Previous month:
October 2008
Next month:
December 2008

November 2008

Paul Krugman Sets the Bar Far too Low...

...when he says that Keynes's greatness is illustrated by the fact that he understood things that George F. Will does not. A six year old child could write more intelligent columns about economics than George F. Will. The fact that Fred Hiatt has not yet fired George F. Will and replaced him with a six year old child is yet another piece of the wreckage of the crashed-and-burned Washington Post detritus scattered around the landscape.


The greatness of Keynes...: illustrated by the trouble people who consider themselves well informed have, to this day, in understanding the basic principles of how a depressed economy works. The key to Keynes’s contribution was his realization that liquidity preference — the desire of individuals to hold liquid monetary assets — can lead to situations in which effective demand isn’t enough to employ all the economy’s resources. When you don’t understand that principle, you end up writing stuff like this [from George F. Will]:

Obama’s “rescue plan for the middle class” includes a tax credit for businesses “for each new employee they hire” in America over the next two years. The assumption is that businesses will create jobs that would not have been created without the subsidy. If so, the subsidy will suffuse the economy with inefficiencies — labor costs not justified by value added.

That is, if the private sector wouldn’t have created a job on its own, that job shouldn’t have been created... [never mind that] the real choice is between having workers doing something and being uselessly, destructively unemployed....

Why do people still fail to get Keynes, after all these years? Keynes might have said that it’s the inherent difficulty of the concepts: "For—though no one will believe it—economics is a technical and difficult subject." But there’s also the Upton Sinclair theorem:

It is difficult to get a man to understand something, when his salary depends upon his not understanding it.

But George F. Will's salary doesn't depend on his not understanding that we are now for the first time since 1982 faced with the prospect of a depression, or upon his not understanding that if Amity Shlaes disagrees with Ben Bernanke on the Great Depression one would be well-advised to bet on Ben Bernanke.

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

John Maynard Keynes Is Very Much Alive

Paul Krugman cites Greg Mankiw:

The Keynesian moment: Greg has this exactly right:

IF you were going to turn to only one economist to understand the problems facing the economy, there is little doubt that the economist would be John Maynard Keynes. Although Keynes died more than a half-century ago, his diagnosis of recessions and depressions remains the foundation of modern macroeconomics. His insights go a long way toward explaining the challenges we now confront.

I think it’s worth saying a bit more about why, exactly, we’re in such a Keynesian moment. If Keynes receded in our consciousness over the past few decades, it wasn’t mainly because of uninformed criticisms from the right; it was because central bankers seemed to have everything under control. Uncle Alan and his counterparts, by controlling the money supply, could do the job of stabilizing the economy, and Keynesian fiscal policy seemed irrelevant. Now, Keynes understood the role of monetary policy quite well, and believed that it had been effective in the past. What he argued, however, was that there were situations in which monetary policy could do no more — and that the world economy he lived in was facing such a situation:

To-day and presumably for the future the schedule of the marginal efficiency of capital is, for a variety of reasons, much lower than it was in the nineteenth century. The acuteness and the peculiarity of our contemporary problem arises, therefore, out of the possibility that the average rate of interest which will allow a reasonable average level of employment is one so unacceptable to wealth-owners that it cannot be readily established merely by manipulating the quantity of money. So long as a tolerable level of employment could be attained on the average of one or two or three decades merely by assuring an adequate supply of money in terms of wage-units, even the nineteenth century could find a way. If this was our only problem now—if a sufficient degree of devaluation is all we need—we, to-day, would certainly find a way.

Archaic language, but he was describing a situation very much like the one we face now. To be sure, Keynes failed to foresee the postwar rise of the “marginal efficiency of capital” — the way that economic growth combined with inflation would create an environment in which interest rates were high enough in normal times that monetary policy was effective at fighting slumps. Hence the long era in which Keynes didn’t seem all that relevant. But his analysis remained as valid as ever, under the right conditions. Those conditions reappeared first in Japan during the 90s; now they’re everywhere.

And in the long run, it turns out, Keynes is anything but dead.

Wall Street Journal and Council on Foreign Relations Crashed-and-Burned Watch (Yet Another Amity Shlaes Edition)

Mr. Murdoch, your intellectual capital is depreciating rapidly. Call your office.

Paul Krugman writes that expansionary fiscal policy was not tried on a sufficiently large scale during the Great Depression--spending boosts were insufficient, and undermined by tax increases while unemployment was still high. Hence, he argues, recovery remained far from complete and unemployment remained high--until World War II came, and expansionary fiscal policy was tried on a sufficiently large scale, and unemployment dropped to 2%.

Amity Shlaes responds by arguing something... completely incoherent--flunking the Turing Test territory. And so Wall Street Journal publishers who give her space and Council on Foreign Affairs staffers who give her fellowships lose credibility, influence, and reputation.


The Krugman Recipe for Depression: Paul Krugman['s]... new book "The Return of Depression Economics," emphasizes the importance of New Deal-style spending. He has said the trouble with the New Deal was that it didn't spend enough.... The New Deal is Mr. Obama's context.... If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery.... New Deal spending provided jobs but did not get the country back to where it was before....

Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data.... He intentionally did not include temporary jobs in emergency programs.... Michael Darby of UCLA has argued that make-work jobs should be counted. Even so, his chart shows that from 1931 to 1940, New Deal joblessness ranges as high as 16% (1934) but never gets below 9%. Nine percent or above is hardly a jobless target to which the Obama administration would aspire....

New Dealers raised taxes again and again to fund spending.... We know that the new administration is going to spend... it can just spend, Krugman-wise, and risk repeating the very depression we seek to avoid...

California Academy of Sciences New Museum Building Blogging

Path Finder A Foucault Pendulum at the North Pole revolves clockwise with a period of 24 hours. A Foucault Pendulum at the South Pole revolves counterclockwise with a period of 24 hours.

By symmetry, a pendulum at the equator must not revolve at all.

By continuity, every pendulum away from the poles must revolve with a period greater than 24 hours.


Why I Was Wrong...

Calculated Risk issues an invitation:

Calculated Risk: Hoocoodanode?: Earlier today, I saw Greg "Bush economist" Mankiw was a little touchy about a Krugman blog comment. My reaction was that Mankiw has some explaining to do. A key embarrassment for the economics profession in general, and Bush economists Greg Mankiw and Eddie Lazear in particular, is how they missed the biggest economic story of our times.... This was a typical response from the right (this is from a post by Professor Arnold Kling) in August 2006:

Apparently, the echo chamber of left-wing macro pundits has pronounced a recession to be imminent. For example, Nouriel Roubini writes, "Given the recent flow of dismal economic indicators, I now believe that the odds of a U.S. recession by year end have increased from 50% to 70%." For these pundits, the most dismal indicator is that we have a Republican Administration. They have been gloomy for six years now...

Sure Roubini was early (I thought so at the time), but show me someone who has been more right! And this brings me to Krugman's column: Lest We Forget

... Why did so many observers dismiss the obvious signs of a housing bubble, even though the 1990s dot-com bubble was fresh in our memories? Why did so many people insist that our financial system was “resilient,” as Alan Greenspan put it, when in 1998 the collapse of a single hedge fund, Long-Term Capital Management, temporarily paralyzed credit markets around the world? Why did almost everyone believe in the omnipotence of the Federal Reserve when its counterpart, the Bank of Japan, spent a decade trying and failing to jump-start a stalled economy?

One answer to these questions is that nobody likes a party pooper.... There’s also another reason the economic policy establishment failed to see the current crisis coming. The crises of the 1990s and the early years of this decade should have been seen as dire omens, as intimations of still worse troubles to come. But everyone was too busy celebrating our success in getting through those crises to notice...

[I]n addition to looking forward, I think certain economists need to do some serious soul searching. Instead of leaving it to us to guess why their analysis was so flawed, I believe the time has come for Mankiw, Kling and many other economists to write a post titled "Why I was wrong".

Let me say what things I was "expecting," in the sense of anticipating that it was they were both likely enough and serious enough that public policymakers should be paying significant attention to guarding the risks that it would create:

(1) A collapse of the dollar produced by a panic flight by investors who recognized the long-term consequences of the U.S. trade deficit.


(2) A fall back of housing prices halfway from their peak to pre-2000 normal price-rental ratios.

I was not expecting (2) plus:

(3) the discovery that banks and mortgage companies had made no provision for how the loans they made would be renegotiated or serviced in the event of a housing-price downturn.

(4) the discovery that the rating agencies had failed in their assessment of lower-tail risk to make the standard analytical judgment: that when things get really bad all correlations go to one.

(5) the fact that highly-leveraged banks working on the originate-and-distribute model of mortgage securitization had originated but had not distributed: that they had held on to much too much of the risks that they were supposed to find other people to handle.

(6) the panic flight from all risky assets--not just mortgages--upon the discovery of the problems in the mortgage market.

(7) the engagement in regulatory arbitrage which had left major banks even more highly leveraged than I had thought possible.

(8) the failure of highly-leveraged financial institutions to have backup plans for recapitalization in place in the case of a major financial crisis.

(9) the Bush administration's sticking to a private-sector solution for the crisis for months after it had become clear that such a solution was no longer viable.

We could have interrupted this chain that has gotten us here at any of a number of places. And I still am trying to figure out why we did not.

Shorter Mark Steyn: Nobody Here But Us White Guys

And what kind of a name is "Steyn" anyway? Matthew Yglesias muses on Mark Steyn's refusal to think of women, Blacks, immigrants, et cetera as real Americans:

Matthew Yglesias: American History: Mark Steyn offers some typical conservative complaining:

Mark K, while I was down in Australia a while back, they had a big Education Summit going on, and the then Prime Minister, the great John Howard, used a marvelous phrase to me about how they wanted to teach Oz history — as an “heroic national narrative”. We don’t do that. In fact, we don’t teach it as any kind of coherent narrative at all. We’ve taken Cromwell’s advice to his portraitist to paint him “warts and all”, and show our kids all but solely the warts — spreading disease to Native Americans, enslaving blacks, interning the Japanese. Any non-wart stuff is mostly invented out of whole cloth: the US Constitution has its good points but they all come from the Iroquois, and the first Thanksgiving is some kind of proto-Communist celebration of collective farming.

