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August 2010

is a Bond Bubble Even Conceivable?

Spencer of Angry Bear says not:

BOND BUBBLE?: Many are talking about the bond market being the latest bubble. But it looks more like the press is just seeing bubbles everywhere. To me a bubble happens when everyone starts believing something that probably is not true... that the long term earnings growth of the S&P 500 was shifting up.... In the 2000's bankers and home owners came to believe that housing prices could never fall so that homeowners could always refinance their mortgages. Consequently, lenders did not have to worry about credit risk.

So for the bond market to be a "bubble" investors would have to start thinking they can make unusually large capital gains in the bond market. But everyone knows that if you buy a 10 year bond that at the end of 10 years all you will get back is your original investment. In the meantime you will get the coupon and what you can earn by reinvesting that coupon. Yes, if rates continue to fall in the short run you will be able to sell the bond for more than you paid, but you total return has to remain limited because in 10 years the possibility of capital gains must converge on zero. As long as this is true the possibility of a bond bubble must remain something reporters and pundits can pontificate on but nothing more than that.

Estimated Monthly GDP Is Declining...

David Beckworth looks at the estimates from Macro Advisers:

Macro and Other Market Musings: How Low Must It Go?: I was shocked to see the outright decline in May and June. Let's be clear what this development means: total current dollar spending declined during May and June in the U.S. economy.  And most likely it continued to fall in July and August given the weak economic outlook.

Paul Krugman Tells Us to Go Read Konczal and Jayadev


Expansionary Austerity?: In a terrific new working paper, MIke Konczal and Arjun Jayadev look under the hood of an Alesina/Ardagna paper that is being widely cited as evidence that austerity will lead to growth. They look to see how many of the austerity -> growth episodes actually involve fiscal contraction in a slump. Here’s a comprehensive list of those cases:

Ireland 1987

And as I among others have noted, the things that drove Irish expansion — devaluation, a boom in its largest trading partner, and a sharp fall in interest rates — have no relevance to the United States today...

Am I the Only Person in the World Who Remembers That the World Trade Center Was a Work of Islamic Architecture?

Laurie Kerr: The Mosque to Commerce:Bin Laden's special complaint with the World Trade Center: We all know the basic reasons why Osama Bin Laden chose to attack the World Trade Center, out of all the buildings in New York. Its towers were the two tallest in the city, synonymous with its skyline. They were richly stocked with potential victims. And as the complex's name declared, it was designed to be a center of American and global commerce. But Bin Laden may have had another, more personal motivation. The World Trade Center's architect, Minoru Yamasaki, was a favorite designer of the Binladin family's patrons—the Saudi royal family—and a leading practitioner of an architectural style that merged modernism with Islamic influences.

The story starts in the late 1950s, when Yamasaki, a second-generation Japanese-American, won the commission to design the King Fahd Dhahran Air Terminal in Dhahran, Saudi Arabia. His design had a rectilinear, modular plan with pointed arches, interweaving tracery of prefabricated concrete, and even a minaret of a flight tower. In other words, it was an impressive melding of modern technology and traditional Islamic form. The Saudis admired it so much that they put a picture of it on one of their banknotes.

For Yamasaki, an architect with a keen mathematical mind and a taste for ornamental pattern-work, this brush with the intricate geometries of Islamic architecture was inspiring, and he began to incorporate arabesques and arches into his work. For the next 12 to 15 years he played with Islamic forms in projects as diverse as the Federal Science Pavilion at the Seattle World's Fair, the Eastern Airlines Terminal at Logan Airport, and even the North Shore Congregation Israel in Glencoe, Ill.

Yamasaki received the World Trade Center commission the year after the Dhahran Airport was completed. Yamasaki described its plaza as "a mecca, a great relief from the narrow streets and sidewalks of the surrounding Wall Street area." True to his word, Yamasaki replicated the plan of Mecca's courtyard by creating a vast delineated square, isolated from the city's bustle by low colonnaded structures and capped by two enormous, perfectly square towers—minarets, really. Yamasaki's courtyard mimicked Mecca's assemblage of holy sites—the Qa'ba (a cube) containing the sacred stone, what some believe is the burial site of Hagar and Ishmael, and the holy spring—by including several sculptural features, including a fountain, and he anchored the composition in a radial circular pattern, similar to Mecca's.

At the base of the towers, Yamasaki used implied pointed arches—derived from the characteristically pointed arches of Islam—as a transition between the wide column spacing below and the dense structural mesh above. (Europe imported pointed arches from Islam during the Middle Ages, and so non-Muslims have come to think of them as innovations of the Gothic period.) Above soared the pure geometry of the towers, swathed in a shimmering skin, which doubled as a structural web—a giant truss. Here Yamasaki was following the Islamic tradition of wrapping a powerful geometric form in a dense filigree, as in the inlaid marble pattern work of the Taj Mahal or the ornate carvings of the courtyard and domes of the Alhambra.

The shimmering filigree is the mark of the holy. According to Oleg Grabar, the great American scholar of Islamic art and architecture, the dense filigree of complex geometries alludes to a higher spiritual reality in Islam, and the shimmering quality of Islamic patterning relates to the veil that wraps the Qa'ba at Mecca. After the attack, Grabar spoke of how these towers related to the architecture of Islam, where "the entire surface is meaningful" and "every part is both construction and ornament." A number of designers from the Middle East agreed, describing the entire façade as a giant "mashrabiya," the tracery that fills the windows of mosques.

In the early '70s, as the trade towers were nearing completion, Saudi Arabia was awash in oil revenues, and the state embarked on a massive modernization and building campaign. Yamasaki was premier among the many foreign architects hired during this period. Unwilling to take on too much work, Yamasaki decided to accept just three choice projects in Saudi Arabia: the Saudi Arabian Monetary Agency head office, the Eastern Province International Airport, and the King Fahd Royal Reception Pavilion at Jeddah Airport. In all three projects he continued his explorations in melding traditional Islamic form with modern materials, methods, and functions.

As a scion of the Binladin contracting firm, destined to inherit some portion of its vast operations, Osama Bin Laden would certainly have been aware of Yamasaki's Saudi Arabian projects. Indeed, his family may have built them. (Minoru Yamasaki Associates won't say, but the Binladens were involved with almost all royal construction.) While Osama was in college in the mid-'70s, Yamasaki was designing his second generation of Saudi work, and the World Trade Center—then the tallest building in the world times two—came to completion in New York. This period was the high-water mark both for Yamasaki's world reputation and for the Saudis' national construction plan—which in Saudi Arabia must have brought a heightened sense of importance to the World Trade Center.

Having rejected modernism and the Saudi royal family, it's no surprise that Bin Laden would turn against Yamasaki's work in particular. He must have seen how Yamasaki had clothed the World Trade Center, a monument of Western capitalism, in the raiment of Islamic spirituality. Such mixing of the sacred and the profane is old hat to us—after all, Cass Gilbert's classic Woolworth Building, dubbed the Cathedral to Commerce, is decked out in extravagant Gothic regalia. But to someone who wants to purify Islam from commercialism, Yamasaki's implicit Mosque to Commerce would be anathema. To Bin Laden, the World Trade Center was probably not only an international landmark but also a false idol.

Matthew Yglesias's Solution to the Mike Allen Problem

Why oh why can't we have a better press corps? Yglesias says that we can:

Yglesias: People Should Talk on the Record! Earlier this week, the Treasury Department invited some bloggers... to meet briefly with Secretary Geithner and I guess some other officials.... Mike Allen... given the ground rules, likewise offered a writeup that didn’t feature specific names or quotes... a “mind-meld”... that Tim Fernholz and other more policy-minded people who were there said was substantially inaccurate.

Brad DeLong glosses this as part of why “Friends Don’t Let Friends Read Politico.” And certainly it is a case study in why you can’t go run and panic after reading a thinly sourced item in a traffic-hungry publication. But part of the issue here, it seems to me, is that DC officialdom ought to realize that its obsession with off the recordy-ness has some serious downsides. Treasury did two meetings this week, one that was with professional blogger types and one that was more with professional economists who also blog, and most of the attendees seem to have come away quite impressed. If that’s the case, wouldn’t people able to listen to a recording of the full session likely also be impressed? And wouldn’t it be easier to clear up misconceptions that Allen’s writeup may have created?

Structural shifts in the media industry away from the “three TV networks and a bunch of local newspaper monopolies” model have shifted the balance of power away from journalists and toward flacks. Consequently, if people want to hold off the record briefings with “senior officials” plenty of writers are going to show up. But merely because people can get away with that kind of thing doesn’t necessarily make it a good idea...

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

Yes, Jeffrey "Toilet Training" Goldberg appears really upset at the distribution of his emails. Glenn Greenwald:

"Retraction": Last night, I emailed Goldberg, told him I intended to write about this....  He responded by acknowledging that no such thing had happened and apologized gracefully enough ("You're right, I'm wrong. My apologies"), but then -- assuming I'd be writing about this -- went to his blog... ("I mistakenly said that I thought Greenwald had retracted a particularly dumb charge leveled against me . . . Glenn sent me an e-mail in which he noted that he had not retracted the charge, even after I pointed out to him that it was false."). 

I'm not going to re-visit Goldberg's conflicting claims about the Israeli strike -- which just oh-so-coincidentally happened to be expressed each time so as to justify a new war -- because I wrote twice about it just recently....  But just think about it:  someone goes on NPR and, when asked by the host about criticisms directed at him, just blurts out that the critic "retracted" the criticism -- a fairly serious charge -- when he must know that that claim is a total fabrication. This didn't happen five years ago, lending itself to a faulty memory.  It happened just last week.... Nothing like what he said on NPR ever happened.  It's just a total figment of his imagination, a complete fabrication.  Who does something like that?  Does Jeffrey Goldberg -- one of our nation's most Serious Middle East "reporters" -- ever tell the truth about anything? 

UPDATE:  Goldberg responds, playing the victim... claiming he merely "confused me with someone else," presumably "someone else" who issued a retraction last week (who?)....  He also complains that I "posted our private e-mail exchange, without asking [him] if that would be okay."  There was nothing "private" about our email exchange; my whole point in emailing him, as I made explicitly clear, was that I intended to write about this episode and wanted to include his response in what I wrote.  The whole exchange was entirely on the record.  It's just amazing how devoted to the Cult of Secrecy so many self-proclaimed journalists are.

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

In which I am reminded of why we call the Washington Post's Susan Schmidt "Steno Sue"...

David Kurtz today, August 20, 2010:

BFF: Tom Delay: "Jack Abramoff is still a friend of mine."

Steno Sue, December 29, 2005:

DeLay, a Christian conservative, did not quite know what to make of Abramoff, who wore a beard and a yarmulke. They forged political ties, but the two men never became personally close, according to associates of both men...

Steno Sue, October 18, 2005:

Abramoff, whom DeLay once described as 'one of my closest and dearest friends'...

Leon Trotsky Liveblogs World War II: August 20, 1940

On August 20, 1940 an agent of Stalin's GPU, Ramon Mercader, assassinated Leon Trotsky. According to Wikipedia, when he was:

released from Mexico City's Palacio de Lecumberri prison on May 6, 1960... [hed] moved to Havana... where Fidel Castro's new revolutionary government welcomed him. In 1961, he moved to the Soviet Union and was awarded the Hero of the Soviet Union medal from the then head of the KGB Alexander Shelepin. The order of Hero was the Soviet Union's highest decoration. He split his time between Cuba and the Soviet Union for the rest of his life and died in Havana in 1978. He is buried (under the name of 'Ramon Ivanovich Lopez' (Рамон Иванович Лопес)) in Moscow's Kuntsevo Cemetery and has a place of honour in the KGB Museum of Security Service on Lubyanka in Moscow.

