Ten Economic Pieces Worth Reading: December 30, 2009
1) Paul Krugman: Fannie, Freddie, and Full Faith:
Fannie and Freddie... [are] in the same business as the Fed these days.... [W]hat the Fed is doing when it engages in “quantitative easing” [is] expanding its balance sheet by buying unconventional assets... a broader provision of credit to the private sector by governmental or quasi-governmental agencies.... Why do this? Part of what depressed the economy during the financial crisis was a widening spread between government debt and private borrowing costs--not just in things like the TED spread, but also in mortgage rates. This spread was narrowed thanks to a combination of Fed actions and the expansion of Fannie-Freddie lending. And the administration very much wants to keep this kind of intervention going. You can argue that some other policy — inflation targeting by the Fed, expanded fiscal stimulus, whatever — would be better. But none of these things seem politically possible. Keeping Fannie and Freddie fully engaged in the mortgage-support business is one of the few tools available to prop up a still very weak economy. And so they’re doing it.
On April 10th 1663, Samuel Pepys, diarist and man-about-London, noted that he had enjoyed “a sort of French wine called Ho Bryan that hath a good and most particular taste that I never met with”. He drank what is now called Château Haut Brion at the Royall Oak Tavern in the heart of London, one of many such establishments that had sprung up after the return from exile of King Charles II three years earlier and which offered such new delicacies as tea, coffee and classy wines. The hedonistic atmosphere of the times was responsible for the introduction not only of “Ho Bryan” and the other great wines of Bordeaux, but also of port from the Douro Valley in Portugal, the sparkling wines of Champagne and the brandy from a little town called Cognac, north of Bordeaux.
3) Lexington: America's greatest strength:
[O]ne reason why America is such attractive place to migrate to is that almost anyone can find an agreeable niche here: "No matter where an immigrant hails from, he can find a cluster of his ethnic kin somewhere in America. In fact, he is probably spoilt for choice. If he wants to live in a suburb, eat Korean food and listen to fire-and-brimstone sermons in Korean, he can do so in northern Virginia. If he prefers an urban and secular Korean lifestyle, he can try Boston or San Francisco. If he craves Ethiopian food, Amharic radio and lots of gay clubs, Washington, DC, may suit him. And so on." You can find welcoming clusters of ethnic minorities in other rich countries, but not nearly as many. In a European country, if you want Korean food and a particular denomination of Korean church, you might find it in the capital but you will struggle in the suburbs. In America, it is easier to find just the niche you want: Polish or Vietnamese, metropolitan or exurban, gay or straight, Episcopalian or Muslim, or any combination of the above." The article tells the stories of three very different immigrants: a conservative Korean Christian, an English fox-hunter and a Dutch-Somali atheist. It contends that: "a country’s economic prospects depend in large measure on whether it is a place where people want to be. Desirable destinations draw talented and industrious migrants. Less desirable ones suffer a brain drain."
The political action committee behind the Tea Party Express (TPE)... directed around two thirds of its spending during a recent reporting period back to the Republican consulting firm that created the PAC.... Our Country Deserves Better (OCDB) spent around $1.33 million from July through November... $870,489 went to Sacramento-based GOP political consulting firm Russo, Marsh, and Associates, or people associated with it. OCDB['s]... site was registered in July 2008 by Sal Russo... the PAC's "chief strategist." Tea Party Express fundraising emails... come from another Russo, Marsh employee, Joe Wierzbicki. Just for good measure, legendary GOP bamboozler Howard Kaloogian is also on OCDB's board, and has close ties to Russo, Marsh...