A few months back, my little boy came home from Second Grade and said to me, “Guess what we learned today?” I said: “Rosa Parks.” He said: “How did you know that?” I said: “Because it’s always Rosa Parks.” And, if you don’t learn it in the context of any broader historical narrative, it’s just a story about municipal transit seating arrangements.

I’m fascinated by how common this depiction of American education is considering that it’s 100 percent false. No doubt there are bad history teachers and bad history classes in the United States, but anyone who’s vaguely in contact with reality can tell you that U.S. history is very much taught as a heroic national narrative. But since contemporary American conservatism is eye-deep in racism, Steyn can’t quite seem to grasp that teaching people about Rosa Parks and so forth is part of the heroic narrative of the victory of American ideals over the worst impulses of human nature. Similarly, the much-bemoaned-by-rightwingers greater attention given in recent decades to the contributions of women and ethnic minority groups is about trying to expand the circle of people who feel invested in the national narrative.

I don't think this depiction of American education is common at all. It is found largely in the pages of National Review and other publications even further into wingnutland. And, as Matt says, Mark Steyn cannot read this as part of the heroic American narrative of opportunity for all because he does not believe in that heroic American narrative.

Washington Post Crashed-and-Burned Watch (Kathleen Parker Edition)

Outsourced to Brendan Nyhan:

Brendan Nyhan: Kathleen Parker: Correlation=causation: A conservative organization called the Intercollegiate Studies Institute has released a new report which shows (yet again) that most Americans don't have extensive factual knowledge of politics. (Whether this matters very much is a question that has been widely debated among political scientists.)

Based on this finding, the Washington Post's Kathleen Parker embarassed herself and her newspaper by suggesting that "passive activities... diminish civic literacy" while "[a]ctively pursuing information... and participating in high-level conversations... makes one smarter":

What's behind the dumbing down of America? The ISI found that passive activities, such as watching television (including TV news) and talking on the phone, diminish civic literacy.

Actively pursuing information through print media and participating in high-level conversations -- even, potentially, blogging -- makes one smarter.

But as anyone who has taken statistics 101 knows, correlation does not equal causation. The fact that people who score lower on the ISI quiz tend to watch TV and talk on the phone does not mean that those activities reduce their civic literacy. A more plausible explanation is that people who have low civic literacy scores also tend to watch more TV and talk on the phone more. (At a minimum, Parker and ISI can't distinguish between these two possibilities with cross-sectional survey data.)

How did this passage make it into the newspaper? Does anyone at the Post know anything about statistics?

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

Things Missing from the Internet

Aaron Swartz reports on weblogs he would like to read:

Blogs I Would Like to Read (Aaron Swartz's Raw Thought):

The Wonk Wing: Thoughtful exploration of important policy issues by decent writers who are clearly fascinated by their subject. Not only would you get a first-class education in the relevant issues around health care, global warming, urban sprawl, zoning, traffic, sewage, etc. but you'd have fun while doing it. Think Ezra Klein for more than just health care. Think The Wonk Room but more Sorkin and less Pennebaker. (Sorry, Wonk Room!)

Perfect Devices: Coverage of things which are simply the best-in-the-world at what they do, and the stories of how they got there. I want stories from the people who calibrate bathroom-mirror lighting to be the perfect combination of brightness and diffusion "so that it's diagnostically acute without being brutal" (ASFTINDA, 302). I want stories about the kitchen at French Laundry and Alinea. I want the start-to-finish story of HF&J designing a typeface. (Yes, I'm eagerly awaiting Objectified.)

17th and Pennsylvania: This is the address of the Starbucks outside the White House, where apparently executive branch officials regularly grab coffee, chat, and meet with a wide variety of famous-for-DC types. Why doesn't an enterprising Gawker Stalker simply sit there and write down what happens?

This Academic Life: Stories of new papers and research results -- not just a summary of the work itself, but the story of how it fits into the field's debates, the personal intrigues of the players, the implications for the wider world. Basically, Lingua Fraca returning as a blog.

Evisceration Quarterly: A daily selection of the finest in insults, takedowns, and general argumentative evisceration. The motto: teaching you how to think by showing you how not to. And, to not be entirely negative, the occasional model of clarity. With special blogging consultant, Brad DeLong.

The Monetary History of the United States

Paul Krugman notes that we now have an ongoing test of Keynes-Bernanke vs. Friedman-Schwartz accounts of the Great Depression:

Paul Krugman: Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history? A central theme of Keynes’s General Theory was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.

Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it’s hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble. So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base: And guess what — it doesn’t seem to be workiing.

I think the thesis of the Monetary History has just taken a hit.

We Are thankful for Hemant Karkare

Dulce et decorum pro mundi mori: The night Mumbai became scene from a nightmare: Police began engaging the terrorists in the Taj and Oberoi hotels. One of the first casualties was Hemant Karkare, Mumbai’s anti-terrorist squad chief and one of its top policemen, who was gunned down leading a team into the Taj.

On Thursday morning, with up to 55 guests being held hostage at the Taj Mahal and an estimated 40 at the Oberoi, the government sent in the elite Black Cat military anti-terrorist squad to flush them out of both hotels. Outside the Taj, the National Security Group of paramilitary police could be seen scaling the Gateway of India monument to get a better shot at the militants. The commandos systematically swept through the buildings, fighting room to room and freeing occupants such as Nori, the sushi chef at the Taj’s Wasabi Restaurant, who had been hiding in his room. “The commandos checked my passport, business card then said go,” he said.

A few streets away the military were figuring out how to dislodge a group of terrorists who had fled into a nearby slum, Colaba Market, where they had invaded a building and taken a Jewish family prisoner. As the sun set over Mumbai on Thursday night, gunfire and explosions were still rocking the Oberoi and the Taj. Meanwhile, police were tightening a cordon round Chabad House, where the Jewish family, consisting of the owner of the building, his wife and three others, were being held...


This is a current copy of the "policies" file at:

This is the place to comment on the comment policy, the email confidentiality policy, and the websufing anonymity policy.

(1) I will not spy on you. I personally will not collect or distribute or republish information about who visits this website--feel free to come here direct from without washing your browser.

(2) People with whom I have relationships I value can rely on me to keep confidential emails to me that they wish kept confidential. Otherwise, not. I am under no obligation to keep anything you send to me confidential unless I have promised previously to do so, and if I have not then I will or will not honor your requests that emails be kept confidential at my sole discretion.

(3) I want this website to be a seminar, not a foodfight. I don't have time to moderate this properly. I do try, occasionally. Thus I will delete comments that I believe to be, and I will delete comments by commenters who write comments that I believe to be:

  1. factually false.
  2. in a tone that is destructive of the conversation here.
  3. drive-bys by those who have no interest in the conversation here.
  4. mere expressions of approval or disapproval without evidence or supporting argument.
  5. off topic.
  6. the talking points of some political tendency.

The smartest thing I have seen on comment policies is Teresa Nielsen Hayden Here are selections (with my annotations):

Making Light: Virtual panel participation:

  1. There can be no ongoing discourse without some degree of moderation, if only to kill off the hardcore trolls. It takes rather more moderation than that to create a complex, nuanced, civil discourse. If you want that to happen, you have to give of yourself. Providing the space but not tending the conversation is like expecting that your front yard will automatically turn itself into a garden. (Which I, unfortunately, don't have time to do: whatever it is, it's not a garden.)

  2. Once you have a well-established online conversation space, with enough regulars to explain the local mores to newcomers, they’ll do a lot of the policing themselves.

  3. You own the space. You host the conversation. You don’t own the community. Respect their needs. For instance, if you’re going away for a while, don’t shut down your comment area. Give them an open thread to play with, so they’ll still be there when you get back.

  4. Message persistence rewards people who write good comments.

  5. Over-specific rules are an invitation to people who get off on gaming the system.

  6. Civil speech and impassioned speech are not opposed and mutually exclusive sets. Being interesting trumps any amount of conventional politeness.

  7. Things to cherish: Your regulars. A sense of community. Real expertise. Genuine engagement with the subject under discussion. Outstanding performances. Helping others. Cooperation in maintenance of a good conversation. Taking the time to teach newbies the ropes. All these things should be rewarded with your attention and praise. And if you get a particularly good comment, consider adding it to the original post.

  8. Grant more lenience to participants who are only part-time jerks, as long as they’re valuable the rest of the time.

  9. If you judge that a post is offensive, upsetting, or just plain unpleasant, it’s important to get rid of it, or at least make it hard to read. Do it as quickly as possible. There’s no more useless advice than to tell people to just ignore such things. We can’t. We automatically read what falls under our eyes. (I think that this is the most important directive of all: trolls must be squashed quickly, or the space turns into... Kevin Drum's comment section.)

  10. Another important rule: You can let one jeering, unpleasant jerk hang around for a while, but the minute you get two or more of them egging each other on, they both have to go, and all their recent messages with them. There are others like them prowling the net, looking for just that kind of situation. More of them will turn up, and they’ll encourage each other to behave more and more outrageously. Kill them quickly and have no regrets.

  11. You can’t automate intelligence. In theory, systems like Slashdot’s ought to work better than they do. Maintaining a conversation is a task for human beings.

  12. Disemvowelling works. Consider it.

  13. If someone you’ve disemvowelled comes back and behaves, forgive and forget their earlier gaffes. You’re acting in the service of civility, not abstract justice.

Thanksgiving Recipes

A message from Elisabetta Addis, who is trying to save us and has only our good in her heart: Against turkey:

Robert's Stochastic thoughts: I dont remember ever having braised just turkey in my life...!!! If it is just turkey, there is no doubt that your ONLY choice is to broil. I do it "porchettato" which is very similar to the person who broils it after a massage with butter and herbs.

The idea is to bone it, to fill the inside with a conspicuous amount of lard or un flavoured bacon chopped up very thinly together with a lot of fresh sage thyme laurel and rosemary, salt and pepper, make a roll, all tied up with the turkey skin out, rub the skin with olive oil, and cover it with a powder made up of sea salt, dry herbs same as above plus some cumin and coriander.