After an earlier assassination attempt by Stalin, Leon Trotsky had written this:

Leon Trotsky: Stalin Seeks My Death (1940): The attack came at dawn, about 4 A. M. I was fast asleep, having taken a sleeping drug after a hard day’s work. Awakened by the rattle of gun fire but feeling very hazy, I first imagined that a national holiday was being celebrated with fireworks outside our walls. But the explosions were too close, right here within the room, next to me and overhead. The odor of gunpowder became more acrid, more penetrating. Clearly, what we had always expected was now happening: we were under attack. Where were the police stationed outside the walls? Where the guards inside? Trussed up? Kidnapped? Killed? My wife had already jumped from her bed. The shooting continued incessantly. My wife later told me that she helped me to the floor, pushing me into the space between the bed and the wall. This was quite true. She had remained hovering over me, beside the wall, as if to shield me with her body. But by means of whispers and gestures I convinced her to lie flat on the floor. The shots came from all sides, it was difficult to tell just from where. At a certain time my wife, as she later told me, was able clearly to distinguish spurts of fire from a gun: consequently, the shooting was being done right here in the room although we could not see anybody. My impression is that altogether some two hundred shots were fired, of which about one hundred fell right here, near us. Splinters of glass from windowpanes and chips from walls flew in all directions. A little later I felt that my right leg, had been slightly wounded in two places.

As the shooting died down we heard our grandson in the neighboring room cry out: “Grandfather!” The, voice of the child in the darkness under the gunfire remains the most tragic recollection of that night. The boy — after the first shot had cut his bed diagonally as evidenced by marks left on the door and wall — threw himself under the bed. One of the assailants, apparently in a panic, fired into the bed, the bullet passed through the mattress, struck our grandson in the big toe and imbedded itself in the floor. The assailants threw two incendiary bombs and left our grandson’s bedroom. Crying, “Grandfather!” he ran after them into the patio, leaving a trail of blood behind him and, under gunfire, rushed into the room of one of the guards.

At the outcry of our grandson, my wife made her way into his already empty room. Inside, the floor, the door and a small cabinet were burning. “They have kidnapped Seva,” 1 said to her. This was the most painful moment of all. Shots continued to ring out but already away from our bedroom somewhere in the pation or immediately outside the walls. The terrorists were apparently covering their retreat. My wife hastened to smother the incendiary flames with a rug. For a week afterward she had to treat her burns.

Two members of our guard appeared, Otto and Charles, who had been cut off from us during the attack by machine gun fire. They confirmed the fact that the assailants had apparently withdrawn since no one was to be seen in the patio. The guard on night duty, Robert Sheldon Harte, had disappeared. Both automobiles were gone. Why the silence from the police stationed outside? They had been bound by the assailants who shouted: “Viva Almazan !” That was the story told by the tied-up policemen.

My wife and I were convinced on the next day that the assailants had fired only through the windows and doors and that no one had entered our bedroom—however, an analysis of the trajectory of the bullets proves irrefutably that eight shots which struck the wall at the head of the two beds and which left holes in four places in both mattresses, as well as traces in the floor underneath the beds could have been fired only inside the bedroom itself. Empty catridges found on the floor, and the lining of a blanket singed in two places testify to the same thing.

When did the terrorist enter our bedroom? Was it during the first part of their operation before we had yet awakened? Or was it, on the contrary, during the last moments when we were lying on the floor? I incline toward the latter supposition. Having fired through the doors and windows several scores of bullets aimed at the beds and not hearing any outcries or groans, the assailants had every reason to conclude that they had accomplished their work successfully. One of them might have at the last moment entered the room for a final check. Possibly the bed clothes and pillows still retained the form of human bodies. At four o’clock in the morning the room was in darkness My wife and I remained motionless and silent on the floor. Before leaving our bedroom the terrorist who came in for verification deeming that the task had been already accomplished might have fired a few shots into our beds “to clear his conscience.”

It would be too irksome to analyze here in detail the various legends which were the product of misunderstanding or malice and which have served directly or indirectly as the basis for the theory of “self-assault.” The press carried reports alleging that my wife and I were not in our bedroom on the night of the assault, El Popular (organ of the Stalinist ally, Toledano,) discoursed concerning my “contradictions": according to one version I reportedly crawled into a corner of the bedroom, according to another version, I dropped to the floor, etcetera. There is not a word of truth in all this. All rooms in our house are occupied at night by designated individuals, with the exception of the library, the dining room and my workroom. But the assailants passed through precisely these rooms and did not find us there. We slept where we always did: in our bedroom. As was already stated, I dropped to the floor in the corner of the room; presently, I was joined by my wife.

How did we survive? Obviously, thanks to a fortunate accident. The beds were under a cross-fire. Perhaps the assailants were afraid to hit each other and instinctively fired either higher or lower than they should have. But that is only a psychological conjecture. It is also possible that my wife and I came to the aid of the happy accident by not losing our heads, not flying around the room, not crying out or calling for help when it was hopeless to do so, not shooting when it was senseless but remained quietly on the floor pretending to be dead.

Stalin’s “Mistake”

To the uninitiated it may seem incomprehensible that Stalin’s clique should have first exiled me and then should attempt to kill me abroad. Wouldn’t it have been simpler to have shot me in Moscow as were so many others?

The explanation is this: In 1928 when I was expelled from the party and exiled to Central Asia it was still impossible even to talk not only about shooting but arrest. The generation together with whom I went through the October revolution and the Civil War was then still alive. The political Bureau felt itself besieged from all sides. From Central Asia I was able to maintain direct contact with the opposition. In these conditions Stalin, after vacillating for one year, decided to resort to exile abroad as the lesser evil. He reasoned that Trotsky, isolated from the USSR, deprived of an apparatus and of material resources, would be powerless to undertake anything. Moreover, Stalin calculated that after he had succeeded in completely blackening me in the eyes of the country, he could without difficulty obtain from the friendly Turkish government my return to Moscow for the final reckoning. Events have shown, however, that it is possible to participate in political life without possessing either an apparatus or material resources. With the aid of young friends I laid the foundations. of the Fourth International which is forging ahead slowly but stubbornly. The Moscow trials of 1936-1937 were staged in order to obtain my deportation from Norway, i.e., actually to hand me over into the hands of the GPU. But this did not succeed. [arrived in Mexico. I am informed that Stalin has several times admitted that my exile abroad was a “major mistake.” No other way remained of rectifying the mistake except through a terrorist act.]

The Preparatory Acts of the GPU

In recent years the GPU has destroyed many hundreds of my friends, including members of my family in the USSR. In Spain they killed my former secretary Erwin Wolfe and a number of my political co-thinkers; in Paris they killed my son Leon Sedov whom Stalin’s professional murderers hunted for two years. In Lauzanne the GPU killed Ignace Reiss who had left the GPU and joined the Fourth International. In Paris, Stalin’s agents murdered another of my former secretaries, Rudolf Kiement, whose body was found in the Seine with the head, hands and legs cut off. This list could be continued interminably.

In Mexico there was an obvious attempt to assassinate me by an individual who appeared in my house with fake recommendations from a prominent political figure. It was after this incident, which alarmed my friends, that more serious measures of defense were undertaken: day and night guard, alarm system, etc.

After the active and truly murderous participation of the GPU in the Spanish events I received many letters from my friends, chiefly in New York and Paris, concerning agents of the GPU who were being sent into Mexico from France and the United States. The names and photographs of some of these gentlemen were transmitted by me in time to the Mexican police. The outbreak of the war aggravated the situation still further because of my irreconcilable struggle against the foreign and domestic policy of the Kremlin. My declarations and articles in the world press on the dismemberment of Poland, the invasion of Finland, the weakness of the Red Army beheaded by Stalin, etc.-were reproduced in all countries of the world in tens of millions of copies. Dissatisfaction inside the USSR is growing. In the capacity of a former revolutionist Stalin remembers that the Third International was incomparably weaker at the beginning of the last war than the Fourth International is today. The course of the wa may provide a mighty impulsion to the development of the Fourth International, also within the USSR itself. That is why Stalin could not have failed to issue orders to his agents-to finish me as quickly as possible.

Supplementary Evidence

Facts known to everyone and general political considerations thus indubitably demonstrate that the organization of the attempt of May 24th could emanate only from the GPU. There is, however, no lack of supplementary evidence.

I. A few weeks before the attempt the Mexican press was filled with rumors of a concentration of GPU agents in Mexico. A great many things in these reports were false. But the substance of these rumors was correct.

  1. Very noteworthy is the exceptionally high technique of the assault. The assassination failed owing to one of those accidents which enter as an integral element into every war. But the preparation and execution of the assault are astonishing in their scope, planning and efficiency. The terrorists are familiar with the layout of the house and its internal life; they are equipped with police uniforms, weapons, electric saw, rope ladders, etc. They succeed completely in tying up the police stationed outside, they paralyze the guards inside by a correct strategy of fire, they penetrate into the intended victim’s room, fire with impunity for three to five minutes, throw incendiary bombs and leave the arena of attack without a trace. Such an undertaking is beyond the resources of a private group. There is to be observed here tradition, training, great resources, and a wide selection of executors. This is the work of the GPU.

  2. Strictly in accordance with the whole system of the GPU is the solicitude for switching the investigation to a false track which was included in the very plan of the assault. While tying up the police, the assailants shouted: “Viva Almazan!” These artificial and fraudulent shouts at night before five policemen, three of whom were asleep, pursued simultaneously two objectives: to distract, if only for a few days or hours, the attention of the coming investigation away from the GPU and its agency in Mexico; and to compromise the followers of one of the Presidential candidates. To kill one opponent while casting the shadow of suspicion on anotherthat is the classic method of the GPU, more exactly of its inspirer, Stalin.

  3. The attackers brought along several incendiary bombs, two of which were thrown into my grandson’s room. The participants in the assault thus had in view not only murder but also arson. Their only goal could have been the destruction of my archives. This is of interest only to Stalin, inasmuch as my archives are of exceptional value to me in the struggle against the Moscow oligarchy. With the aid of my archives I was able, in particular, to expose the Moscow juridical frameups. On November 7, 1936 the GPU, incurring great risks, had already stolen part of my archives in Paris. It did not forget about them in the night of may 24th. The incendiary bombs are thus something like Stalin’s visiting card.

  4. Extremely characteristic of the crimes of the GPU is the division of labor between the secret killers and the legal “friends": while the assault was being prepared, along with the underground work of conspiracy, there was conducted an open slanderous campaign aimed to discredit the intended victim. The same division of labor continues after the perpetration of the crime: the terrorists go into hiding while their attorneys, out in the open, attempt to direct the attention of the police to a false trial.

  5. Finally, it is impossible not to call attention to the reactions of the world press: newspapers of all tendencies proceed openly or tacitly from the fact that the assault is the handiwork of the GPU; only the newspapers subsidized by the Kremlin and fulfilling its orders defend an opposite version. This is an irrefutable piece of political evidence!

May 27—The Turn in the Investigation

On the morning of May 24th the leading representatives of the police asked my collaboration in solving the crime. Colonel Salazar and tens of agents called on me for various information in the most friendly way. My family, my coworkers and I did everything in our power.

On May 25 or May 26, two agents of the secret police told me that the investigation was on the correct road and that now it had been at all events already “proven that it is a question of attempted assassination.” I was astounded. After all, was it still necessary to prove this? I asked myself precisely against whom did the police have to prove that the assault was an assault? In any case, up to the evening of May 27 the investigation, so far as I could judge, was directed against the unknown assailants and not against the victims of the assault. On May 28 I transmitted to Colonel Salazar some evidence, which as the third stage of the investigation demonstrated, was very important. But on the agenda at the time was the second stage of which I did not have any suspicion, namely, an investigation directed against myself and my collaborators.

During the day of May 28 a complete and abrupt turn in the orientation of the investigation and the attitude of the police toward my household was prepared and accomplished. We were immediately surrounded by an atmosphere of hostility. What was the matter? we wondered. This turn could not have occurred of itself. There must have been concrete and imperative reasons. Not even a semblance of fact or factual data which might have justified such a turn of the investigation has been revealed nor could have been revealed. I can find no explanation for the turn other than the monstrous pressure exerted by the GPU apparatus, basing itself on all its “friends.” Behind the scenes a veritable coup d’etat occurred. Who directed it?

Here is a fact which might seem insignificant but which merits the most serious attention: El Popular and El Nacional carried on the morning of May 27 an identical story: “Mr. Trotsky Contradicts Himself,” which ascribed to me contradictions on the question of my whereabouts on the night of May 24 and during the very time of the attack. The story, which went absolutely unnoticed by me in those frenzied hours, was a crude invention from beginning to end. Who supplied the “left” newspapers with the story? This is a question of capital importance! The story referred as its source to anonymous “observers.” Who are these “observers?” Just what did they observe and where? It is quite self-evident that this story had as its aim to prepare and justify in the eyes of governmental circles, where these papers are widely read, the hostile turn of the investigation against me and ‘my collaborators. An investigation of this peculiar episode would unquestionably shed light on many things.