5) Renminbi RX - Paul Krugman Blog - NYTimes.com:
Dean Baker is right: it’s bizarre to report that Chinese officials are (a) worried about inflation and (b) determined not to let their currency appreciate without noting that these are contradictory policies.... By deliberately keeping E higher than it would be under floating, China is creating pressures for P to rise; the inflationary pressures are directly related to the exchange rate policy. This isn’t a new story. The proximate cause of the breakup of Bretton... was the fact that Germany, whose currency was pegged to the dollar, found itself facing inflationary pressures; the Germans solved that problem by letting the Deutsche mark float, and the rest is history. Oh, and right now Spain faces deflationary pressure because it can’t devalue, yet the economy wants a depreciated real exchange rate. So China is basically trying to keep water from flowing downhill. And it really needs to stop.
6) Calculated Risk: Divergent Views on Treasury Yields in 2010:
Here are a couple of stories with very different views... From Bloomberg: Morgan Stanley Sees 5.5% Note as U.S. Faces Deficits (ht Bob_in_MA): "Yields on benchmark 10-year notes will climb about 40 percent to 5.5 percent, the biggest annual increase since 1999, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said." And the LA Times has comments from PIMCO's El Erian: "El-Erian says people are fooling themselves if they think all the bullish data of late means a strong recovery is in the offing. So he's buying Treasurys and selling riskier stuff. His bet: Investors will get scared again and want U.S.-guaranteed debt so they know they'll get repaid." Earlier Greenlaw argued that the Fed would start raising rates in the 2nd half of 2010 because of rising inflation, even with a fairly weak economy. I think it is unlikely that the Fed will raise rates in 2010 (although possible) - and I'll definitely take the under on Greenlaw's 2010 prediction of 7.5%+ rates on 30-year fixed mortgages - that seems extremely unlikely.
7) Barry Ritholtz: Freefall in LCD Prices:
So the old 27″ Sony TV — a 32″ CRT in the bedroom is — finally dying. Turn it on, and the screen goes on and off until its warmed up. I want to replace it with a bigger flat panel — I want 37″, the wife insists on smaller. Looks like 32″ will be the compromise. I am torn between getting something really nice or a something that’s a really good deal. I am leaning towards the latter. The TV in the den is kickass — and I really don’t want to be tempted to watch anything other than late night TV before bedtime. I started looking around for a replacement, and I was stunned at how much prices have freefallen. The NYT runs full page J&R ads most days, and the discounts have been pretty deep. Here’s what I scared up:
Good (720p)
- Panasonic VIERA X1 Series TC-L32X1 LCD HDTV ($400) (More info at Panasonic)
- Sony KDL-32L5000 BRAVIA L-Series LCD Flat Panel HDTV ($449) (More info at Sony)
Better (1080p):
- LG 32LH30 LCD HDTV ($449) (More info at LH)
- Sony KDL-32XBR9 Class BRAVIA XBR9 Series LCD HDTV ($599) (More info at Sony)
Are there any better suggestions? I’m leaning towards the cheap Panasonic VIERA X1 Series TC-L32X1 — a 2009 model that comes with an iPod doc — it turns the tv set into a audio system.