Then broil, broil, broil till the skin is crispy and the inside is all white but still juicy, which you know by testing, i.e. pricking with a fork and check the amount and color of the outcoming juice. Can be done with an upper leg, with a breast, and even with a whole turkey. Can be done without boning, but it does not come out well unless you fill the cavity with some moistenable material, like for example unseasoned bread crumbs mixed together with the herbs and pork fat above, and some pre-boiled potatoes, or even oranges or non-sweet apples.

Even then, it is barely edible, come on, it is turkey!!! do you know why they call a dumb person turkey? Because it has no taste!!!!

Braised turkey alone is not fit for human consumption, even if it is braised with wine and herbs. Chunks of turkey meat broiled together with onions and peppers, or onions, potatoes and carrots, plus white wine and herbs, maybe...but still, one does it because turkey is cheap and nutricious, not because of the great taste, come on!!!

Tell the blogosphere.

A message from Walter Jon Williams: For bacon and sausage:

Angel Station: Death By Stuffing: "Well," I can hear you saying, "we may eat too much turkey over the holiday weekend, but at least turkey is low in calories and cholesterol!" Pah! Not if you have Thanksgiving at our house! Not if you are served Uncle Walter's Bacon and Sausage Stuffing!

Start by cutting up a POUND OF BACON into strips. Cook the bacon in the bottom of a large stock pot until it renders up its fat. Then throw a POUND OF SAUSAGE MEAT into the pot, and cook it until it renders up its fat. Then throw in THREE CHOPPED ONIONS and HALF A DOZEN CHOPPED GARLIC CLOVES. Cook until the vegetables grow all wilty. Add ONE WHOLE STICK OF BUTTER. When the butter melts, add A POUND OR SO OF BREAD CRUMBS, HALF A DOZEN CHOPPED, HARD-BOILED EGGS, ONE CUP CHOPPED PARSLEY, TWO TEASPOONS RUBBED SAGE, SALT & PEPPER, and the CHOPPED GIBLETS, assuming you're not doing anything else with them.

Cook until the bread crumbs no longer crunch when you bite them.

(And, come to think of it, when you have this, why do you need a turkey exactly?)

This may send you into the hospital for your second bypass, but you'll be smiling as you go.

What Is Going on with Berkshire Hathaway?

Warren Buffett wrote last year: Last year I told you that Berkshire had 62 derivative contracts that I manage.... Today, we have 94... [in] two categories.... The second category of contracts involves various put options we have sold on four stock indices (the S&P 500 plus three foreign indices). These puts had original terms of either 15 or 20 years and were struck at the market. We have received premiums of $4.5 billion, and we recorded a liability at yearend of $4.6 billion. The puts in these contracts are exercisable only at their expiration dates, which occur between 2019 and 2027, and Berkshire will then need to make a payment only if the index in question is quoted at a level below that existing on the day that the put was written. Again, I believe these contracts, in aggregate, will be profitable and that we will, in addition, receive substantial income from our investment of the premiums we hold during the 15- or 20-year period.

Two aspects of our derivative contracts are particularly important. First, in all cases we hold the money, which means that we have no counterparty risk. Second, accounting rules for our derivative contracts differ from those applying to our investment portfolio. In that portfolio, changes in value are applied to the net worth shown on Berkshire’s balance sheet, but do not affect earnings unless we sell (or write down) a holding. Changes in the value of a derivative contract, however, must be applied each quarter to earnings.

Thus, our derivative positions will sometimes cause large swings in reported earnings, even though Charlie and I might believe the intrinsic value of these positions has changed little. He and I will not be bothered by these swings – even though they could easily amount to $1 billion or more in a quarter – and we hope you won’t be either.... [W]e are always ready to trade increased volatility in reported earnings in the short run for greater gains in net worth in the long run. That is our philosophy in derivatives as well...

Berkshire Hathaway Credit Risk, Index Puts Are Overblown Worries - Seeking Alpha

Whitney Tilson:

Berkshire Hathaway Credit Risk, Index Puts Are Overblown Worries: I’ve seen a lot of crazy things in my investment career, but I struggle to think of anything that tops this: Berkshire Hathaway’s (BRK.A) five-year credit-default swap spreads have more than tripled in the past two months and now stand at 475 basis points.... [T]he median CDS spread for companies with the lowest investment grade bond rating (BBB-) is 348 basis points.... Berkshire’s CDSs are higher than a wide range of other financial companies [more than 4x Travelers (TRV), 3x JP Morgan Chase (JPM) and well above Citigroup (C), even after Thursday’s stock collapse – the world has truly gone mad!]. A final thought on how crazy Berkshire’s CDS spreads are: What are investors who are buying CDSs on Berkshire thinking regarding counterparty risk? If things get so bad that AAA-rated Berkshire Hathaway goes bankrupt and defaults on its debt, what counterparty is likely to still be standing to pay on the CDSs???....

If one does no analysis, Berkshire’s derivative contracts appear to pose similar risks to those that caused AIG and others to collapse, but in reality, nothing could be further from the truth.... Buffett elaborated on this in the Q3 earnings release....

At the end of the third quarter, we had a liability of $6.72 billion for equity index put option contracts for which we have received cash payments of $4.85 billion. This means our recorded loss to date is $1.87 billion though the first payment that could be triggered would be in 2019.... In the meantime all of the $4.85 billion can be invested by Berkshire....

What about the much larger equity index put option contracts, for which Berkshire was paid $4.85 billion and had suffered noncash “losses” of $1.9 billion through Q3?... Buffett sold at-the-money puts on the four major world market indices at various times over the past few years.... If the indices rebound by 67% over the next 13.5 years... a mere 3.9% annually, then the puts will expire worthless and Buffett can pocket the entire $4.85 billion....

I think it’s very likely that the indices will compound at 4% annually from today’s depressed levels, making it unlikely that Berkshire will have to pay out anything on these contracts. And given how much Buffett was paid to write them and his ability to invest the premium he was paid in any way he chooses, it’s even more unlikely that this will be a losing investment. Thus, even knowing what I know today, I think this was a fantastic investment and wish Buffett had written more of these contracts (perhaps he’s writing more today?)...

In this environment, it’s not surprising to us that the stocks of companies with shaky balance sheets, poor business models and/or weak competitive positions are getting clobbered, but Berkshire’s freefall in the past few weeks is certifiably crazy – and a buying opportunity that will long be remembered.

How Did We Get Here? Michael Lewis's View...

Michael Lewis believes that the seeds of our financial crisis were sown when Wall Street investment banks transformed themselves from partnerships to public corporations--that that destabilized their internal risk controls and incentives and made them go for variance.

He has lunch with John Gutfreund:

The End of Wall Street's Boom: John Gutfreund did violence to the Wall Street social order—and got himself dubbed the King of Wall Street—when he turned Salomon Brothers from a private partnership into Wall Street’s first public corporation. He ignored the outrage of Salomon’s retired partners. (“I was disgusted by his materialism,” William Salomon, the son of the firm’s founder, who had made Gutfreund C.E.O. only after he’d promised never to sell the firm, had told me.) He lifted a giant middle finger at the moral disapproval of his fellow Wall Street C.E.O.’s. And he seized the day. He and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

No partnership, for that matter, would have hired me or anyone remotely like me. Was there ever any correlation between the ability to get in and out of Princeton and a talent for taking financial risk?

Now I asked Gutfreund about his biggest decision. “Yes,” he said. “They—the heads of the other Wall Street firms—all said what an awful thing it was to go public and how could you do such a thing. But when the temptation arose, they all gave in to it.” He agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

It was now all someone else’s fault.

He watched me curiously as I scribbled down his words. “What’s this for?” he asked.

I told him I thought it might be worth revisiting the world I’d described in Liar’s Poker, now that it was finally dying. Maybe bring out a 20th-anniversary edition.

“That’s nauseating,” he said.

Hard as it was for him to enjoy my company, it was harder for me not to enjoy his. He was still tough, as straight and blunt as a butcher. He’d helped create a monster, but he still had in him a lot of the old Wall Street, where people said things like “A man’s word is his bond.” On that Wall Street, people didn’t walk out of their firms and cause trouble for their former bosses by writing books about them. “No,” he said, “I think we can agree about this: Your fucking book destroyed my career, and it made yours.” With that, the former king of a former Wall Street lifted the plate that held his appetizer and asked sweetly, “Would you like a deviled egg?”

Until that moment, I hadn’t paid much attention to what he’d been eating. Now I saw he’d ordered the best thing in the house, this gorgeous frothy confection of an earlier age. Who ever dreamed up the deviled egg? Who knew that a simple egg could be made so complicated and yet so appealing? I reached over and took one. Something for nothing. It never loses its charm. 

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

I have spent three hours on the phone over the past two days trying to offset the consequences of three pieces of journalistic malpractice in the coverage of Christie Romer down the hall--Kelly Evans and Brenda Cronin of the Wall Street Journal who fear she is a milksop who will not dare contradict Larry Summers, Mike Allen of the Politico and James Barnes of the National Journal who say that she is a secret supply-sider, and John Judis who says that she is opposed to Obama fiscal policy.

That's three hours I am never going to get back.

In all of these conversations, eventually my interlocutor says: "But if what you say is true, then you are saying that the journalist"--Cronin or Evans or Judis or Allen or Barnes--"is simply not competent to write the story. Is that what you are saying?"

And I have come around to replying: "Yes. That is what I am saying."

Does anybody have a suggestion as to a more polite way that I can deal with people who say: "But if it isn't true, why did this reputable news organization"--the WSJ or Politico or the National Journal or TNR--"print it?"

Anybody? Anybody? Bueller?

First, Kelly Evans and Brenda Cronin of the Wall Street Journal:

Romer Joins a Crowd of Strong Voices as Chair of Council of Economic Advisers - One Obama adviser said Ms. Romer wasn't known for being confrontational and might have a difficult time dealing with Mr. Summers, who will be the president's top economic adviser and can be intellectually intimidating...