Two servants in our household were questioned for the first time on May 28, i.e., on the day when we were already stifling in an atmosphere of hostility and when the minds of the police were already directed toward the theory of selfassault. On the next day, the 29th, both women were again called and taken at 4 P.M. to Via Madero (Guadalupe) where they were questioned until 11 P.M. inside the building and from 11 P.M. to 2 A.M. in the dark yard, in an automobile. No records were kept. They were brought home at about 3 A.M. On May 30 a police agent appeared in the kitchen with a ready-made protocol and both women signed without reading it. The agent left the kitchen a minute or so after entering it. When both women found out from the newspapers that my secretaries Charles and Otto had been arrested on the basis of their testimony, they both declared that they had said absolutely nothing that could have justified arrest.

Why were these two members of the guard arrested and not the others? Because Otto and Charles served as liaison agents with the authorities and with our few friends in the city. Preparing the blow against me, the investigating magistrates decided first of all to isolate our house completely. On the same day a Mexican, S., and a Czech, B., our young friends who had visited us to express their sympathy, were placed under arrest. The aim of the arrests was obviously the same: to cut off our connections with the outside world. The arrested members of the guard were confronted with a demand that they confess in “a quarter of an hour” that it was I who had ordered them to carry out the “self-assault.” I am not at all inclined to exaggerate the importance of these episodes or to invest them with a tragic meaning. They interest me solely from the standpoint of the possibility of exposing those behind-the-scenes forces that were able in the course of 24 hours to bring about an almost magical turn in the direction of the investigation. These forces continue even today to exert an influence on the course of the investigation.

On Thursday May 30 when B. was questioned in Via Madera, all the police agents proceeded from the theory of self-assault, and conducted themselves insolently with me, my wife and my collaborators. During his incarceration for four days, S. had the opportunity to listen to quite a few conversations between the police agents. His conclusion is as follows: “The hand of Lombardo, Toledano, Bassols and others penetrates deeply into police activity and this, with considerable success. The idea of self-assault ... was artificially inspired from this source.”

The Theory of “Self-Assault”

The pressure of interested circles must have assumed truly irresistable proportions in order to compel the representatives of the investigation to take a serious attitude toward the absurd idea of self-assault.

What aim could I pursue in venturing on so monstrous, repugnant and dangerous an enterprise? No one has explained it to this day. It is hinted that I wanted to blacken Stalin and his GPU. But would another assault add anything at all to the reputation of a man who has destroyed an entire old generation of the Bolshevik party? It is said that I want to prove the existence of the “Fifth Column.” Why? What for? Besides. GPU agents are quite sufficient for the perpetration of an assault, there is no need of the mysterious Fifth Column. It is said that I wanted to create difficulties for the Mexican government. What possible motives could I have for creating difficulties for the only government that has been hospitable to me? It is said that I wanted to provoke a war between the United States and Mexico. But this explanation completely belongs to the domain of delirium. In order to provoke such a war it would have been in any case much more expedient to have organized an assault on an American ambassador or on oil magnates and not a revolutionist-Bolshevik, alien and hateful to imperialist circles.

When Stalin organizes an attempt to assassinate me, the meaning of his actions is clear: he wants to destroy his Enemy No. I. Stalin incurs no risks thereby; he acts at long distance. On the contrary, by organizing “self-assault” I have to assume the responsibility for such an enterprise myself; I risk my own fate, the fate of my family, my political reputation, and the reputation of the movement which I serve. What do I stand to gain from it?

But even if one were to allow the impossible, namely, that after renouncing the cause of my whole life, and trampling underfoot common sense and my own vital interests I did decide to organize “self-assault” for the sake of some unknown goal, then there still remains the following question: Where and how did I obtain 20 executors? how did I supply them with police uniforms? how did I arm them? how did I equip them with all the necessary things, etc., etc. In other words, just how did a man, who lives almost completely isolated from the outside world, contrive to fulfill an enterprise conceivable only for a powerful apparatus? Let me confess that I feel awkward in subjecting to criticism an idea that is beneath all criticism.

The GPU mobilized with great skill its agents in order to kill me. The attempt failed owing to an accident. The friends of the GPU are compromised. They are now compelled to do everything in their power in order to fix upon me the responsibility for the unsuccessful attempt of their own chieftain. In accomplishing this they have not a wide choice of means. They are compelled to operate with the crudest methods, and to guide themselves by Hitler’s aphorism: the bigger the lie the more readily it will be believed.

The Reactions of the Press

Extremely valuable conclusions concerning the behindthe-scenes work of the GPU can be drawn from a study of the conduct of a certain section of the Mexican press in the days following the attempted assassination. Let us leave aside La Vo de Mexico, the official Stalinist publication with its crude contradictions, senseless accusations and cynical slander. Let us likewise leave aside the organs of the Right which are on the one hand guided by a chase after sensation and on the other, try to utilize the assault for their own purposes, i.e., against the “lefts” in general. Politically I am further removed from such newspapers as Universal or Excelsior than Lombardo Toledano and his ilk. I employ the above-named papers for self-defense just as I would employ a bus for transportation.

Furthermore the maneuvers of the right wing papers are only a reflection of the politics of the country and, in essence they have a detached attitude on the question of the assault and of the GPU. For our purposes it is much more important to analyze the conduct of El Popular and, in part, El Nacional. The active policy, in this case is conducted by El Popular. As regards El Nacional, the latter only adapts itself to its interested colleague.

“El Popular” and the Assault of May 24

Despite the fact reported by newspapers that Toledano left the capital two or three days prior to the attack, El Popular had at the critical moment very clear and precise directives. The assault did not at all catch the paper off-guard. The editors did not on this occasion try to turn the attack into a joke, nor did it refer to my “persecution mania,” etcetera.-On the contrary, the paper immediately assumed a serious and an alarmed tone. The issue of May 25 across the front page advanced the slogan “The attempt against Trotsky is an attempt against Mexico.” The leading editorial under the selfsame heading demanded the most rigid investigation and an exemplary punishment of the criminals no matter what their political tendency and what foreign power they are connected with. By its phraseology the article seeks to create the impression of highest impartiality and patriotic indignation. The immediate aim is to dig something like an abyss between the editors of El Popular and the terrorists, who might turn up in the hands of the police, if not today then on the morrow. This measure of precaution is all the more necessary the more zealously El Popular had conducted in the preceding period a campaign of slander against me.

However, under the literary shell of impartiality there lurk cautious insinuations which are destined in the next few days to receive a further elaboration. It is remarked in passing, in a single phrase that there are “mysterious and suspicious aspects to the assault.” That day these words passed unnoticed. But now it is completely clear that the author of the article had reserved for himself beforehand the possibility of advancing the theory of “self-assault” in the event of failure on the part of the judicial inquiry. The second insinuation is no less significant: the article predicts that the “enemies of Mexico” will ascribe the attempt to Stalin and Moscow. The enemies of Mexico are here identified with the enemies of Stalin. The solemn call to search out the criminals no matter with what power they are connected, acquires a very limited interpretation.

With all its zigzags and equivocations the article is care fully thought out. The contradictions of the article flow from the contradictoriness and indefiniteness of the situation itself. The outcome of the investigation was as yet unknown. In the event of success of the investigation it was necessary to withdraw as far away as possible. In the event of its failure it was necessary to preserve freedom of action along the lines of old slander and persecution. It was necessary at the same time to distract, so far as possible, attention away from the GPU, without however tying one’s own hands completely. Rereading the article today, one can clearly see the white stitching stick out on all sides.

In the issue of May 26 the same line is continued in the main. El Popular demands of the authorities energetic punishment of the guilty ones. The danger that the participants of the attempt might immediately fall into the hands of the police is still very great; hence the harsh voice of impartiality.

The issue of May 27 already carries the cynical story “Mr. Trotsky Contradicts Himself.” This is the first attempt to develop the insinuation concerning the “suspicious aspects” of the assault. The story avers that I gave conflicting testimony concerning my whereabouts during the attack. The incongruity of this insinuation hits one between the eyes. If a man living in emigre solitude proved capable of mobilizing twenty conspirators and obtaining for them police uniforms and machine guns, then he ought to be capable of preparing an answer as to his whereabouts at the time of the assault. But let us not be captious about the technique of falsification. One thing is clear; El Popular is preparing the ground for the theory of “self-assault.”

The investigation meanwhile runs into great difficulties; the GPU is capable of foreseeing a great deal and of covering up well its tracks. Since the time of the assault three days have elapsed. The danger of the arrest of the chief participants in the assault could be considered as eliminated, inasmuch as during this time they had ample opportunity to cross the border with passports prepared in advance. In correspondence with this, El Popular takes a bolder tone on May 27. The matter is not limited to the above cited story in the news section. The leading article on that day flatly states that the “attempt with every passing day awakens great doubts and seems more and more suspicious and less and less logical"; further on, the word “camouflage” is mentioned. The article ascribes the attempt to American imperialists who seek to intervene in Mexico and who base themselves apparently on my collaboration. Why the imperialists should have selected as the object of the assault none other than myself remains unknown. And just how the assault against a Russian Bolshevik in Mexico could justify intervention by the United States remains even less comprehensible. Instead of analysis and proof, a selection of noisy phrases.

It remains to recall that prior to the conclusion of the Stalin-Hitler bloc, El Popular used to depict me invariably with a swastika. I was suddenly transformed into an agent of the United States only after the invasion of Finland by the Red Army. El Popular tries to dispose of me with the same freedom as Stalin uses in issuing orders to his agents. In their verbal agitation and behind-the-scenes maneuvers Toledano and his allies undoubtedly went much further than they did in their own press. As the events of the next few days show, they engaged in especially intense work among the police.

On May 28 the investigating authorities were already completely swung over to the idea of “self-assault.” Two of my secretaries, Otto and Charles, and two individuals connected with my household, B. and S., were placed under arrest. Having gained this victory, El Popular carefully retreats to the shadows: in the issue of May 28 it once again assumes an objective position. It is clear why the directors of the paper were cautious of engaging themselves irrevocably. They knew more than they told, they placed much less confidence in the version of self-assault than did the police sidetracked to a false trail by them. They were afraid that this version might at any moment be blown up. That is why, after transferring the responsibility to the police, El Popular on May 28 once again assumes the pose of an alarmed patriotic observer.

In the issue of May 29, El Popular published without comment the declaration of the Communist Party which denanded, not the punishment of the terrorists, but the deporta:ion of Trotsky from Mexico. That day my house and all its nhabitants were cut off from the outside world by a ring of antastic suspicions. It is noteworthy that Toledano leaves, )fl this occasion as well, the most candid slogans of the Kremin to be spoken by the leaders of the Communist party, who

have nothing to lose. He seeks to preserve a bridge for his own retreat.

On June 1 the press carried my letter to the Prosecutor of the Republic, openly naming Lombardo Toledano as a. moral accomplice in the preparation of the assault. After this Toledano steps half way out of the shadows. “C.T.M. (Mexican Confederation of Workers) accuses Trotsky of serving as an instrument in the (Yankee) war of nerves (against Mexico) “ proclaimed El Popular on June 6. What does this mean? It is empty rhetoric without meaning and without any basis in fact! In the name of the C.T.M. Toledano submits to the authorities a document in which the assault is woven into a web of an extensive and extremely indefinite international intrigue. Besides myself, suspected of intrigue are a great many factors, institutions and individuals. A great many, but not the GPU. Only “the enemies of Mexico,” as we already know, are capable of suspecting the GPU. Thus in all his maneuvers Toledano remains Friend No. 1 of the GPU.

“El Nacional”

In contradistinction to all other newspapers of the capital, El Nacional did not even mention the attempt in the first section of its issue for May 25. In the second section it carried a dispatch under the heading “Trotsky Subjected to a Theatrical (!) Attempt in His Home.” On what basis the paper reached its appraisal remained unknown. I am, unfortunately, compelled to assert that in several prior instances the paper attempted to ascribe to me reprehensible actions without a shadow of justification.

