -- and an obligation that the nation should gratefully fulfill.

Virginia Postrel: Politics and Global Warming

Virginia Postrel waxes wroth:

Dynamist Blog: There's No Such Thing as a Free Carbon Cap: It's infuriating how all three presidential candidates prattle on about the need to fight global warming while also complaining about the high price of gasoline. The candidates treat CO2 emissions as a social issue like gay marriage, with no economic ramifications.... The last thing you'd want to do is reduce gas taxes during the summer, as John McCain has proposed. That would just encourage people to burn more gas on extra vacation trips--as any straight talker would admit.

The connection between higher prices for energy and reduced carbon dioxide emissions may not have hit the national consciousness yet, but the LAT's Margo Roosevelt reports that California utilities--and eventually their customers--are beginning to realize this isn't just a symbolic issue.... The [Los Angeles] DWP, to whom I pay my electric bills, wants out of the carbon dioxide caps. It apparently thinks the law shouldn't apply to socialist enterprises.

April 21: Econ 101b: Why Is Asia Gambling on Bretton Woods II?

April 21: Why Is Asia Gambling on Bretton Woods II?

Notes: Slides:; Lecture Audio:


April 14: Econ 101b: Risks of International Financial Crisis

April 14: Risks of International Financial Crisis