Christie has known Larry since before Larry cinished his Ph.D. Christie has never had any difficulties dealing with Larry. Witness

In addition to questions about DeLong and Summers's interpretation... one can also question their method.... Estimating potential GNP is very difficult and inevitably involves many choices. Throughout their analysis, nearly all of DeLong and Summers's choices cause the postwar gap to be smaller than would result from an easily justifiable alternative choice. Thus, I would suggest that 1.5 should be viewed as an upper bound on a plausible ratio... it would be easy to derive sensible gap-based measures that showed either no improvement or a worsening of macroeconomic performance.... Let me give a few examples of how their estimates of potential output are biased...

No difficulties in contradicting the intellectually intimidating Summers. None. Zero.

Second, Mike Allen of the Politico repeating a piece of misinformation from James Barnes of the National Journal

At the same time that Obama is calling for higher income taxes on people making $250,000 or more, the Romers have found that tax increases are generally bad for economic growth and that they primarily discourage investment -- the supply-side argument that conservatives use to justify tax cuts for the rich...

But Romer and Romer's "The Macroeconomic Effects of Tax Changes" does not make the (false) supply-side argument that cutting taxes in a time of deficits will cause the economy to grow faster and so reduce the deficit. In a time of deficits, they say, it is raising taxes that causes the economy to grow faster:

Panel (d) shows that the point estimates for the effect of a deficit-driven tax increase of 1% of GDP on GDP are consistently positive. However, there are too few tax changes of this type for the effects to be estimated precisely. The maximum impact is a rise in GDP of 2.48% (t = 1.03). While one should be very cautious in reading anything into such imprecise estimates, the results are suggestive...

Third, John Judis of the New Republic:

Mistreating Depression: Barack Obama announced today that the chair of his Council of Economic Advisors will be Christina Romer.... Obama uncharacteristically stumbled over his words in introducing her. He seemed to be learning who she was as he spoke--and that may say more about the appointment than the actual words of praise he uttered.... Obama... appoint[ed] someone--whether wittingly or not--whose views on the economy appear to place her well to the right of mainstream Democratic economic opinion.... Romer's view is that what ended the depression was an expansion in the monetary supply, due to the inflow of gold from abroad. "Fiscal policy, in contrast, contributed almost nothing to the recovery before 1942," Romer wrote in a 1991 paper for the National Bureau of Economic Research. That's a view that would lead one to emphasize monetary over fiscal fixes--that is, changes in the federal funds rate and money supply over increases in public investment and cuts in taxes. This policy perspective would seem to de-emphasize or even oppose the kind of massive public investments that Obama now seems to be considering...

As Eric Rauchway says:

That Romer article on the Great Depression: Romer’s argument goes something like this: (1) Per E. Cary Brown, and Keynes before him, the New Deal did not provide enough fiscal stimulus to spur recovery during the 1930s—not that it didn’t work, but that it wasn’t tried. (2) Yet there was significant recovery during the 1930s, both as to economic growth and to job growth. (3) So we have a mystery: where did the recovery come from? Did it come from the ordinary operations of the economy? No; there was an inflow of money from outside. (4) Why was there an inflow of money? Not because of the Fed—it wasn’t cooperative. But by stabilizing the banks and devaluing the dollar, Roosevelt’s administration set policy that drew overseas investments into the US. (5) This money came from overseas at first because of the devaluation, but it came in quantity later because it needed someplace safer to go than a Europe menaced by Hitler. Other countries’ misfortune was America’s good luck. (Which means you can’t necessarily say that there would have been a recovery without the war; the inflow of overseas investment owed partly to the war.) (6) Romer’s conclusion then is that “the rapid rates of monetary growth were due to policy actions and historical accidents.”

She’s very clear throughout that deliberate policy choices were key, and she thinks the deliberate policy choice of FDR to devalue in 1933/34 was most key. But there’s nothing particularly prejudicial there against fiscal policy. Nor an argument about the superiority of monetary policy. But an empirical case that owing to planning and luck, monetary policy worked in the 1930s.

New Republic Crashed-and-Burned Watch (Why Oh Why Can't We Have a Better Press Corps?)

John Judis on Christina Romer:

Mistreating Depression: First, [Romer's] history is misleading. She singles out the "1950s" as an Eden of economic policy and performance. She acknowledges later that "there were two recessions in the 1950s, and that in 1958 was quite deep," but even that acknowledgement is insufficient. Yes, it is true if you define the "1950s" literally as 1950 to 1959; but there were four recessions from 1948 to 1960...

This isn't up to Donald Luskin Stupidest Man AliveTM levels, but it is remarkably close.

The rest of the article is no better.

Talking Points on the Designation of Christina D. Romer as the Candidate to Be Nominated by President Obama to the Senate for the Post of Chair of the Council of Economic Advisers

  • World-class expert on the Great Depression: if you want to avoid any of the mistakes made during the Great Depression, she is the one to hire.
  • World-class expert on monetary and fiscal policy: encyclopedic knowledge of their history--since we need a CEA chair who knows more about stabilization policy than about tax or labor or industrial organization policy.
  • Very good at explaining economics: great similarities between teaching Econ 1 and teaching the White House staff about economics.
    • Very good at making people believe that relatively complicated ideas about economics are simple facts of nature.
  • Bush moved the CEA staff out of the Eisenhower Executive Office Building:
    • A very bad thing because the CEA staff can no longer look over the shoulders of the White House staff and offer advice.
    • CDR should demand, as a condition of appointment, that at least her two deputies have offices in the White House complex.
  • A center-left moderate:
    • But these are not moderate times. To be moderate now is to be radical. To be radical is to be moderate.
  • A woman who taught her then-two year old that the answer to the question "Who should be president?" was "Bruce Babbitt."

Other appointees:

  • Geithner, Summers, Orszag--world-class appointments; at least as well qualified as anybody else in the world for these jobs.
  • Who is going to be the consensus-builder?
    • You need a person to build a happy consensus among economic policy advisers.
    • If you don't have a builder of the happy consensus, then you have a situation in which lobbyists, spin-doctors, and rogue vice presidents have points of entry in order to make bad policy.

The Citigroup Bailout: What Are They Doing?

Paul Krugman has had enough:

Citigroup - Paul Krugman Blog - Mark Thoma has the rundown of informed reactions. A bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more. Amazing how much damage the lame ducks can do in the time remaining.

It is unclear to me why they aren't just buying common stock. As it is, they're endangering their own reputations to an extraordinary degree...

Five People for the Obama-Biden Administration

From Obama World HQ: five very good public servants:

Washington Wire: CHICAGO – President-elect Barack Obama and Vice President-elect Joe Biden officially announced key members of their economic team today, naming Timothy Geithner as Secretary of the Treasury and Lawrence Summers as Director of the National Economic Council. Obama and Biden also named Christina Romer Chair of the Council of Economic advisors, and named Melody Barnes and Heather Higginbottom to serve as Director and Deputy Director of the Domestic Policy Council.

“Vice President-elect Biden and I have assembled an economic team with the vision and expertise to stabilize our economy, create jobs, and get America back on track. Even as we face great economic challenges, we know that great opportunity is at hand – if we act swiftly and boldly. That’s the mission our economic team will take on,” said President-elect Obama.

The economic team members announced today are listed below:

Timothy F. Geithner, Secretary of the Treasury: Timothy Geithner currently serves as president and CEO of the Federal Reserve Bank of New York, where he has played a key role in formulating the nation’s monetary policy. He joined the Department of the Treasury in 1988 and has served three presidents. From 1999 to 2001, he served as Under Secretary of the Treasury for International Affairs. Following that post he served as director of the Policy Development and Review Department at the International Monetary Fund until 2003. Geithner is a graduate of Dartmouth College and the Johns Hopkins School of Advanced International Studies.

Lawrence H. Summers, Director of the National Economic Council: Lawrence Summers is currently the Charles W. Eliot University Professor at Harvard University. Summers served as 71st Secretary of the Treasury from 1999 to 2001 and as president of Harvard from 2001 to 2006. Before being appointed Secretary, Summers served as Deputy and Under Secretary of the Treasury and as the World Bank’s top economist. Summers has taught economics at Harvard and MIT, and is a recipient of the John Bates Clark Medal, awarded to the American economist under 40 judged to have made the most significant contribution to economics. Summers played a key advisory role during the 2008 presidential campaign.

Christina D. Romer, Director of the Council of Economic Advisors: Christina Romer is the Class of 1957 Professor of Economics at the University of California, Berkeley, where she has taught and researched since 1988. Prior to joining the faculty at Berkeley, Romer was an assistant professor of economics and public affairs at Princeton University’s Woodrow Wilson School of Public and International Affairs. Romer is co-director of the Program in Monetary Economics at the National Bureau of Economic Research and has been a visiting scholar at the Board of Governors of the Federal Reserve System.

Melody C. Barnes, Director of the Domestic Policy Council: Melody Barnes is co-director of the Agency Review Working Group for the Obama-Biden Transition Team, and served as the Senior Domestic Policy Advisor to Obama for America. Barnes previously served as Executive Vice President for Policy at the Center for American Progress and as chief counsel to Senator Edward M. Kennedy on the Senate Judiciary Committee from December 1995 until March 2003.

Heather A. Higginbottom, Deputy Director of the Domestic Policy Council: Heather Higginbottom served as Policy Director for Obama for America, overseeing all aspects of policy development. From 1999 to 2007, Higginbottom served as Senator John Kerry’s Legislative Director. She also served as the Deputy National Policy Director for the Kerry-Edwards Presidential Campaign for the primary and general elections. After the 2004 election, Higginbottom founded and served as Executive Director of the American Security Project, a national security think tank. She started her career as an advocate at the national non-profit organization Communities in Schools.

Bruce Bartlett: The Contrast Between Bush-Cheney and Obama-Biden

Bruce writes:

The Arena: So far, I am very impressed. Larry Summers at the NEC is brilliant. Tim Geithner at Treasury inspires confidence. Peter Orszag at OMB tells me that we will get honest numbers on which to base policy for a change. And Christina Romer at the CEA puts one of the nation’s top experts on the Great Depression at close hand.