It is worthy of the most diligent attention that on the same day on which El Nacional called the attempt “theatrical,” El Popular wrote, “The attempt against Trotsky is an attempt against Mexico.” At first sight it might appear as if El Nacional displayed a much more hostile attitude toward the victim of the assault than did El Popular. As a matter of fact that is not the case. By its conduct El Nacional merely revealed that it is much further removed than El Popular from the sources of Stalinism, and consequently the source of the assault. El Nacional has editors who strive to do all they can to please the Stalinists. They know that the simplest way is to utter some sort of suspicion towards me. When the editors received news of the assault against my home, one of the editors placed in circulation the first ironical formula that came into his head. This very fact shows that the editors of El, in contrast to the editors of El Popular, know not of what they write.

In the following days there is to be observed, however, a drawing together of the lines of these two publications. El Nacional, gathering from the conduct of El Popular that it blurted out very incautiously its hypothesis of a “theatrical” attempt, beat a hasty retreat and assumed a more guarded position. For its part, El Popular, becoming convinced that none of the participants of the attempt had been arrested, began to pass over to the position of a “theatrical” attempt. The story of May 27 “Mr. Trotsky Contradicts Himself” was also carried by El Nacional. On the basis of an analysis of the articles in El Popular and a comparison between them and the articles in El Nacional it is thus possible to state with certainty that Toledano knew in advance of the preparations for the attempt, even if in the most general way. The GPU simultaneously prepared-along different channels-the conspiratorial plot, the political defense and the disinformation of the investigation. During the critical days El Popular received instructions, undoubtedly, from Toledano himself. It is quite probable that none other than he is the author of the article of May 25. In other words, Lombardo Toledano took moral part in the preparation of the attempt and in covering up its traces.

My Guard

For a clearer understanding of the background of the assault as well as of certain circumstances relating to the investigation, it is necessary to say a few words about my guard. There were reports in the newspapers to the effect that I “hired” almost strangers for the guard, that they were people who worked for pay, etc. All this is false. My guard has existed since the day of my exile to Turkey, i.e., almost 12 years. The composition of the guard was constantly changing depending on the country where I lived, although a few of my collaborators accompanied me from one country to another. The guard has always consisted of young comrades, tied to me by the identity of political views and selected by my older and more experienced friends from among volunteers of whom there has been no lack.

The movement to which I belong is a young movement which arose under unprecedented persecutions on the part of the Moscow oligarchy and its agencies in all countries of the world. Generally speaking, it is hardly possible to find in history another movement which has suffered so many victims in so short a time as has the movement of the Fourth International. My personal and profound conviction is that in our epoch of wars, seizures, rapine, destruction and all sorts of bestialities, the Fourth international is destined to fulfill a great historical role. But this is the future. In the past it has known only blows and persecutions. No one could have hoped during the last 12 years to make a career with the help of the Fourth International. For this reason the movement was joined by people selfless, convinced, and ready to renounce not only material boons but, if necessary, to sacrifice their lives. Without any desire of falling into idealization, I shall nevertheless permit myself to say that it is hardly possible to find in any other organization such a selection of people devoted to their banner and alien to personal pretensions as in the Fourth International. My guard has been throughout recruited from among this youth.

The guard in Mexico was at first constituted of young Mexican friends. However, I soon became convinced of the inconvenience of such an arrangement. My enemies systematically tried to involve me in Mexican politics in order thus to make impossible my stay in the country. And inasmuch as my young Mexican friends, living in my house, actually could to a certain degree appear as agents of my political influence, I was compelled to refuse their participation in the guard and replaced them by foreigners, primarily from among citizens of the United States. They were all sent here after special selection by my experienced and old friends.

Let me add for the sake of complete clarity that the guard is not maintained by me (I lack such resources) but by a special committee which collects the necessary funds among friends and sympathizers. We live—my family and guards—as a small shut-in commune, separated by four high walls from the outside world. All these circumstances suffice to explain why I consider myself justified in placing trust in my guard and believing it incapable of treachery or crime.

Despite all precautions, it is, of course, impossible to consider as absolutely excluded the possibility that an isolated agent of the GPU could worm his way into the guard. The investigation placed under suspicion from the very beginning Robert Sheldon Harte, the kidnapped member of my guard, as an accomplice in the assault. I replied to this: if Sheldon Harte were an agent of the GPU he could have killed me at night nd gotten away without setting in motion 20 people all of whom were subjected to a great risk. Moreover, in the days immediately prior to the assault, Sheldon Harte was busy with sucii innocent things as buying little birds, repairing a bird cage, painting it, etc. I have not heard a single convincing argument to indicate that Sheldon Harte was a GPU agent. Therefore I announced from the outset to my friends that I would be the last one to give credence to Sheldon’s participation in the assault. [Sheldon Harte proved to be another martyr murdered by Stalin. Trotsky’s article was written on June 8. On June , 1940 the body of Sheldon Harte was found-shot to death by the GM gang which had kidnapped him.—EDITOR.] If contrary to all my suppositions such a participation should be confirmed, then it would change nothing essential in the general character of the assault. With the aid of one of the members of the guard or without this aid the GPU organized a conspiracy to kill me and to burn my archives. That is the essence of the case.

The Expelled Members of the Communist Party

In its official declarations the Communist Party reiterates that individual terror does not enter into its system of actions, etc. No one supposes that the assault was organized by the Communist Party. The GPU makes use of the Communist Party but is not at all merged with the Communist Party.

Among the possible participants in the assault those who are well acquainted with the internal life of the Communist Party have mentioned an individual who was in his day expelled from the party, and was later, in return for some kind of services, reinstated. The question of the category of the “expelled” is generally of great interest from the standpoint of investigating the criminal methods of the GPU. In the first period of the struggle against the opposition in the USSR, Stalin’s clique used to intentionally expel from the party the least stable opposionists, placing them in extremely difficult material circumstances and thus giving the GPU the opportunity for recruiting among them agents for work among the opposition. Later on this method was perfected and extended to all the parties of the Third International.

The expelled may be divided into two categories: some leave the party because of principled differences and turn their back to the Kremlin and seek new roads. Others are expelled for careless handling of funds or other actual or alleged crimes of a moral nature. The majority of the expelled in this second category have become closely attached to the party apparatus, are incapable of any other work, and have grown too accustomed to a privileged position. The expelled of this type constitute valuable material for the GPU which transforms them into obedient tools for the most dangerous and criminal undertakings.

The leader of the Mexican Communist Party for many years, Laborde, was recently expelled on the most monstrous charges: as a man who wap venal, a man who sold out strikes, and even took bribes from... “Trotskyites.” The most astonishing thing, however, is that despite the extremely opprobrious nature of the charges, Laborde did not attempt even to justify himself. He showed thereby that the expulsion was necessary for some mysterious aims which he, Laborde, dared not oppose. Still more, he utilized the first opportunity in order to declare in the press his immutable loyalty to the party even after his expulsion. Simultaneously with him a number of others were expelled who follow the self-same tactic. These people are capable of anything. They will carry out any order, perpetrate any crime, so as not to lose favor with the party. It is even possible that some of them were expelled in order to remove beforehand from the party any responsibility for their participation in the assault that was being prepared. The instructions whom to expel and under what pretext come in such cases from the most trusted representatives of the GPU who hide behind the scenes.

For Stalin it would have been most profitable to have organized the murder in such a way as to represent it before the world working class as a sudden and spontaneous chastisement of an “enemy of the people” by Mexican workers. Worthy of attention from this standpoint is the persistence and eagerness of the GPU in linking me up at all costs with the presidential election campaign, namely, the candidacy of General Alamazan. A number of declarations by Toledano and by leaders of the Communist Party, reveal this strategical plan quite clearly: to find or to create a favorable pretext which would enable them to deal arms in hand with their enemies, on which list I probably do not occupy the last place. There can be no doubt that among the workers’ militia of the C.T.M. there are special secret shock groups created by the GPU for the most risky undertakings.

In order to parry this plan in time I persistently demanded on every occasion in the press the establishment of an impartial investigating commission to sift all false reports. But even without this the public opinion of Mexico has obviously up to now rejected the slander. The Stalinists, so far as I am able to judge, have not succeeded in inculcating workers’ circles with hatred toward me. Stalin, meanwhile, got tired of waiting for the outburst of “popular indignation” and the GPU received from him orders to act through the more customary and direct methods.

Another Assassination Attempt Is Certain

The accidental failure of the assault, so carefully and so ably prepared, is a serious blow to Stalin. The GPU must rehabilitate itself with Stalin. Stalin must demonstrate his power. A repetition of the attempt is inevitable. In what form? Possibly once again in the form of a pure terrorist act where along with machine guns will appear bombers. But it is not at all excluded that they will try to cover up the terrorist act by means of faked “popular indignation.” The slanderous campaign which is being conducted with ever increasing venom by Stalin’s agents in Mexico is aimed precisely for this purpose.

To justify their persecution of me, and to cover up the assaults of the GPU, the agents of the Kremlin talk about my “counter-revolutionary” tendency. It all depends on what one understands as revolution and counter-revolution. The most powerful force of the counter-revolution in our epoch is imperialism, both in its fascist form as well as in its quasidemocratic cover. Not one of the imperialist countries wishes to permit me inside its territories. As regards the oppressed and semi-independent countries, they refuse to accept me under the pressure of imperialist governments or of the Moscow bureaucracy which now plays an extremely reactionary role in the entire world. Mexico extended hospitality to me because Mexico is not an imperialist country; and for this reason its government proved to be, as a rare exception, sufficiently independent of external pressure to guide itself in accordance with its own principles. I can therefore state that I live on this earth not in accordance with the rule but as an exception to the rule. In a reactionary epoch such as ours, a revolutionist is compelled to swim against the stream. I am doing this to the best of my ability. The pressure of world reaction has expressed itself perhaps most implacably in my personal fate and the fate of those close to me. I do not at all see in this any merit of mine: this is the result of the interlacing of historical circumstances. But when people of the type of Toledano, Laborde et al proclaim me to be a “counter-revolutionist,” I can calmly pass them by, leaving the final verdict to history.

Winston Churchill Liveblogs World War II: August 20, 1940

Winston Churchill:

In the House of Commons: The gratitude of every home... goes out to the British airmen who, undaunted by odds, unwearied in their constant challenge and mortal danger, are turning the tide of the world war by their prowess and by their devotion. Never in the field of human conflict was so much owed by so many to so few.

All hearts go out to the fighter pilots, whose brilliant actions we see with our own eyes day after day; but we must never forget that all the time, night after night, month after month, our bomber squadrons travel far into Germany, find their targets in the darkness by the highest navigational skill, aim their attacks, often under the heaviest fire, often with serious loss, with deliberate careful discrimination, and inflict shattering blows upon the whole of the technical and war-making structure of the Nazi power. On no part of the Royal Air Force does the weight of the war fall more heavily than on the daylight bombers who will play an invaluable part in the case of invasion and whose unflinching zeal it has been necessary in the meanwhile on numerous occasions to restrain.

We are able to verify the results of bombing military targets in Germany, not only by reports which reach us through many sources, but also, of course, by photography. I have no hesitation in saying that this process of bombing the military industries and communications of Germany and the air bases and storage depots from which we are attacked, which process will continue upon an ever-increasing scale until the end of the war, and may in another year attain dimensions hitherto undreamed of, affords one at least of the most certain, if not the shortest of all the roads to victory. Even if the Nazi legions stood triumphant on the Black Sea, or indeed upon the Caspian, even if Hitler was at the gates of India, it would profit him nothing if at the same time the entire economic and scientific apparatus of German war power lay shattered and pulverised at home...

links for 2010-08-19

Why Friends Don't Let Friends Read the Politico

Tim Fernholz on Mike Allen:

TAPPED Archive | The American Prospect: I was at the same deep-background briefing where Allen had his "mindmeld"... I don't think he's got it right.... Allen references a part of the conversation that concerned the Deficit Commission.... The official believed that the largest consensus was forming around an undefined plan to support the long-term solvency of Social Security and was discussing why that hypothetical plan might help bolster political will for other deficit-reduction ideas. The official would note that Social Security is already solvent for decades.

The most important omission from Allen's item is that the official concluded the conversation by noting that Social Security is not a generous benefit compared to other public pensions around the world and that cutting benefits, even years in advance, would be difficult to justify.... Allen doesn't mention that the official cited Paul Krugman when talking about Social Security's contributions to the deficit. Finally, the reason the administration official was interested in credibility before the markets is so the government could borrow more money for temporary fiscal stimulus.... It's hard to dispute Allen's interpretation without being able to post direct quotes, but hopefully this adds some much-needed context. At least, let it be a lesson to take these unsourced items with a shakerful of salt.