8) BEST NON-ECONOMICS THING I'VE SEEN TODAY: Bill O'Reilly:
9) STUPIDEST THING I'VE SEEN TODAY: David Harvey: Organizing for the Anti-Capitalist Transition:
A revolutionary politics that can grasp the nettle of endless compound capital accumulation and eventually shut it down as the prime motor of human history, requires a sophisticated understanding of how social change occurs. The failings of past endeavors to build a lasting socialism and communism have to be avoided and lessons from that immensely complicated history must be learned. Yet the absolute necessity for a coherent anti-capitalist revolutionary movement must also be recognized. The fundamental aim of that movement is to assume social command over both the production and distribution of surpluses. We urgently need an explicit revolutionary theory suited to our times. I propose a “co-revolutionary theory” derived from an understanding of Marx’s account of how capitalism arose out of feudalism. Social change arises through the dialectical unfolding of relations between seven moments within the body politic of capitalism viewed as an ensemble or assemblage of activities and practices: a) technological and organizational forms of production, exchange and consumption b) relations to nature c) social relations between people d) mental conceptions of the world, embracing knowledges and cultural understandings and beliefs e) labor processes and production of specific goods, geographies, services or affects f) institutional, legal and governmental arrangements g) the conduct of daily life that underpins social reproduction. Each one of these moments is internally dynamic and internally marked by tensions and contradictions (just think of mental conceptions of the world) but all of them are co-dependent and co-evolve in relation to each other. The transition to capitalism entailed a mutually supporting movement across all seven moments. New technologies could not be identified and practices without new mental conceptions of the world (including that of the relation to nature and social relations). Social theorists have the habit of taking just one of the these moments and viewing it as the “silver bullet” that causes all change. We have technological determinists (Tom Friedman), environmental determinists (Jarad Diamond), daily life determinists (Paul Hawkin), labor process determinists (the autonomistas), institutionalists, and so on and so forth. They are all wrong. It is the dialectical motion across all of these moments that really counts even as there is uneven development in that motion. When capitalism itself undergoes one of its phases of renewal, it does so precisely by co-evolving all moments, obviously not without tensions, struggles, fights and contradictions. But consider how these seven moments were configured around 1970 before the neoliberal surge and consider how they look now and you will see they have all changed in ways that re-define the operative characteristics of capitalism viewed as a non-Hegelian totality. An anti-capitalist political movement can start anywhere (in labor processes, around mental conceptions, in the relation to nature, in social relations, in the design of revolutionary technologies and organizational forms, out of daily life or through attempts to reform institutional and administrative structures including the reconfiguration of state powers)...
10) HOISTED FROM THE ARCHIVES: DeLong (April 4, 2003): Let us now praise... the wild-eyed enthusiasts who begat the dot-com bubble-boom:
When the stock market hit the puke stage, conventional wisdom turned. The whole new economy thing had been a bad thing. Time, talent, and capital were thrown away on unsustainable enterprises like point-and-click pet food; it was good for Odwalla, but not good for America.... Fortunes were poured into overflowing snake pits of fiber-optic cables, which, like Web-ordered groceries, proved to be profit-free zones. In just four years, the craze sucked up $600 billion worth of purchasing power....
As Andy Grove said in these pages, "The dotcoms threw themselves on the bonfire, but they created a bigger flame as a result." So while the Intels, Dells, and Oracles might be shells of their former market-cap selves, huge amounts of useful stuff found its way to consumers. Even the flameouts pumped out stuff so cheap that though it's not all clearly useful, it's still an amazing bargain.... [H]istory will look back and see gain and gain... profits are not the same thing as social value. Just because a group of firms, an industry segment, flopped as a profitmaker does not mean it failed as a producer.... The US airline industry is a perpetual loss machine. Yet the service it provides the rest of us is incredibly valuable. British investors in US railroads during the late 19th century got their pockets picked twice: first as waves of overenthusiasm led to overbuilding, ruinous competition, and unbelievable (for that time) burn rates, and second as sharp financial operators stripped investors of control and ownership during bankruptcy workouts. Yet Americans and the American economy benefited enormously from the resulting network of railroad tracks that stretched from sea to shining sea. For a curious thing happened as railroad bankruptcies and price wars put steady downward pressure on shipping prices and slashed rail freight and passenger rates across the country: New industries sprang up.
Consider, for example, the old Montgomery Ward and Sears Roebuck catalogs. Sears and Montgomery Ward discovered at the end of the 19th century that the cost of shipping consumer goods to rural America was no longer a competitive burden. Mail a catalog to every household in the country. Offer them big-city goods at near big-city discounts. Rake in the money from satisfied customers. For two generations this business model - call it the "railroad services" business model - was a license to print money, made possible only by the gross overbuilding of railroads, the resulting collapse of freight rates, and the fact that railroad investors had had to kiss nearly all their money good-bye. Their pain was outweighed by the gain to American consumers and manufacturers, who could now order and ship goods essentially free. The irrational exuberance of the late 1800s made the railroads a money-losing industry - and a wealth-creating industry...