This group has made me realize just how poor Bush’s appointments in recent years have been in the economic area. When slavish political loyalty is apparently the only requirement for a Bush Administration job, and demonstrable competence barely counts at all, it doesn’t tend to attract the best and the brightest. When on those rare occasions, Bush managed to get someone who is competent, there is no evidence that he paid the slightest attention to them, preferring instead the counsel of “Mayberry Machiavellis,” as former White House adviser John DiIulio called them. No wonder we are in the mess we are in.

Too Much Preferred Stock

The Citi rescue:

The U.S. government is committed to supporting financial market stability, which is a prerequisite to restoring vigorous economic growth. In support of this commitment, the U.S. government on Sunday entered into an agreement with Citigroup to provide a package of guarantees, liquidity access and capital.

As part of the agreement, Treasury and the Federal Deposit Insurance Corporation will provide protection against the possibility of unusually large losses on an asset pool of approximately $306 billion of loans and securities backed by residential and commercial real estate and other such assets, which will remain on Citigroup's balance sheet. As a fee for this arrangement, Citigroup will issue preferred shares to the Treasury and FDIC. In addition and if necessary, the Federal Reserve stands ready to backstop residual risk in the asset pool through a non-recourse loan.

In addition, Treasury will invest $20 billion in Citigroup from the Troubled Asset Relief Program in exchange for preferred stock with an 8% dividend to the Treasury. Citigroup will comply with enhanced executive compensation restrictions and implement the FDIC's mortgage modification program.

With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy.

We will continue to use all of our resources to preserve the strength of our banking institutions and promote the process of repair and recovery and to manage risks. The following principles guide our efforts:

We will work to support a healthy resumption of credit flows to households and businesses.

We will exercise prudent stewardship of taxpayer resources.

We will carefully circumscribe the involvement of government in the financial sector.

We will bolster the efforts of financial institutions to attract private capital.

Christie Romer to CEA?

Jake Tapper:

Political Punch: ABC News has learned that President-elect Obama had tapped University of California -Berkeley economics professor Christina Romer to be the chair of the Council of Economic Advisers, an office within the Executive Office of the President.

Romer, a widely respected economist with an expertise on the U.S. economy, will be one of the key economic advisers whom Mr. Obama will introduce to the nation this morning, along with New York Federal Reserve president Timothy Geithner, tapped to be Obama's nominee for Secretary of the Treasury, and former Treasury Secretary Larry Summers, who will serve as the director of the National Economic Council.

Romer and her husband David, also an economist at Berkeley, are members of the Business Cycle Dating Committee of the National Bureau of Economic Research, which decides when a recession has officially started or ended...

Excellent choice! (Of course, Austan Goolsbee would be another excellent choice. Ceci Rouse would be another excellent choice. Et cetera.) Throws our spring teaching schedule into a complete mess, however.

Things Worth Reading in the Past Week

In Economics:

Matthew Yglesias: Markets, Property Rights, and Air Pollution
Carmen Reinhart and Kenneth Rogoff: Regulation should be international
Menzie Chinn The Progress of the Financial Crisis in One Picture: Mortgages, Flight to Safety, Credit Lock
Dilip Abreu and Markus Brunnermeier: Bubbles and Crashes
John Cochrane: The Dog That Did Not Bark: A Defense of Return Predictability
Matthew Yglesias: Private Jets
Matthew Yglesias: Long and Deep
Justin Fox: The bankruptcy-by-some-other-name solution at GM «
Matthew Yglesias: The Driver’s Case for Congestion Pricing
Andrew Ross Sorkin: A Bridge Loan? U.S. Should Guide G.M. in a Chapter 11 -
Ken Houghton Sends Us to Joe Wilcox: Intel-Microsoft Vistagate, Part 3
Paul Krugman: Macro policy in a liquidity trap
Bruce Bartlett: What's the most important first step Republicans should take on the road to recovery?
Felix Salmon: Stocks: Recession Bites
Krishna Guha: US drops plan to buy toxic assets
Justin Fox: Do GM’s Arguments Against Bankruptcy Hold Water?
Justin Fox: The Government’s AIG Dilemma
Paul Krugman: Stimulus Math
Martin Wolf: Obama’s economic challenges
John Quiggin: Assessing Financial Model Builders
Henry Blodget: New York Times (NYT) Running On Fumes
John Maynard Keynes to Franklin Delano Roosevelt, December 1933
Paul Krugman: Rooseveltonomics
Jon Kocjan: Quickly Building "Industrial Strength" Homeowner Relief
Ben Bernanke: Asset-price "bubbles" and monetary policy

In Politics:

Stan Collender: Quick Question: Big 3 Auto Companies
Thoreau: Different poxes on different houses
The Economist: The Republican Party: Ship of Fools
Matthew Yglesias: Private Jets
Matthew Yglesias: Long and Deep
Michael Bérubé on the Weathermen
Jon Hilsenrath: Banks Keep Lending, but That Isn't Easing the Crisis
Justin Fox: Phil Gramm's mea non culpa
Digby: Washington Post Crashed-and-Burned Watch (Chris Cilizza Edition)
White Vote Share for McCain
Jonathan Freedland: An English Lesson
Frank Schaeffer: Sarah Palin Will Never Be President -- Trust Me
Stanley Greenberg: Goodbye, Reagan Democrats
Eric Martin: Project for the Next American Catastrophe
David Kurtz: TPMtv: The Prodigal Senator
Adam Nossiter: For South, a Waning Hold on Politics
Duncan Black: How Many Seats?
Mark Schmitt: Grading the Election Theories
Matthew Yglesias on Joe the Plumber
Who Is IOZ?: My Heart Knows What the Wild Goose Knows
Paul Krugman: The monster years
Steve Benen: What Lieberman Finds "Unacceptable"
Dana Goldstein: The Identity Politics Election
Matthew Yglesias: Good Riddance

Ben Stein Has Driven Felix Salmon to a Higher State of Shrillness

Every week--every week--the New York Times publishes Ben Stein is another week that all honorable reporters should quit. Felix Salmon:

Ben Stein Watch: November 23, 2008 - Finance Blog - Felix Salmon - Market Movers - I think it's fair to say that Ben Stein has officially capitulated. In his panicked and unhelpful column this week he says that the economy is "shot through and through with fear, even terror", and that things could get much worse:

If a colossal worldwide deleveraging spreads to Treasury debt owned by foreigners, the situation will be deadly serious.

Ben, let me explain to you what deleveraging is. When you borrow at a low rate to lend at a higher rate, you're leveraged. Traditionally, banks do that by borrowing short (through taking in deposits) and lending long, making their money from a positively-sloping yield curve. More recently, they tried other ways of doing much the same thing, setting up off-balance-sheet investment vehicles which had triple-A ratings and could therefore borrow at very low rates while lending to riskier credits in sectors such as subprime mortgages. In a deleveraging, those trades are unwound. The riskier, higher-yielding assets are sold, and your own excessive borrowings are paid down. If the assets have fallen substantially in value, the deleveraging can be associated with large losses. As a result, the one asset class which is absolutely safe from global deleveraging is the Treasury market. No one ever borrowed at low rates to invest in Treasuries, because Treasuries are always the lowest-yielding bonds in the world. No one can borrow cheaper than the US government.

Now it's possible that foreigners will sell their Treasury bonds for dollars, convert those dollars back into their domestic currency, and start spending at home. That would help to stimulate the global economy, and it might weaken the dollar. A weaker dollar, right now, would be a good thing: it would help US exporters, and no one's worried about inflation, which often accompanies currency weakness...

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

More New Deal Denialist Truth Squadding by Eric Rauchway at The Edge of the American West

Eric writes:

With Tyler against the strawmen and conservatives: In the NYT, you’ll see the eminently reasonable and decent Tyler Cowen explain, “The New Deal Didn’t Always Work, Either.” It’s a good thing nobody’s arguing that, then, isn’t it? Here’s a few quick points.

(1) As Tyler points out, and as I say in my book, the New Deal featured some notable errors. Everyone’s favorite to hate is the National Recovery Administration, which (as Tyler puts it) “sought to cartelize industry, backed by force of law.” Even if it had functioned it would probably have ended up increasing both prices and wages, leaving no net improvement in purchasing power; in the event, it didn’t function. It was unpopular with the public and Congress, tasked with investigating itself, discredited and almost discarded by the time the Supreme Court declared it unconstitutional.

Here’s the point to note: I’ve seen nobody argue, nor does Tyler cite anyone arguing, that, as a historical matter, NRA was the New Deal’s big success, nor that as a lesson of history, we should try NRA again.

(2) As Tyler points out, and as you’ve read here, “New Deal fiscal policy didn’t do much to promote recovery.” Just so: which is what Keynes was explaining, what Krugman argues, and what has been the understanding of the subject since E. Cary Brown’s work back in the 1950s: the lesson of New Deal fiscal policy is that Roosevelt was too conservative about its use.

When Tyler says, “we shouldn’t think that fighting a war is the way to restore economic health”—well, good thing nobody sane thinks that. The point of Michael Cembalest’s graph is not “war good” but “fiscal stimulus good”—you can have fiscal stimulus without war, and indeed fiscal stimulus is much more effective—and also morally defensible, we should note—without killing off your young and productive workers.

Here’s the point to note: I’ve seen nobody argue, nor does Tyler cite anyone arguing, either that we should repeat note-for-note the New Deal’s use of fiscal policy or that we should wage a war because it will allow less restrained fiscal policy. The point is that we should learn the lessons of New Deal fiscal policy and not be as conservative as FDR was in the 1930s.

(3) Tyler says, “The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well.” Absolutely right. Indeed, we can go further: they would have been desirable in the late nineteenth century, when other countries were enacting such policies, and they would have been desirable in the early twentieth century, when Theodore Roosevelt and Woodrow Wilson saw some early such measures into law over the objections of conservatives. And, as Tyler says, they would have been desirable in the 1920s. Funnily enough, the party in power in the 1920s was the non-TR version of the Republican Party, which had no interest in such policies. Inasmuch as these policies had been desirable for decades and blocked by political opposition, it was eminently sensible for the New Deal Democrats to enact them in the 1930s, because who knew when there would again be a majority in favor of them.