I Am Hearing It Was a Huge Mistake to Invite Mike Allen to the Meeting...

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

Apparently--according to other participants, who put it much much more strongly than Felix does in public--he did not understand what was said, misrepresented what he did understand, and dragged the conversation away from useful substance into pointless and uninformed horse-race speculation.

Not a win by the Treasury team.

Feix Salmon reports on what of substance was discussed:

What Treasury’s thinking: On Wednesday, there was another meeting, this time with professional, salaried bloggers, with a decidedly center-left bias. (Tim Fernholz, Mike Allen, Derek Thompson, Shahien Nasiripour, Nick Baumann, Ezra Klein, me. Matt Yglesias was literally left out in the rain, unable to get past Treasury security.)... Ezra and I both felt a little jealous that we had to compete with Mike Allen asking about politics when we could have listened to a detailed and wonky discussion between Steve Waldman and Tim Geithner on the subject of bailout incentives....

I can tell you that Geithner looked healthier than the past couple of times I’ve seen him: I daresay he’s actually getting some sleep these days, which has got to be a good thing. I also learned a fair amount about how Treasury views the world. The big picture, at least as I grokked it, is that although the recovery started off stronger than Treasury had hoped, the broad economy is still in a pretty weak position. The Fed is doing its part to try to keep a certain amount of momentum going, but fiscal policy is harder, because it needs the cooperation of Congress. And it’s far from clear what kind of fiscal legislation can be passed at this point....

Treasury has no worries about bond bubbles. If corporate debt is trading at low yields, that’s great: it makes it easier for companies to borrow money to employ more people. There also didn’t seem to be much concern about the failure of the Chinese yuan to strengthen visibly against the dollar, even after the authorities there said that they would allow it to do so. Of course the US wants to see a stronger yuan. But it seems happy for China to get there in a relatively slow and unpredictable manner.

On unemployment, there’s definitely concern that the longer people stay out of work, the less employable they become, turning a cyclical problem into more of a structural one. But again, it’s hard to see what Treasury can actually do about that, given political realities...

The Macroeconomic Situation and How We Got Here

Labour markets: The wrong direction | The Economist

Back in December 2008 I thought that prudent macroeconomic policy--policy geared to deal with a 20%-percentile outcome, that could then be cut back if and when it turned out that we had good or even neutral look--involved (a) a $1+ trillion fiscal stimulus, (b) the Federal Reserve taking the size of its balance sheet from $2 trillion to $3 trillion, (c) the Federal Reserve adopting a 3% annual inflation target and taking active steps to hit that target, and (d) the Treasury using its TARP authority to take tail risk on another $1-$2 trillion of risky assets.

We got a real number of $600 billion in effective fiscal stimulus.

We really needed more. And we could still have more--(a) requires congressional approval, but (b), (c), and (d) do not and are still on the table.

Ryan Avent tells us why we need them:

Labour markets: The wrong direction: I MENTIONED I wouldn't cover initial jobless claim announcements until they stopped hovering around 450,000, as they'd done since late last year. Well, they're no longer in the 400,000 range.... Last week, initial claims touched 500,000.... Long-term inflation expectations dipped again from July to August. The Cleveland Fed notes:

The Federal Reserve Bank of Cleveland reports that its latest estimate of 10-year expected inflation is 1.68 percent. In other words, the public currently expects the inflation rate to be less than 2 percent on average over the next decade.

With the employment picture looking grim and inflation forecast to miss the Fed's target for years, it would seem to be an appropriate time to begin taking aggressive steps to reverse the economy's course.

Perhaps what went on was that the economic advisers gave Obama a 50%-percentile forecast rather than a 20th-percentile forecast, that Obama thinks himself a lucky person who always gets the breaks, and so pushed for policies appropriate to an 80th-percentile forecast?

Delong Smackdown Watch: Beveridge Curve Edition

Free exchange | The Economist

David Altig and Ryan Avent join Robert Waldmann in saying: "don't panic about the Beveridge Curve--yet."

Ryan writes:

Labour markets: How structural is unemployment?: The Atlanta Fed's David Altig recently noted that this could indicate growing structural unemployment, and Minneapolis Fed president Narayana Kocherlakota went much further, declaring that most of existing unemployment is structural. But Mr Altig provides another view of the Beveridge curve that complicates the picture.... You can see the second quarter datapoint that looks like a departure from the usual line. But what you also see is that this departure is quite common in the early stages of recovery from a deep recession. This makes sense; early in recovery the ratio of job seekers to job openings is quite high. As a result the matching process takes longer; firms have more applicants to sort through and more time to select the ideal candidate.

The Heinlein Perplex

Reading William Patterson's Robert A. Heinlein: In Dialogue with His Century: 1907-1948, Learning Curve simply increases my sense of the magnitude of the Heinlein perplex.

Heinlein in the 1940s, when he leaves left-wing populist politics and becomes a writer, seems much more than I had thought to have launched himself on a trajectory to spend the rest of his life as the center of a group whose raison d'etre was to try to live in the early days of a better future, to look sanely and humanely and in a reality-based way at humanity's lurching progress, and to try to help make us become who are best selves are--to be the heir of Jules Verne and H.G. Wells.

But by the early 1960s he has aged mightily in mind: the best days are no longer in our future but instead in the pre-Great Depression midwest, Dwight D. Eisenhower is soft on communism, and his reaction to living in America's Martin Luther King years is to write Farnham's Freehold, of all things.

What happened?

Isaac Asimov's view, from I, Asimov:

There had to be a certain circumspection in [my] friendship [with] Heinlein, however. Heinlein was not the easygoing fellow... did not believe in doing his own thing and letting you do your thing. He had a definite feeling that he knew better and to lecture you into agreeing with him.... [While] Campbell always remained serenely indifferent if you ended up disagreeing with him... Heinlein would, under those circumstances, grow hostile.

I do not take well to people who are convinced they know better than I do, and who badger me for that reason, so I began to avoid him.

Furthermore, although a flaming liberal during the war, Heinlein became a rock-ribbed far-right conservative immediately afterward... at just the time he changed wives from a liberal woman, Leslyn, to a rock-ribbed far-right conservative woman, Virginia.

Ronald Reagan did the same when he switched wives from the liberal Jane Wyman to the ultraconservative Nancy, but Ronald Reagan I have always viewed as a brainless fellow.... I can't explain Heinlein in that way at all, for I cannot believe he would follow his wives' opinions blindly. I used to brood about it in puzzlement.... I did come to one conclusion. I would never marry anyone who did not generally agree with my political, social, and philosophical view of life.... I would certainly not change my own views just for the sake of peace in the households, and I would not want a woman so feeble in her opinions that she would do so....

Another point about Heinlein is that he was not among those writers who, having achieved a particular style, clung to it.... Heinlein... tried to keep up with the times... "with it" as far as post-1960s literary fashions were concerned.... I always wished that he had kept to the style he achieved in such stories as "Solution Unsatisfactory"... and such novels as Double Star... which I think is the best thing he ever wrote....

He died on May 8, 1988, at the age of eighty to an outpouring of sentiment.... He had kept his position as greatest science fiction writer unshaken to the end.

In 1989, his book Grumbles from the Grave was published posthumously. It consists of letters he wrote to editors and, chiefly, to his agent. I read it and shook my head and wished it hadn't appeared, for Heinlein (it seemed to me) revealed, in these letters, a meanness of spirit that I had seen in him even in the NAES days but that I feel should not have been revealed to the world generally...

links for 2010-08-18

Know That the Walls Have Not Just Ears, But Tongues

David Kravets:

Court OKs Covert iPhone Audio Recording: Using an iPhone to secretly record a conversation is not a violation of the Wiretap Act if done for legitimate purposes, a federal appeals court has ruled. “The defendant must have the intent to use the illicit recording to commit a tort of crime beyond the act of recording itself,” (.pdf) the 2nd U.S. Circuit Court of Appeals ruled. Friday’s decision by the 2nd U.S. Circuit Court of Appeals, which involves a civil lawsuit over a secret audio recording produced from the 99-cent Recorder app, mirrors decisions in at least three other federal appeals courts.

The lawsuit concerns a family dispute over the making of a dying mother’s will. Days before the Connecticut woman died, her son secretly recorded a kitchen conversation between the son, mother, stepfather and others over how to handle her estate after her death. The son, in a probate dispute, turned over the audio file to the court in 2008 to bolster his position concerning the estate of his late mother, who died without a will. The stepfather sued him, alleging a privacy breach under the Wiretap Act. A federal judge dismissed the case, and the stepfather appealed.

The appeals court ruled that, even if the son consented to his own taping, he could be sued for money damages for a breach of the Wiretap Act if and only if he did so with a nefarious intent. “We affirm, and, in so doing, hold that the exception to the one-party consent provision of 18 U.S.C. § 2511(2)(d) requires that a communication be intercepted for the purpose of a tortious or criminal act that is independent of the intentional act of recording,” the New York-based federal appeals court said.

Lord Skidelsky Is a Member of the More Expansionary Policy Now Caucus

Robert Skidelsky:

Fixing the Right Hole - Project Syndicate: The “laws of holes” are as unforgiving as the laws of physics.  If you find yourself in a hole and want to get out, the first thing you do is to stop digging. If you confront a number of holes to fix and want to know which to fix first, you choose the one which poses the greater danger. These laws are particularly true when applied to government finance....

Contrary to Keynes, orthodox economists believe that, after a big shock, economies will “naturally” return to their previous rate of growth, provided that governments balance their budgets and stop stealing resources from the private sector.  The theory underlying this way of thinking was set out in the July Bulletin of the European Central Bank. Debt-financed public spending, the ECB argued, will “crowd out” private spending by causing real interest rates to rise or by leading households to increase their saving because they expect to pay higher taxes later. Either way, a fiscal stimulus will not only have no effect; the economy will be worse off....

The Bulletin’s authors do not believe that a “crowding out” of this type actually happened over the last two years... the Bulletin finds that fiscal-stimulus programs in the eurozone have caused GDP to be 1.3% higher in 2009-2010 than it otherwise would have been. Evidence for the positive impact of fiscal stimulus is even stronger in the US.... Alan Blinder and Mark Zandl found that the total stimulus policy adopted in 2009-2010... averted another Great Depression. Fiscal expansion alone caused GDP in the US to be 3.4% higher over 2009-2010 than it otherwise would have been....

What is it about cutting the deficit that is supposed to restore confidence? Well, deficit reduction may lead consumers to believe that a permanent tax reduction is on the horizon.... Fiscal consolidation, its advocates claim, “might” lead investors to expect improvement on the supply side of the economy. But it is unemployment, loss of skills and self-confidence, and investment rationing that are hitting the supply side. We are told that the “credible announcement and implementation” of fiscal-consolidation strategy “may” diminish the risk premium associated with government debt. This will reduce real interest rates and make “crowding in” of private spending more likely. But real interest rates on long-term government debt in the US, Japan, Germany, and the United Kingdom are already close to zero.... Finally, the reduction of governments’ borrowing requirements “might” have a beneficial effect on output in the long run, owing to lower long-term interest rates. Of course, low long-term interest rates are necessary for recovery. But so are profit expectations....

The ECB’s arguments look to me like scraping the bottom of the intellectual barrel. The truth is that it is not fear of government bankruptcy, but governments’ determination to balance the books, that is reducing business confidence by lowering expectations of employment, incomes, and orders. The problem is not the hole in the budget; it is the hole in the economy....

Policymakers need to re-learn their Keynes, explain him clearly, and apply his lessons, not invent pseudo-rational arguments for prolonging the recession.

Tim Duy Knew at the Time That There Was a Housing Bubble

May 23, 2005: Tim Duy:

Economist's View: Fed Watch: The Fed and the Housing Bubble: David Wessel reported in the Wall Street Journal that the Fed is becoming concerned about a potential housing bubble. Those concerns were reiterated by Greenspan in the Q&A.... I don’t blame Fed officials for raising the alarm. I’m concerned, too. But the important question is what are they prepared to do about it? I continue to believe that the Fed is not likely to change the path of monetary policy to pop a housing bubble.

Bubbles pose significant challenges for policymakers. They are economic distortions that lead to inefficient resource allocation, and tend to have nasty unexpected consequences when they pop. But to what extent, if any, should they be a focus of central bank policy? I think conventional wisdom at the Fed is that you should keep your eye on the ball, and the ball is price stability....

Assuming that a more aggressive monetary policy is off the table for the time being.... The regulatory process can move at a glacial pace, so it is apparently premature to conclude that banking regulators are about to put the kibosh on the housing market. Moreover, regulators appear to be well behind the curve.... Looks like the financial industry is working overtime to keep a fire under the housing market. Does anyone out there believe that the regulators can match their pace?...

Yes, There Was a Housing Bubble Identifiable at the Time

Wrong To Be Right - Paul Krugman Blog -

Paul Krugman rolls the videotape:

Wrong To Be Right: Yves Smith says most of what needs to be said about the Boston Fed study saying that nobody could have called the housing bubble. I’d just add that it’s helpful to look at what we knew back when. Here’s a picture from Kash of house prices up to early 2005; by the way, these were OFHEO prices, which most now believe understated the rise, which was better shown by Case-Shiller. But here’s what it looked like.... Given this kind of picture — and given the fact that the late-80s rise in southern California was, in fact, a bubble — how could you not be very worried? And when you looked at the rationalizations for high housing prices being given at the time, it was obvious that they were questionable.

Sorry: the evidence just screamed bubble. No excuses for those who didn’t want to hear it.

I was one who thought I was relatively sympathetic to the "housing price rises are justified" arguments--after all, I believed in the global savings glut which should permanently reduce real interest rates and so raise the prices of long-duration assets, I believed that it was rational to expect higher oil prices in the future and thus greater locational land-value differentials, and I believed that America had filled up for many purposes--that housing prices would rise on average in the future, and an expected continual rise makes it rational for prices to jump now.

As I wrote in 2005:

May 24, 2005:

Housing Bubble - Grasping Reality with Both Hands: Up until six months ago, I could account for housing prices in terms of scarcity (they aren't building many houses near the California coast any more) and low interest rates. That's getting less possible with each passing day...

July 25, 2005:

Worrying About the Housing Bubble - Grasping Reality with Both Hands: Dean Baker is more than worried about the housing bubble.... "Given how far out of line house prices have grown from fundamentals, there is no way to avoid enormous economic damage when the bubble collapses. However, the sooner house prices drop, the less damage there will be."

I can see three scenarios for getting out of things without serious damage:

  1. Interest rates stay low for a long time, so the bubblyness of the housing market deflates gradually.
  2. The housing market collapses, but the dollar collapses too. If the Federal Reserve then follows an accomodative monetary policy, workers who lose jobs in construction and consumer services will be able to move relatively smoothly into jobs making goods for export.
  3. The housing market deflates at the same time that businesses' animal spirits recover, and so workers who lose jobs in construction and consumer services will be able to move relatively smoothly into jobs making and installing capital goods.

September 18, 2005:

Dealing with the Housing Bubble - Grasping Reality with Both Hands: Mark Thoma reports Janet Yellen's views on the housing bubble:

Economist's View: Yellen: There is a Bubble But Don't Pop It With Monetary Policy: [W]hile I'm certainly not predicting anything about future house price movements, I think it's obvious that the housing sector represents a risk to the U.S. outlook. This brings me to the debate about how monetary policy should react to unusually high prices of houses--4or other assets, for that matter.... [P]olicy should be calibrated to the wealth effects of house prices on output and inflation. The debate lies in determining when, if ever, policy should be focused on deflating the asset price bubble itself. In my view, the... decision to deflate an asset price bubble rests on positive answers to three questions. First, if the bubble were to collapse on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers... are, "no," "no," and "no."... In answer to the first question on the size of the effect, it could be large enough to feel like a good-sized bump in the road, but the economy would likely to be able to absorb the shock... In answer to the second question... the Fed [would have] time to cushion the impact.... In answer to the third question... a tighter policy to deflate a housing bubble could impose substantial costs on other sectors of the economy that would lead to equally unwelcome imbalances... other strategies, such as tighter supervision or changes in financial regulation, would not only be more tailored to the problem, but also less costly to the economy...

Yes, people could have knowed. Some of us did.

Why Oh Why Can't We Have a Better Press Corps? (Atlantic Monthly Edition)

Clive Crook accuses Obama of a:

...muddled message exposed him to attack from both sides... incompetent politics...

What Clive Crook says would have been competent politics--what he says Obama should have said about the mosque of lower Manhattan:

What Obama Should Have Said: The Constitution's protection of religious freedom is central to this country's meaning and purpose. Yet many Americans are uneasy about this project. I understand and respect their feelings. The Ground Zero site is hallowed ground, and calls for special sensitivity. Critics of the decision to build are within their rights to express their objections, and to call for it to be reversed. As this discussion proceeds, I implore both sides to show understanding and tolerance, because the way we talk this through matters more than the eventual outcome. I urge the project's advocates to reflect sympathetically on the sensitivities aroused by this unique site. And I urge opponents of the centre to consider the message we could send to our enemies by welcoming this building to a site near Ground Zero: Unlike you, we embrace religious freedom; we celebrate Muslim Americans as fellow citizens; Islam is not our enemy. The president's opinion on this difficult matter has no special standing, and I am not seeking to bring the debate to an end, but I will tell you what I think. I hope that critics will think about the opportunity we have in this project to advance our ideals and demonstrate them to the world, that the objections are withdrawn, and that the project can go ahead...

What Obama actually said:

President Obama’s Iftar Remarks: [W]e must all recognize and respect the sensitivities surrounding the development of Lower Manhattan.  The 9/11 attacks were a deeply traumatic event for our country.  And the pain and the experience of suffering by those who lost loved ones is just unimaginable.  So I understand the emotions that this issue engenders.  And Ground Zero is, indeed, hallowed ground.

But let me be clear.  As a citizen, and as President, I believe that Muslims have the same right to practice their religion as everyone else in this country. And that includes the right to build a place of worship and a community center on private property in Lower Manhattan, in accordance with local laws and ordinances.  This is America.  And our commitment to religious freedom must be unshakeable.  The principle that people of all faiths are welcome in this country and that they will not be treated differently by their government is essential to who we are.  The writ of the Founders must endure....

Our enemies respect no religious freedom.  Al Qaeda’s cause is not Islam — it’s a gross distortion of Islam.  These are not religious leaders — they’re terrorists who murder innocent men and women and children.  In fact, al Qaeda has killed more Muslims than people of any other religion....

[T]he reason that we will win this fight is not simply the strength of our arms — it is the strength of our values.  The democracy that we uphold. The freedoms that we cherish.  The laws that we apply without regard to race, or religion, or wealth, or status.  Our capacity to show not merely tolerance, but respect towards those who are different from us –- and that way of life, that quintessentially American creed, stands in stark contrast to the nihilism of those who attacked us on that September morning, and who continue to plot against us today.

In my inaugural address I said that our patchwork heritage is a strength, not a weakness.  We are a nation of Christians and Muslims, Jews and Hindus — and non-believers.  We are shaped by every language and every culture, drawn from every end of this Earth.  And that diversity can bring difficult debates.  This is not unique to our time.  Past eras have seen controversies about the construction of synagogues or Catholic churches.  But time and again, the American people have demonstrated that we can work through these issues, and stay true to our core values, and emerge stronger for it.  So it must be — and will be — today...

See any difference that makes the first competent politics and an unmuddled message, and the second incompetent politics and a muddled message?

I don't.

What is Happening with Bond Prices?

St. Louis Fed: FRED Graph

It is very hard to have a bubble in bonds because there is a date certain at which the principal is repaid. In year nine you cannot delude yourself into thinking that somebody will pay more than face value in year ten. And so in eight it is very hard to delude yourself into thinking that somebody in year nine will delude themselves into thinking that somebody will pay more than face value in year ten.

Nevertheless, Jeremy Siegel and Jeremy Schwartz think that we are in a bond bubble:

The Great American Bond Bubble: If 10-year interest rates, which are now 2.8%, rise to 4% as they did last spring, bondholders will suffer a capital loss more than three times the current yield. Ten years ago we experienced the biggest bubble in U.S. stock market history.... A similar bubble is expanding today that may have far more serious consequences for investors. It is in bonds, particularly U.S. Treasury bonds. Investors, disenchanted with the stock market, have been pouring money into bond funds, and Treasury bonds have been among their favorites.... We believe what is happening today is the flip side of what happened in 2000. Just as investors were too enthusiastic then about the growth prospects in the economy, many investors today are far too pessimistic....

From our perspective, the safest bet for investors looking for income and inflation protection may not be bonds... stocks, particularly stocks paying high dividends, may offer investors a more attractive income and inflation protection than bonds over the coming decade....

Today, the 10 largest dividend payers in the U.S. are AT&T, Exxon Mobil, Chevron, Procter & Gamble, Johnson & Johnson, Verizon Communications, Phillip Morris International, Pfizer, General Electric and Merck. They sport an average dividend yield of 4%, approximately three percentage points above the current yield on 10-year TIPS.... Their average price-earnings ratio, based on 2010 estimated earnings, is 11.7, versus 13 for the S&P 500 Index. Furthermore, their earnings this year (a year that hardly could be considered booming economically) are projected to cover their dividend by more than 2 to 1....

Those who are now crowding into bonds and bond funds are courting disaster.... If over the next year, 10-year interest rates, which are now 2.8%... rise to 4% as they did last spring, the capital loss will be more than three times the current yield. Is there any doubt that interest rates will rise over the next two decades as the baby boomers retire and the enormous government entitlement programs kick into gear?

With future government finances so precarious, private asset accumulation and dividend income must become the major sources of retirement funding. At current interest rates, government bonds will not be the answer...

A bubble--I thought--is when those holding an asset do so because they expect its price to rise more-or-less indefinitely, and such a price rise is impossible. Such a bubble is very prone to rapid collapse when people realize that their expectations are very wrong.

Do holders of U.S. Treasury bonds expect the prices of the assets they own to rise more-or-less indefinitely? No, they do not. They expect their holdings of Treasury bonds to be and to continue to be safe places to park their money, and they expect other asset classes to be risky.

Over time, I think, the fear of other asset collapses will ebb--but this is highly likely to produce a gradual rise in the prices of other asset classes and a gradual fall in Treasury prices, but a gradual fall does not make Treasury bonds unsafe.

Those who hold Treasuries to maturity will get the returns they expect: for holders-to-maturity, Treasury bonds are indeed very safe absent a very unlikely upward leap in inflation.

So I cannot see any possibility of a bubble collapse at the short end of the Treasury market--less than ten years, seven.

But how about the spectrum from seven years on out to thirty? Could there be a sudden large downward movement in Treasury bond prices that would convince holders of Treasuries that they are not safe at all and induce a wave of panicked selling that would look like the collapse of a bubble?

In asset prices, never say never: the only thing you can ever say with absolute certainty is J.P. Morgan's: "they will fluctuate."

But I don't think so. People today buy an on-the-run ten-year Treasury at a yield of 2.64%--the bond with a 2.65% coupon maturing on August 15, 2020 at a price of 100.07. Its price drops tomorrow to 88.96. Do they conclude that their long Treasury position is too risky to hold? Or do they conclude that the Treasury correction has come and gone, and that Treasuries are actually safer than ever?

To argue that there is a Treasury bond bubble going on, you have to believe that such a fall in Treasury bond prices would induce further selling. And I cannot see that--not with the current state of macroeconomic news.

Reinhart And Rogoff Are Members of the More Expansionary Policy Caucus

Paul Krugman:

Reinhart And Rogoff Walk In The Light: Here.


We may need another stimulus bill just to decompress from the previous one, a smaller one to cushion the landing.


I’m not one of those deficit hawks. … I’m not saying you run out and pull the plug and have an adjustment that could derail what fragile recovery we do have.

Good for them.

Roger Farmer Is a Member of the More Expansionary Policy Caucus...

...and he is a very smart if (because he is a?) non-standard macroeconomist.


We need more quantitative easing to create jobs: I argue in this piece that:

  • Quantitative easing should be expanded
  • Even if the Bank of England were to buy the entire UK national debt that this policy would not be inflationary
  • The global recovery is faltering and an expansionary policy is needed to encourage private investors to create jobs
  • Additional quantitative easing could save as much as £38.5bn a year in interest costs to the taxpayer

May 18, 2006 was an important day. It was the day when the Bank of England began to pay interest on reserves. In October 2008 the Fed followed suit. This monumental change in policy gave the Bank an important new tool in its arsenal. It allowed the Bank to influence the economy not just through expansion or contraction of the stock of money, but also through the composition of its balance sheet.In March 2009 the Bank and the Fed made a second unprecedented change in policy. They began to buy long term assets; both central banks have increased their asset holdings over the past year by roughly 11 per cent of GDP. The Bank and the Fed are each sitting on inflated balance sheets that are more than twice their normal size.