Here’s the point: Tyler thinks such policies are good, universal healthcare is probably one of them; it would be eminently sensible for the Obama Democrats to enact it now, because who knows when there will again be a majority in favor of it.

I’m pleased to join forces with Tyler against the wicked NRA-revivalists when they show up, and against the now actually existing opposition on the right, who would fight against these clear conclusions.

Le Citi Toujours Dormer...

Why oh why can't we have a better press corps? Eric Dash and Julie Creswell write that:

  • Citigroup had poor risk controls.
  • As a result, the bank owned $43 billion of mortgage-related assets that it incorrectly thought were safe.
  • They weren't.
  • And so as a result the market value of Citi has collapsed by a factor of ten: from $200 billion to $20 billion.

To which the only appropriate response is: "Huh?" How can losses out of $43 billion of optimistically overvalued asserts eliminate $224 billion of value? Eric Dash and Julie Creswell don't answer that question. They don't even seem to recognize that it is a question that they should be interested in. That they were given this story to write, and that no editors said "wait a minute! this doesn't add up!" is yet another signal that the New York Times is in its death spiral: not the place to go to learn anything about an issue.

Here they are:

The Reckoning - Citigroup Saw No Red Flags Even as It Made Bolder Bets: In September 2007... Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets.... [M]any Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers... failed to rein them in.... Citigroup’s stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago....

The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.... For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading. But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster....

From 2003 to 2005, Citigroup more than tripled its issuing of C.D.O.’s, to more than $20 billion from $6.28 billion, and Mr. Maheras, Mr. Barker and others on the C.D.O. team helped transform Citigroup into one of the industry’s biggest players. Firms issuing the C.D.O.’s generated fees of 0.4 percent to 2.5 percent of the amount sold....

Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages. Such a downturn did come.... The slice of mortgage-related securities held by Citigroup was “viewed by the rating agencies to have an extremely low probability of default (less than .01%),” according to Citigroup slides used at the meeting.... Mr. Maheras continued to assure his colleagues that the bank “would never lose a penny,” according to an executive who spoke to him....

“There is really no excuse for institutions that specialize in credit risk assessment, like large commercial banks, to rely solely on credit ratings in assessing credit risk,” John C. Dugan, the head of the Office of the Comptroller of the Currency, the chief federal bank regulator, said in a speech earlier this year. But he noted that what caused the largest problem for some banks was that they retained dangerously big positions in certain securities — like C.D.O.’s — rather than selling them off to other investors. “What most differentiated the companies sustaining the biggest losses from the rest was their willingness to hold exceptionally large positions on their balance sheets which, in turn, led to exceptionally large losses,” he said.... Citigroup has suffered four consecutive quarters of multibillion-dollar losses as it has written down billions of dollars of the mortgage-related assets it held on its books...

The narrative structure seems to be: They did not tell the bank to wash its hands! And it caught a cold! And then it died! The villains!

This does not seem to me to be satisfactory...

Look at it this way: A bank like Citigroup has a lot of assets--a lot of people have promised to pay it a lot of money in the future. Let's collapse all those dates in the future at which people have promised to pay Citi down to one point in time four years in the future, and let's collapse all the amounts promised in the pre-crisis situation in all their different configurations down to one number $1,263 billion. Citigroup thus has assets: in four years people will pay it $1,263 billion in cash.

Citigroup also has liabilities in the pre-crisis situation. It has borrowed--i.e., accepted deposits (that is what a deposit is: the bank has borrowed money from you, but they call it a deposit rather than a borrowing so that you will think that what you put in the bank is still there) and issued notes to the tune of $800 billion.

So Citigroup in this pre-crisis situation has assets of $1,263 and liabilities of $800 billion and thus is worth $463 billion right? Wrong. The $800 billion is essentially due tomorrow--if the depositors and creditors want to get it out rather than roll it over, they can do so. The assets are in the future and are uncertain. Future assets are worth less than current assets: this is the time discount on safe assets. Risky assets are worth less than safe assets: this is the risk discount. With a (safe) time premium of 4% per year and a risk premium of 2% per year, Citi's assets are worth 6% less on the open market today for each year they are in the future. Compound this over four years and you get a risk factor of 0.792. In this pre-crisis situation, Citi's assets could only be sold on the open market for $1,000 if they had to be sold immediately. But you still have a healthy bank: assets with a present value of $1,000; liabilities with a present value of $800; a net worth of $200 billion.

Path Finder

But things can go wrong:

  1. You can learn that you were always mistaken about the value of your assets--that they were always really worth less than you thought they were.
  2. You can learn bad news--that your assets used to be worth what you thought they were, but bad unexpected things have happened to your assets and they are worth less. (They are, after all, risky things to own: that's what "risky" means: bad things can happen and values can go down.)
  3. The safe rate of time discount can go up because of a liquidity crunch: people suddenly value cash now more than cash later by a greater degree. This will push the discount factor down and make the present value of your assets less even if you have had no bad news of any kind about their long-run value.
  4. The risk premium rate of time discount can go up because the market is no longer as tolerant of risk, or no longer as tolerant of your risks as it used to be. This will push the discount factor down and make the present value of your assets less even if you have had no bad news of any kind about their long-run value.

So now you have the post-crisis balance sheet of Citi:

Path Finder

As best as I can guess, things (1), (2), and (4) have gone wrong:

1.Citi's (and everybody else's, it seems) risk models were wrong: assumed that the tails of distributions were much too thin--never mind what they were doing making calculations based on tail densities about which you inevitably have no information at all anyway). This seems to have cost Citi about $30 billion in impairing the future value of its assets.

  1. We have gotten bad news about housing prices, independent of the erroneous distributional assumptions in the risk models. This seems to have cost Citi another $30 billion or so in impairing the future value of its assets.

  2. Has been working for Citi, not against it: the Federal Reserve has pushed short- and medium-term safe interest rates down far to diminish the magnitude of the liquidity premium--the preference for cash now rather than cash later. This would have raised the value of Citi's assets but for...

  3. ...the explosion of the risk premium. The risk premium on other investment banks's assets has gone from 2% to 6% or so. Citi's premium has gone up to 8% because it right now bears the additional risk that the government will step in and nationalize it, confiscating much of the shareholders' equity stake in the process.

Should Citi's management have planned for and guarded against this explosion in the risk premium? I certainly did not expect it--I did not think we could see this big a rise in the risk premium outside of a real cousin of the Great Depression, and I thought that modern tools of macroeconomic management would keep such a thing from happening. I never expected to see the unemployment rate hit 15% in my lifetime. I still don't.

It's in the nature of a bank to get into trouble and be on (or over) the edge of failure in a financial crisis. Banks exist to provide liquidity and safety: to turn the long-term highly-risky investments in plant, equipment, and infrastructure that are our social capital into the short-term liquid largely-safe assets that savers largely want. This means that banks are--if they are doing there job--long duration and long risk, and their values crater whenever there is a financial crisis because a financial crisis is a sharp fall in the value of long-duration and high-risk assets.

A bank that has not lost massive amounts of value in the past year and a half is either extremely nimble or extremely lucky: even the nimble and lucky JPMorgan Chase has lost 60% of its shareholder value in the past year and a half.

The question of how much duration and risk a bank should assume per dollar of capital is a knotty one--if you match durations and assume no risk, then your stock value never crashes. But shareholders are paying you to be a bank, not to be a not-bank. Rubin has a lot of big wins in his career: as a risk-arbitrage trader, as head of Goldman Sachs, the 1993 budget, the 1995 Mexican rescue, the 1997-98 East Asia crisis--that suggest that his judgment is generally good, and that he takes aggressive but appropriate risks that are in the interests of his principals. You got to know when to hold 'em and know when to fold 'em, but even if you do you may still break even.

The article says that Bob Rubin is racking his brain right now trying to think of what he could have known or could have learned back in 2005-6 that would have told him that Citigroup had taken on too much subprime mortgage risk, or that its internal risk-management controls were deficient:

Asked then whether he had made any mistakes during his tenure at Citigroup, [Rubin] offered a tentative response. “I’ve thought a lot about that,” he said. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.” Besides, he said, it was impossible to get a complete handle on Citigroup’s vulnerabilities unless you dealt with the trades daily. “There is no way you would know what was going on with a risk book unless you’re directly involved with the trading arena,” he said. “We had highly experienced, highly qualified people running the operation”...

Sophia Nelson Needs to Return From the Gamma Quadrant

She writes:

It's My Party, But I Don't Feel Part of It: Election night was a bittersweet night for me.... [A]s a black Republican, I was chagrined that the political party I've belonged to for 20 years... lost 96 percent of the black vote and 67 percent of the Hispanic vote.... We'll have to decide whether we want to be the party that believes in smaller government, lower taxes and less regulation, or whether we're going to be a litmus-test party that responds only to the demands of social conservatives.... [W]e'll have to confront our most disastrous modern legacy: our poor relationship with black Americans, the very people the party was formed to protect....

John McCain that seemed to simply concede the black vote... only one high-level black adviser or spokesperson on his full-time paid campaign staff. The GOP convention was embarrassingly devoid of people of color -- among more than 2,000 delegates, only 36 were black. The problem, former Maryland lieutenant governor Michael Steele told the Washington Times last week, is that party officials "don't give a damn."... It didn't have to be this way....

I joined the Republican Party in 1988, attracted by George H.W. Bush's message of a "kinder, gentler" America and Jack Kemp's mantra of economic development and urban enterprise zones, which seemed a natural fit for the black community.... [B]eing a moderate black Republican isn't easy. My black GOP colleagues and I endure endless ridicule and questioning from other African Americans, including close friends and family members who wonder how we can belong to a political party that is so overwhelmingly white, male, Southern, conservative and seemingly closed to ethnic minorities.