The asset purchases by the Bank of England and the Fed have not resulted in corresponding increases in the UK and US money supplies because when a central bank pays interest on reserves, the money supply is no longer tied to the asset base of the bank. A broad measure of the US money supply has been contracting at a rate of 9.6 per cent per annum, a rate that has not been seen since the Great Depression, and growth in the broad UK money supply has been steady. Private investors can choose to hold their wealth in the form of safe assets or risky assets. At the safe end of the spectrum there is cash. At the risky end there is equity and low grade bonds. Unemployment remains at  7.8 per cent in the UK and 9.5 per cent in the US because investors are scared to put their money into activities that create jobs. The appetite for risk has vanished.

Quantitative easing encourages the private sector to create more jobs. As yields on long term assets fall, some of that money moves into equity and newly capitalised firms expand and begin to hire workers. In light of a slowdown in the global recovery, quantitative easing is a programme that should be vastly expanded. Unlike fiscal expansion, which increases the national debt, quantitative easing saves money for the Treasury. Take the UK case, where the Bank of England has bought mainly gilts. The expansion of the Bank balance sheet by £200bn generated a net flow income of roughly £6bn since gilts pay, on average, a return of 3.5 per cent and the Bank returns 0.5 per cent to commercial banks as interest on reserves....

As the economy begins to recover, private demand will put upward pressure on interest rates. In order to prevent an explosion in domestic credit creation that could fuel inflation, the Bank will raise the Bank rate. At the same time, it will raise the rate that it pays on reserves...

links for 2010-08-17

Mark Zandi's Take on the Obama Tax Cuts

The Obama administration thinks that, after taxes revert to their 2001 levels next year it should provide the middle class with a permanent tax cut equal to the Bush 2001 tax cut. I disagree: I think that the Obama administration should provide the middle class with a temporary two-year tax cut equal to the Bush 2001 tax cut.

Now comes Mark Zandi--who I respect, and who you have to respect--to argue that the Obama administration should provide the middle class with a permanent tax cut equal to the Bush 2001 tax cut and the rich with a temporary two-year tax cut equal to the Bush 2001 tax cut.

The Tax Cut We Can Afford: UNLESS Congress and President Obama act soon, Americans’ taxes will increase in 2011, when the cuts enacted under President George W. Bush are due to expire. Almost everyone agrees that this makes little sense given the economy’s fragility. But consensus ends there. The president supports permanently extending the current tax rates for all except the highest-income households, while Congressional Republicans want the entire basket of cuts to be made permanent. The prudent middle ground would be to forestall any tax increases in 2011 and to phase in higher rates on upper-income households in 2012, when the economy will be on firmer ground.

The president’s plan would be taking an unnecessary gamble with the struggling recovery....

In most times, raising taxes on the wealthy by such a modest amount has had little impact on the economy. But these aren’t most times. The well-to-do appear unusually sensitive to changes in their finances, probably because their nest eggs are significantly smaller with the drop in stock and housing prices. Only the top 3 percent of households would have to pay higher taxes if the president got his way, but this rarefied group currently accounts for a fourth of consumer spending. If they pull back, even a bit, the recovery could be derailed....

Some people make a more nuanced argument that higher taxes on the wealthy could pay for additional economic stimulus — like a bigger job tax credit or resurrected 1930s-style work programs. This view has theoretical merit — some of my own analysis has been used to support it — but it is asking too much of our political system now to get it just right....

On the other hand, the Republican proposal to keep the current tax rates permanently in place even for the wealthy takes an unnecessary gamble with our long-term fiscal outlook. Tax cuts do not pay for themselves. Even when President Ronald Reagan slashed much higher tax rates in half, this argument failed; in the current tax debate, it is unsupportable....

Once the recovery is off and running, and stock and housing prices are consistently rising, allowing the Bush tax cuts for high-income households to expire — over, say, a three-year period — would not harm the economy... the economy performed admirably in the 1990s when high-income households paid the same higher tax rates. And the wealthy would benefit as much as anyone from reducing the federal deficit, because that would keep interest rates low, spurring investment and job creation....

In this recession, the government has necessarily made a string of momentous economic policy decisions. Some have worked well; others have been a disaster. We can’t afford any more mistakes.

Federal Reserve Bank of Minneapolis Narayana Kocherlatkota Gets One Very Wrong

There is no reason to think that the bulk of current unemployment is any sense "structural": if aggregate demand were higher it would melt away just as unemployment in 1982 melted away.

There is good reason to think that if we do nothing for the next two years and unemployment remains elevated that a good deal of unemployment then will be "structural," not amenable to being cured by aggregate demand.

Fear of the transformation of current cyclical into future structural unemployment is a reason for urgent action now to boost demand--not for passivity.

Ryan Avent reports:

Monetary policy: Why isn't the Fed acting?: [A]a speech today by Minneapolis Fed President Narayana Kocherlakota suggests that some Federal Reserve voices are taking the potential for structural unemployment very seriously....

What does this change in the relationship between job openings and unemployment connote? In a word, mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs.... Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers. Of course, the key question is: How much of the current unemployment rate is really due to mismatch, as opposed to conditions that the Fed can readily ameliorate? The answer seems to be a lot.... Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.

And Ryan comments:

That's a huge statement: according to a Fed president, most of the current unemployment cannot be eliminated by monetary policy. Does this make sense? Readers won't be surprised to hear me say that while structural factors are surely causing some unemployment, it's a bit of a leap to argue that most of it can be traced to those barriers.... [I]f structural barriers were the main factor leading to high unemployment, one would expect to see an inflationary response—efforts to increase hiring above levels the economy can sustain would lead to rising wages and prices. Firms faced with too few qualified workers should be increasing salary offers. And obviously, we're not observing these trends. And listen to Mr Kocherlakota himself describe the scale of the output shortfall....

[T]his number actually understates the economic problem.... If the economy had actually grown at that [normal] rate over the past two and a half years, we would have between 7 and 8.2 percent more output per person than we do right now. My forecast is such that we will not make up that 7-8.2 percent lost output anytime soon....

In short, this is a troubling revelation. It would be useful to know whether other Fed members are thinking along similar lines. Certainly Ben Bernanke's comments have not reflected this view. But the lack of significant action from the Fed may itself speak volumes.

Why Oh Why Doesn't Barack Obama Recess-Appoint joe Gagnon to the Federal Reserve Board of Governors?

It is a mystery to me.

Joe Gagnon:

Monetary policy: Joseph Gagnon on monetary policy: IT IS now apparent that deflation is a more serious risk for the US economy than inflation. Both headline and core inflation are well below the 2% level that central banks view as optimal for economic growth and that the Fed has adopted as its goal. Recent bad news on economic growth and employment further increase the risk of plunging into outright deflation.

The case for monetary stimulus is strong. But what form should it take? With financial markets now in healthier shape, the Fed does not need to invoke the “unusual and exigent circumstances” clause to lend directly to the private nonbanking sector. Rather, it should return to its traditional roles of lending to the banking system and buying Treasury securities. Three actions, in particular, would be helpful at this time.  

First, the Fed should lower the interest rate it pays on bank reserves to zero. This is a small step, as the current rate is only 0.25%, but there is no reason to pay banks more than the rate paid by the closest substitute, short-term Treasury bills. Three-month Treasury bills currently yield 0.15%, and that rate, too, should be brought down to zero. 

Second, the Fed should bring down the rates on longer-term Treasury securities by targeting the interest rate on 4-year Treasury notes at 0.25% and aggressively purchasing such securities whenever their yield exceeds the target. That is a 75-basis point reduction from the current rate of 1%. This step would also push down longer-term yields and reduce a wide range of private borrowing rates, encouraging business investment, supporting the housing market, and boosting exports through a weaker dollar. Moreover, pushing down yields on short- to medium-term Treasury securities is precisely the strategy for fighting deflation recommended by Ben Bernanke in 2002

Finally, the Fed could bolster the stimulative effects of these actions by establishing a full-allotment lending facility to enable banks to borrow (with high-quality collateral) at terms of up to 24 months at a fixed interest rate of 0.25%.

These measures are all within the Federal Reserve’s established powers. They pose essentially no risk to the Fed’s balance sheet. Roughly speaking, they comprise a net easing of the stance of monetary policy equivalent to a 100 basis point cut in the federal funds rate. According to the Federal Reserve’s own economic model, such a policy move would reduce unemployment roughly as much as a 2-year $500 billion fiscal package and yet it would actually reduce the federal budget deficit. And it can be reversed quickly should the balance of risks shift from deflation to inflation.

links for 2010-08-16

James J. Kilpatrick Is Dead

The press corps in the 1960s and 1970s was even worse than it is now.

Nationally syndicated columnist James J. Kilpatrick:

I did not say I was sorry for my former views on racial integration. I said, very carefully, that I was sorry I ever defended the practice of State-sanctioned segregation. There is a world of difference.  Neither did I ‘belatedly come to the conclusion that I was wrong about my former stand on equality of the races.’ As I tried to make clear, I belatedly came to the conclusion that I was wrong about my former stand on the rightness of State-sanctioned discrimination...

Jeet Heer sends us to Nancy MacLean:

Nancy MacLean provides a good summary of Kilpatrick’s politics in the 1960s:

Answering [the Civil Right march in Birmingham in 1963], James Kilpatrick, the rising star in the conservative firmament, made his movement’s premises more explicit:

This precious right to discriminate underlines our entire political and economic system...

As for the Negro claiming the right to inclusion, why, he had sat out the whole industrial revolution.

He is still carrying the hod... still digging the ditch. The hell he is equal.... He has no right... to favored treatment in employment, promotion, or anything else.

White Americans should rise in “resentment,” he argued, against “those who demand in the name of race what they have not earned in the way of worth.”... He complained that blacks were being “petted and pampered, cuddled and coddled” by “reverse racism,” an interesting line of attack, since simple equal opportunity, much less affirmative action, had not yet been accepted as public policy.

Far from rendering Kilpatrick marginal, such outbursts won him a lucrative platform as a national spokesman for the cause. In 1964 the Newsday syndicate hired him to write a weekly column, “A Conservative View,” soon carried by fifty newspapers. "By 1970 I was appearing there times a week in 170 newspapers across the country." [Kilpatrick] would be invited to dine at the Nixon White House, was featured as a writer for Nation’s Business, and was given a weekly television spot on 60 Minutes....


When criticized by an annoyed segregationist for apologizing for “your former views regarding racial integration,” Kilpatrick hastened to set the “record straight”:

I did not say I was sorry for my former views on racial integration. I said, very carefully, that I was sorry I ever defended the practice of State-sanctioned segregation. There is a world of difference.  Neither did I ‘belatedly come to the conclusion that I was wrong about my former stand on equality of the races.’ As I tried to make clear, I belatedly came to the conclusion that I was wrong about my former stand on the rightness of State-sanctioned discrimination.

The Future of Education

Why does Matthew Yglesias use this picture:


rather than this one:

Google Image Result for


It is in a good cause, however, as he calls on the Ivy League alumni of the world to give to worthier causes than their several Almae Matres:

TED and Competition: [A]s Brad DeLong likes to point out the “get a bunch of people in a room to listen to some guy talk” model of education was an organizational response to the high price of books. In principle, it would seem to have been made obsolete by the printing press and the public library. Yet obviously that didn’t happen. Colleges and universities managed to make themselves indispensable sources of credentials and social prestige... they still engage in an incredible quantity of pre-Gutenberg educating.

Which is just to say that I think there’s a need to not just let this process play out, but for alumni of the richest universities—people like Salam and Kamenetz and myself—to take some direct action... people need to be told that giving money to fancy colleges mostly seems like a big waste.... Money should be given to educational institutions... that are doing good work helping children from underprivileged backgrounds (and, no, offering generous financial aid to kids from poor families and then not admitting any doesn’t count) or else to innovative programs aimed at diffusing knowledge much more widely than a pool of several thousand undergraduates. Institutions will change when people try to force them to. People give money to non-profits in order to elevate their social status—if we change social conventions about what constitutes praiseworthy donating, then things will change.