And truth be told, it's sometimes an ill fit.... Shannon Reeves... started a college Republican chapter at Grambling State University in 1988. In 2003, he wrote an open letter to the party after it was disclosed that in 1999, a newsletter published by the then-vice chairman of the California Republican Party had carried an essay suggesting that the country would have been better off if the South had won the Civil War. "I am tired of being embarrassed by elected Republican officials who have no sensitivity for issues that alienate whole segments of our population," Reeves wrote. "This embarrassment is different for a black Republican. Not only do we have to sit in rooms and behave professionally towards Republicans who share this ideology, we have to go home to a hostile environment where we are called Uncle Tom and maligned as a sell-out to the community because of our membership in the Republican Party." With those words Reeves expressed what many of us have felt over the years -- and felt again during the recent campaign as we listened to racially coded Republican ads and speeches aimed at scaring working-class and rural white voters about Obama...

Sophia: Jack Kemp lost. The Republican Party is now controlled by people who would rather have the votes of those who think it's a damned shame the South lost the Civil War than your vote. That is how it is. That is how it has been since Nixon.

Eric Rauchway Translates John Maynard Keynes

Eric writes on Keynes to FDR, February 1, 1938:

Keynes to FDR, February 1, 1938 « The Edge of the American West: Because a number of people have asked, and the relevant section—the start of the letter—doesn’t seem to be on the Internets elsewhere, I provide here the opening of Keynes’s letter to Roosevelt, with some interpolation/translation and historical detail:

...the present recession,,,

by which he means, the downturn of late 1937-1938, not the Depression: partly due to an ‘error of optimism’ which led to an overestimation of future demand, when orders were being placed in the first half of this year. If this were all, there would not be too much to worry about. It would only need time to effect a readjustment....

But I am quite sure that this is not all. There is a much more troublesome underlying influence. The recovery was mainly due to the following factors:—

(i) the solution of the credit and insolvency problems, and the establishment of easy short-term money;
(ii) the creation of an adequate system of relief for the unemployed;
(iii) public works and other investments aided by Government funds or guarantees;
(iv) investment in the instrumental goods required to supply the increased demand for consumption goods;
(v) the momentum of the recovery thus initiated.

Now of these (i) was a prior condition of recovery, since it is no use creating a demand for credit, if there is no supply...

This is the start of what teachers call the “praise sandwich”—we’ll say something nice, before we explain why you get a D. So let’s begin: good for you, Mr. President: the bank holiday, revaluing and stabilizing the currency, deposit insurance, recapitalizing the banks with the RFC--all that was swell.

...But an increased supply will not by itself create an adequate demand...

For example, notice how people still aren’t borrowing from banks, which still aren’t lending? That means you still have work to do.

...The influence of (ii) evaporates as unemployment improves, so that there is a dead point beyond which this factor cannot carry the economic system...

Good for you too, for not letting people starve: but relief is not recovery.

...Recourse to (iii) has been greatly curtailed in the past year...

I use the passive voice here to spare your feelings, but why oh why did you cut back on the WPA and the PWA, seeking a balanced budget, when the recovery had barely begun?

...(iv) and (v) are functions of the forward movement and cease—indeed (v) is reversed—as soon as the position fails to improve further...

You see, the flywheel of government spending had only just barely engaged the gears of the economy when you timidly pushed the clutch back in, so of course you started immediately to slow down.

...The benefit from the momentum of recovery as such is at the same time the most important and the most dangerous factor in the upward movement. It requires for its continuance, not merely the maintenance of recovery, but always further recovery. Thus it always flatters the early stages and steps from under just when support is most needed...

You need the government to spend more to get over that initial inertia and let the economy begin to run smoothly of its own accord.

...It was largely, I think, a failure to allow for this which caused the ‘error of optimism’ last year. Unless, therefore, the above factors were supplemented by others in due course, the present slump could have been predicted with absolute certainty...

I’m trying very politely not to say that a monkey could have told you not to cut back on government spending at just that moment. “Have you perhaps a monkey to advise you?” is the kind of thing I am avoiding saying.

...It is true that the existing policies will prevent the slump from proceeding to such a disastrous degree as last time...

Congratulations, you have not made quite such a mess of things as Herbert “almost twenty-five percent unemployment!” Hoover. Yet.

But they will not by themselves—at any rate, not without a large-scale recourse to (iii)—...

Remember (iii)? (iii) was “public works and other investments aided by Government funds or guarantees”. You need more of that. On a large scale. Otherwise, “error of optimism” –> catastrophe.

...maintain prosperity at a reasonable level...

The letter goes on at some length to make further recommendations, and toward the end gets on to being nice to FDR again, letting him know that he can lead the markets with the often-quoted comparison of businessmen to “domestic animals by nature, even though they have been badly brought up and not trained as you would wish.”

John Maynard Keynes to Franklin Delano Roosevelt, 2/1/1938. “Activities 1931-1939,” vol. XXI of The Collected Writings of John Maynard Keynes (Cambridge, Eng.: Macmillan, 1982), pp. 434-439.

And Eric posts a slide sent to him by Michael Cembalest of JPMorganChase:

A picture worth a thousand of Keynes2019s (and my) words. « The Edge of the American West

The Recession Deepens

Calculated Risk:

Calculated Risk: Goldman Slashes GDP forecast: From Bloomberg: Goldman Slashes U.S. Growth Forecasts, Says Recession Deepens

In a research note released this morning, Goldman Sachs slashed their Q4 GDP forecast from a decline of 3.5%, to a decline of 5% in Q4 (at an annual rate). They are now forecasting unemployment will reach 9% by Q4 2009.

They are also forecasting (not in Bloomberg article) that unemployment will rise to 6.8% in November with 350,000 in reported job losses.

This isn't quite the "just awful" scenario, but it is pretty close.

Homesteading the Noosphere

Matthew Yglesias and Ezra Klein believe that they are two very lucky people:

Matthew Yglesias

Matthew Yglesias: I Am Terrifying: I may not be as hot as Ezra Klein, but I’m really smart:

Whatever their provenance, the public intellectuals of 2009 will want to be fluent in the obvious issues of the moment: environment and energy, market turmoil, China, Russia, Islam. On that basis it looks like another good year for established stars such as Thomas Friedman, Martin Wolf, Bjorn Lomborg and Minxin Pei. But a rising generation of bloggers is terrifyingly young and bright: expect to hear more from Ezra Klein, Megan McArdle, Will Wilkinson and Matthew Yglesias.

I think it would be strange if the main qualification for becoming a high-profile public intellectual in the future is that you had to start a personal blog in 2002 or 2003.

Ezra Klein:

Ezra Klein: Luck: If my metric is "large media institutions making outlandish claims abut my virtues," then it's been a pretty good day or two. But as Matt Yglesias says, it's a bit unnerving to realize just how much of my career is the product of starting a blog during a very narrow window that spanned from 2001 to early-2003.

I always say that if I had done the same work on my school paper, no one would have noticed, but it's actually worse than that: A week after starting my first blog, I was rejected from City on a Hill press, Santa Cruz's student newspaper. And it's entirely possible that if I hadn't been rejected from City on a Hill, I would have put a lot of effort into that, and let my little vanity blog expire. Now, of course, it's harder to break into blogging, even as the talent and sophistication of the contenders has rocketed. Dylan Matthews, for instance, is smarter and more informed than I am now, and he's 18. And not 18 in the sense that 18 stands in to dramatize some low number. He's just actually 18. It's terrifying.

All of which is to say, luck is important, and more people should be Rawlsians.

Me? I owe what place I have to the fact that I have smart friends, and listen to them. It was Paul Mende who told me in 1995 when I left the Treasury that if I were smart I would get onto the internet in a big way--that it was The Next Really Big Thing--and I listened. It hasn't been The Next Really Big Thing in anything like the way anybody envisioned in 1995, but it has been very good to us.

Washington Post Crashed-and-Burned Watch (David Cho Edition)

Felix Salmon is very unhappy with David Cho of the Washington Post and with Henry Paulson as well:

Yet More Paulson Revisionism: It's not easy to keep Paulson's stories straight, but when it comes to Lehman Brothers, the First Version was that it was a good thing that it was allowed to fail. The Second Version was that Treasury never had the power to rescue Lehman. And the Third Version is that he was trying desperately to save Lehman, as he says today:

When the investment bank Lehman Brothers released disastrous second-quarter earnings this summer, shortly before it went bankrupt, Paulson asked its chief executive, Richard S. Fuld Jr., what the next quarter would look like. Fuld said it might be worse. Paulson demanded that he find a buyer for the company.

Fuld balked, looking for other ways to save the firm. So Paulson moved ahead himself and tried, ultimately unsuccessfully, to engineer a deal.

"I was the only guy who drove that," Paulson said. "I called two banks when none of them were interested. I tried to get them interested. I urged them to do it. . . . That's what a Treasury Secretary needs to do when you are in a war."

If you're being charitable to Paulson, you might think that at least the second two versions are consistent -- that Paulson tried to save Lehman despite not yet having the power to nationalize it, and that shortly afterwards, in the TARP bill, he was sure to give himself that power.

But it turns out that story doesn't wash, for two reasons. Firstly, Paulson is happy admitting to Cho that he has done lots of things as Treasury secretary which he was unsure he had the power to do. But more importantly, when he introduced the TARP bill initially, it didn't include a lot of the powers that Congress eventually gave him. Nouriel Roubini told the story of what really happened over a month ago: Congress realized that Paulson needed extra powers, and went to great lengths to give him those powers even though he never asked for them. As Nouriel says:

Paulson should be lucky that his early opposition to such public capital injection in the financial system did not prevent Congress - via the back door - to do what was right.

This is not Paulson "winning" powers from Congress which he "asked for" -- it's Paulson being given powers by Congress which he didn't ask for. If there's any hero in this story, it's not Paulson, it's Barney Frank. And it's depressing to see Paulson try to grab whatever little credit there is to go round.

And depressing to see David Cho of the Washington Post at work as well. Why oh why can't we have a better press corps?

Friday Morning Condiments Blogging

At Yali's Cafe East in Stanley Hall...

  • The squeeze bottle that looks like honey is honey.
  • The carafe that says "half and half" is half milk and half cream.
  • The carafe that says "skim" is skim milk.
  • The shaker labeled "cinnamon" is cinnamon.
  • The shaker labeled "chocolate" is chocolate.
  • The shaker that looks as if it holds vanilla holds salt.
  • The shaker that looks as if it holds nutmeg holds pepper.

Be advised.

Time for the Government to Buy Citigroup

No real point to merging it into JPMorgan Chase or Bank of America. And it is definitely too big to fail.

Who wants to be Deputy Assistant Secretary of the Treasury for Citigroup?

Peter Eavis:

Share Slump Tests Citi Limits: Following steep drops all week, Citi's shares shed another 26% Thursday, even after Prince Alwaleed bin Talal, a large and longtime shareholder, said he plans to increase his stake in the bank.... The market appears to be in a game of chicken with the government over Citi.... The political risk of giving banks basically free money is huge. And even that mightn't do the trick.... The only way to get that [leverage] ratio down is to slash assets -- almost impossible right now -- or issue a large amount of common stock. And that is the dilemma for the government. Citigroup's market value is $26 billion. If the government wanted to inject another, say, $25 billion through common stock it would end up controlling the bank...

Yep. Time to do it. Swedish model. No more of this "preferred stock capital injection" business. Common stock. And with commitment comes control.

Senator Arlen Specter: Dishonest and Dishonorable

Now Specter opposes the telecom immunity bills he voted for.

Mike Lillis:

The Washington Independent » Specter: Telecom Immunity Remains a “Festering Wound”: You recall the issue: The White House wanted not only expanded powers to spy on Americans without court oversight, but also demanded across-the-board immunity for the telecom companies that had broken the law by cooperating under the program. After a few months standing up to the administration’s wishes, Democrats caved on the issue. Then it virtually went away.

With the arrival of news that Eric Holder has been picked to be attorney general under the Obama administration, however, the topic has resurfaced. In an interview with MSNBC this afternoon, GOP Sen. Arlen Specter (Pa.), a vocal critic of the warrantless spying program, said he hopes Holder will “re-professionalize” the Justice Dept. in the wake of the Bush administration. That means taking a closer look at the legality of the wiretapping program, he said. “You have to have law enforcement with adequate tools,” Specter said. “But this business of warrantless wiretapping is not really in accordance with constitutional rights. And where you have the immunity granted to the telephone companies, that is still a festering wound”...

S&P Round Trip.

Average real capital gain over the twelve years since Greenspan's "irrational exuberance" speech in December 1996: -2.1% per year.

Average dividend paid on the S&P composite over the twelve years since Greenspan's "irrational exuberance" speech in December 1996: 1.6% per year.

Real return on the S&P composite over the twelve years since Greenspan's "irrational exuberance" speech in December 1996: -0.5% per year.

And the Campbell-Shiller evidence for mean reversion in stock prices is now stronger than ever...


We do not yet have an Obama-Biden administration economic policy team. We do not yet have nominees sent up to the Senate. We do not yet even have people who have been designated to be nominees sent up to the Senate on January 21, 2009. What we have are people about whom it has been leaked that they are going to be designated as the people to be nominated: we have a bunch of nominee-designate-leakees for three slots. They are:

  • Peter Orszag: OMB Director-nominee-designate-leekee. The Director of the Office of Management and Budget is the guardian of budgetary rationality: Do the government’s tax and spending plans add up? Do they make sense? Are the right departments being given the money then need—and are they spending it the right way? Are the entitlement programs the right size and targeted the right way? The Bush II administration was marked by a series of extraordinarily weak OMB Directors who essentially did not try to do their jobs—and the country is much the worse for it. The Bush I and Reagan administrations were marked by very strong but devious OMB Directors who did not work and play well with others—and so in the end failed to do their jobs. Peter Orszag is either the best or one of a very small group of people who are the ones best qualified for this job.

  • Austan Goolsbee: CEA Chair- nominee-designate-leekee. The Chair of the President’s Council of Economic Advisers is the guardian of economic rationality: Do the government’s policies make economic sense, or are they bad for the long-run health of the economy? The CEA was created after World War II by the Employment Act of 1947. After the Great Depression and the federal government’s assumption of the role of macroeconomic management and stabilization, it was thought that economists had something to say about this, that as a result that economists needed access to the president, and that this access should be institutionalized. During the Bush II administration the CEA’s offices were moved out of the Eisenhower Executive Office Building and thus out of the bubble that is the White House Complex. As a non-negotiable condition of his taking the job, Austan should insist on at least his two deputies—the other two members of the CEA—having offices inside the Eisenhower EOB. Six eyes can cover three times as much ground as two, and a surprisingly large share of the business of government is done by wandering around the Eisenhower building and the White House talking to people in hallways (or just hanging out in the Starbucks at 17th and Pennsylvania and talking to whoever comes by).

  • Jack Lew: NEC Chair-nominee-designate-leekee. The Assistant to the President for Economic Policy chairs the cabinet-level committee on economic policy, and together with their staff serves as the traffic cop for the paper and issue flow on economic policy into the president. The NEC Chair’s job has two components: First, to guide the economic policy team as they hammer out a consensus view on what the best economic policy is in order to leave as few points of entry for spin doctors, lobbyists, or rogue vice presidents to twist economic policy in destructive directions. (The Bush II NEC chairs never understood that this was their principal role, and so they were all catastrophic failures at the job.) Second, in cooperation with the chief of staff, to make sure that the president hears not what he wants to hear but what he needs to hear. This usually means that the president gets pissed off at the NEC chair (and chief of staff) at some point: the best analogue to these jobs comes from track-and-field: javelin catcher. (Condi Rice is the most striking example in recent times of an assistant to the president who simply did not do her job: as NSC chair she set out to make sure that the president heard what he wanted to hear and not what he needed to hear, and in a good world she would now have no entrée into polite society.)

There are far more jobs that have not yet been filled, even in the most provisional fashion:

  • Peter Orszag’s naming as OMB Director-nominee-designate-leekee leaves a hole at the equally important post which is the OMB Director’s Capitol Hill shadow: the Director of the Congressional Budget Office. My favorite candidate for CBO Director is Doug Elmendorf of the Brookings Institution.

  • Federal Reserve Chair-nominee-designate-leekee. Ben Bernanke’s term as Fed chair is up in two years. Ben might not want to continue—it’s been a rough ride. And Ben will probably be damaged goods: too many people who think that he gave away too much public money to feckless financiers and too many other people who think that he has not done enough to protect and stabilize the financial system. I think Ben has done a good job—certainly a much better job than I would have done in his shoes. But I think the odds are that a fresh start would be good, and for policy continuity it would be a good idea to designate Ben Bernanke’s probable successor now.

  • Treasury Secretary-nominee-designate-leekee. There are two ways to go with Secretary of the Treasury: First, to choose somebody with as much gravitas as possible—a Warren Buffett or a Paul Volcker—and give them as a deputy somebody extremely capable but perhaps not yet of sufficient financial stature to be the ideal choice for the top job. (My favorite candidate for Deputy Secretary if the Obama-Biden administration goes down this road is Laura Tyson.) Second, to sacrifice some gravitas and to instead choose the smartest and most energetic person with sufficient knowledge of finance. (This is my preferred option: and my preferred candidate is Larry Summers.) As far as the Treasury is concerned, the bench is thinner than I had first thought: you need somebody who (a) knows finance, and (b) hasn’t been making a fortune over the past five years by benefiting from the creation of the mess that the government must now clean up.

  • Financial Regulatory-Legislative-Czar-nominee-designate-leekee. Somebody is going to have to design and win broad congressional support for the reformed financial regulatory system that we need. A Treasury Secretary who tries to do this job in addition to all the other responsibilities of the Treasury Secretary will be spread much too thin to be effective. My favorite candidate for this job is Sheila Bair. Here profiting from the creation of the mess is not a disability for the same reason that FDR chose Joe Kennedy to be the first Chair of the Securities and Exchange Commission.

  • Trade Czar-nominee-designate-leekee. This will, I think, turn out to be a much more important job in the Obama-Biden administration than people recognize. Trade agreements are a principal way that we deploy our foreign policy soft power. And trade sanctions are, I think, going to be a principal tool in the construction of the system of global governance to fight global warming.

  • Secretary of Labor

  • Secretary of Commerce

  • Secretary of Transportation

  • Secretary of Energy

  • Secretary of the Interior

Why Oh Why Can't We Have a Better Press Corps? (Another Pro-Publica Edition)

Dick Tofel of ProPublica tries to have his cake and eat it too.

On the one hand, Dick Tofell says that Felix Salmon isn't allowed to talk to ProPublica's reporters:

Nieman Journalism Lab: Tofel... “I said to [Salmon] that we believe our reporter’s time is better devoted to additional reporting on the subject than to debating. That’s a resource decision we have to make. You may think that’s wrong, you may think that’s antiquated, but that’s the decision we make.”

On the other hand, Joshua Benton isn't allowed to criticize ProPublica because Benton has not talked to ProPublica's reporters:

Joshua Benton: Tofel... said he wished I would have called him or ProPublica before writing my post. He said I had a “’shoot first and ask questions later’ approach, which I know is becoming more common” online. “Why wouldn’t you want to be better informed before you publish?” he asked me...

Remarkable: "we won't talk to you because our work stands by itself and you can't criticize our work because you haven't talked to us."

Fannie and Freddie Did Not Cause the Crisis

Once again, Richard Green's refutation of the right-wing hack claim that Fannie and Freddie caused the crisis by leading poor private-sector financiers to make stupid loans:

Richard's Real Estate and Urban Economics Blog: Charles Calomiris and Peter Wallison blame Fannie Mae for the Subprime Mess: Hmmmm. The loan performance on Fannie's book of business is substantially better than the overall mortgage market. And starting in 2002, Fannie Freddie (pink line) lost market share to ABS (light blue line). The data underlying the graph is from the Federal Reserve, Table 1173. Mortgage Debt Outstanding by Type of Property and Holder:

Path Finder