Four People Whom the Atlantic Could Hire to Replace Jeffrey Goldberg

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

Four readers--any one of whom would improve the Atlantic's coverage significantly were Jeffrey "Al Qaeda Is Allied to Saddam Hussein!" Goldberg to be fired and were one of them to be hired as a replacement--write to James Fallows:

Zach Hensel:

My primary problems with Goldberg's piece are the omissions:

  1. His citation of disgusting rhetoric from Iranian leaders is literally the only evidence presented suggesting that a nuclear Iran would use its power to blow up Israel or threaten to do so. He omits the fact that not only has Iran never engaged Israel militarily (in an official capacity; support for militaristic groups is another issue), but also that Israel cooperated militarily with Iran during the Iran/Iraq war; selling some hundreds of bmillions in weapons; and the destruction of the Osirak reactor helped Iran more than Israel.

  2. There's a perfectly good antecedent that's not discussed. America bombed Iraq in 1998 because we were certain they were a year or so from going nuclear (according to common wisdom; not reality). Four and a half years later, we invaded Iraq. Whether Israel or America bombs Iranian weapons sites won't change the fundamental problem. Iran will be accused of dodging future weapons inspections after any bombing whether it is true or not, just as Saddam was allegedly dodging inspections right up to shock-and-awe even though Hans Blix, who ought to know about these things, insisted otherwise. This is because the fundamental problem with Iran for Israel is not the development of nuclear weapons. Israel possesses an overwhelming nuclear deterrent and could develop missile defense long before Iran had an arsenal capable of annihilating Israel. The problem is Iran's support for militaristic, Islamic organizations in the Palestinian territories and elsewhere. This is what threatens Israel's security, and there's no path around it that doesn't involve an invasion or revolution.

  3. Iran acquiring a single nuclear weapon (or a few) is not a transcendental [existential??] threat. Unlike Iran, Pakistan has engaged Israel militarily. Like Iran, Pakistan does not recognize Israel. Israel tried and failed to derail Pakistan's development of their bomb, and Pakistan has not wielded it offensively to threaten any country. Instead, it's a deterrent against Indian aggression. It's far more likely that, rhetoric aside, Iranians want nuclear weapons to possess a similar deterrent against Israel, which would deter, amongst other things, Israel's strategic assassinations.

I don't think that someone disinterested in whether or not Iran was bombed would fail to include this context. Including these data points would provide arguments against bombardment or invasion that Goldberg ignores (his only argument is that it would lead to chaos, but that it'd be less chaotic -- or at least less dangerous for Israel -- if America did the dirty work). Another failure of his article is the absence of any Iranian perspective what-so-ever... although that's hard to come by when he regularly accuses Iran experts such as the Leveretts of being complicit in murder (all quotes from Iranians are used to convey the country's commitment to destroying Israel; no thoughts from Iranians or experts on Iran on how Iran would respond to such an attack).

None of this should imply that I don't think Iran should be disarmed. It's just that, looking at history, an airstrike won't further that goal. [JF: I agree.] It will instead lead to war, a war that will possibly lead to Israel's use of nuclear weapons. The risk of adding Iran to the list of nations possessing nuclear weapons is grave but benign next to that of total regional war in the Middle East.

Krishna Kumar:

After reading Mr. Goldberg's article, I felt it was well written and well reported, but fundamentally dishonest. He says to be "paralyzed" about making choices on attacking Iran, but he's stacked the deck in his article to come to only one conclusion: US support of an Israeli attack. His support of the "Obama plan" is conditional because he wants to Obama plan to fail, and the best remaining option therefore is to attack.

To sum up his article, the threat to Isreal to an Iranian nuclear weapon is NOT a direct attack, which would be too horrible to contemplate. Every quote in there suggests some sort of horrible balance of powers would exist. The threat is that Isreal would no longer be a refugee for Jews, which is an existential threat to a state founded on the memory of the Holocaust. And we have an Israeli prime minister who is uniquely attuned to that memory because of (possibly irrational) relationship with his father and a dead brother....

As you point out, there is a disagreement on the costs of an attack. But the reason he, and the Israelis he quotes, believe the costs are worth it is that they perceive a different set of benefits. The ultimate benefit, which Goldberg is trying to hide in his article, isn't about security -- is it about restoring the dream that Israel is the one safe haven for the Jews.

Steve Clemons made a good point which is, Goldberg is probably played a bit by some people in the WH, because there is a value in making the Iranians believe the probability for an Israeli or American attack is possible. But the key sentence for me is when he asks, almost in an aside, what Central Command would do if Isreali jets flew into Iraq, and an invisible quote, outside of context, says "do nothing." That novelistic details moves beyond reporting and moves it into propaganda.

I do think your post is wrong when you restate his stated belief that the "Obama plan" must work or it gets ugly. Let's say the plan fails, and Iran builds "the bomb". You still have 2-3 years as they build an effective delivery device to negotiate, and then an intermediate time period after that where negotiation is still possible (i.e. the President tells the Iranian president that if Tel Aviv magically disappears one day, Iran will still cease to exist thanks to US nukes). So is not quite the black period he depicts. Difficult, but the failure of the plan does not make an Israeli attack the best of a bunch of bad options.

Kevin Douglas:

Just reread Jeffrey Goldberg's article in light of your comments. Here is the problem I see. If there did exist some broad consensus among Israeli elites that 1) a military strike on Iran by Israel was a bad idea (for a bunch of reasons), but 2) a strike by the US on Iran would be very much in Israel's interests, am I being too much of a cynic if I suggest that Goldberg would have written exactly the same article? Given that the US has not struck Iran for so many years, and Obama has shown no support for this, the only way the US would engage in such a strike is if they considered it the best of several bad options. "Better us than Israel going it alone--at least we could do real damage and mitigate the diplomatic fallout", might be one such rationale (the decision act is only triggered by worry that Israel will act). If the Israeli government thinks opinion within the Obama administration is divided, then of course it's in their interests to bluff.

Which brings us back to Goldberg. His severest critics, I suspect, would take this one step further and agree with the following: even if Goldberg KNOWS that there exists the broad consensus among Israeli elites that there should be no unilateral strike by Israel on Iran, if these elites try to use them as a mouthpiece to bolster their bluff he'll happily go along. A less toxic version of this argument would be that Goldberg's sympathies make it easy for elites to use him in this way (he doesn't have to be a knowing accomplice, just someone who is willing to act as a stenographer).

Even if you think the above scenarios are wrong (ie. that no such consensus exists among Israeli elites), what the Atlantic is being accused of, I think, is indifference to a rather common form of journalistic bad faith....

Joshua Yunis:

Here is Jim Webb in 1998, in a Times Op-Ed entitled "What to do About China?":

American Government and business leaders are thus left with the unavoidable truth that China, despite its constant protests to the contrary, can no longer claim to be a non-expansionist power. And they must now prepare for the future consequences of that reality.

They can begin by putting American relationships with Japan, India, Israel and Russia on a much firmer footing. Along with the United States, these four countries possess the key ingredients of geography, military and economic power, and technological superiority to insure that China's future conduct conforms to international norms.....

....Second, Israel. It stands to lose greatly through the strategic axis China is developing with the Muslim world. The first foreign official to visit Pakistan after its detonation of nuclear devices was Iran's Foreign Minister, Kamal Kharrazi, who proclaimed that ''Muslims now feel more confident that Pakistan's nuclear capability would play a role of deterrence to Israel's.'' Though he later played down this statement, the world must consider it in the context of Iran's attempt to develop nuclear weapons of its own, also with Chinese -- and Russian -- assistance. The United States and Israel must keep the rest of the world focused on this, and should not rule out pre-emptive military strikes if there is evidence that Iran is building a weapon." (emphasis added)

Those were the days. Now, of course, Webb takes a more skeptical line on a pre-emptive strike. Why the change of heart? I don't know for sure, but if I had to guess, it's not because Webb has suddenly become a dove and/or brushed aside the risks of Iran developing a nuclear weapon. Our ~150,000 troops in bordering Iraq and Afghanistan might have something to do with it. (Reading this Op-Ed, coupled with his 2002 Washington Post piece about invading Iraq read as a kind of primer on all that went wrong with American foreign policy over the past 8-10 years).

James Fallows comments:

As mentioned earlier, it's awkward for me to quote and answer hostile mail about Jeff Goldberg's cover story, and about my subsequent claim that it is a valuable work of reportage that does not constitute warmongering.... [T]his is not my article to explain, defend, or elaborate on.... [B]ecause messages like [these]... involve the magazine's larger journalistic approach and presentation of the Iran question, here are some highly critical but non-vitriolic reader responses. They strike these main themes:

  • That the pre-war arguments Jeff Goldberg made about the urgency of invading Iraq (which I disagreed with at the time, as I did about the need for that war) are so fundamentally connected to his current reporting and analysis about Iran that this article must be seen as a continuation of his previous views;

  • That while the article's reporting might seem impressive, the framing of the issue predetermines a conclusion (by making the Iranian threat more imminent-seeming, and elevating the need for a military response);

  • That the very existence of the article implicitly advances the interests of Israeli hardliners, by artificially creating an emergency atmosphere -- over the risk of impending Israeli action -- which, if believed, could induce action from the United States [Jeff Goldberg's response, of course, is that the article is reporting as actual news the emerging views of the Israeli government]; and

  • That the article assumes rather than examines or proves the "existential" nature of an Iranian threat to Israel -- that Israel simply could not exist in peace with the knowledge that Iran had a nuclear bomb, even though it coexists with a nuclear-armed Pakistan and has enough of its own nuclear weapons to threaten a total-devastation retaliatory below against Iran.

I would have no problem quoting such criticisms -- and trying to answer them -- if they were about something I'd written, and indeed many of them involve my own judgment; so I figure they are part of a fair kicking-off of the debate...

First Draft of September 8 Principles of Economics Lecture: Financial Markets and Depression Economics

3.0. What We Hope You Will Learn

3.1. Recapitulation

Last time we saw how recessions and depressions could come to be. We took Jean-Baptiste Say's circular flow principle of 1803--the idea that because everybody's spending is somebody else's income there can be no depressions, no recessions, no "general gluts" but only sectoral shifts and readjustments--and we broke it. We broke it by pointing out that the normal process of adjustment, by which workers smoothly move from industries and occupations where there is excess supply to industries and occupations where there is excess demand, simply does not work when the excess supply is of goods and services and the excess demand is for money--or some other kind of financial asset. Then people working in industries where there is excess supply lose their jobs. But there is no countervailing source of extra hiring in the economy to give them someplace to go.

And last time we saw how these recessions and depressions could come to be big. Workers who lose their jobs are in households that thus lose their incomes, and they cut back on their spending. This second round of falling spending on currently-produced goods and services amplifies the shortage of aggregate demand for goods and services, and multiplies the effect of whatever the initial problem was. Then there is a third round, a fourth, and a fifth, until the economy settles down in some high-unemployment depressed state.

What is the level of production at that depressed state? We presented a way to calculate it: our multiplier equation. We argued that the economy will tend to rapidly head for and then remain at a state in which total production and incomes Y are equal to aggregate demand, total spending on goods and services, or total expenditure E:

E = Y

that total expenditure E will be the sum of spending on consumption goods C and on other components of final demand O:

E = C + O

And that consumption spending will have a component C0 that depends on confidence and other factors and a component cy x Y that depends on households incomes:

C = c0 + cy x Y

Those three relationships will all be in balance if and only if:

Y = (c0 + O)/(1 - cy)

If aggregate demand, expenditure E is greater than production and incomes Y, then inventories are falling and firms are busily hiring workers and expanding production. If E is less than production and incomes Y, then inventories are rising and firms are firing workers, cutting back on production, failing and closing down. Only if aggregate demand and expenditure on the one hand are equal to production and incomes Y is the economy in balance, in equilibrium.

We presented this aggregate expenditure framework, and we argued that it did a good job at getting at the essence of what is going on in recessions and depressions.

But we left one big question unanswered: What are the sources of the declines in c0 and O that set in motion the decline in aggregate demand, in total expenditure on goods and services? What financial assets are businesses and households trying to buy that produces the excess demand in finance and the deficiency of demand for goods and services?

3.2. Macroeconomics and Financial Markets

Economists have argued for more than a century about just what is the financial market excess demand that produces the shortfall in aggregate demand for goods and services. As best as we can see, all these debates have been fruitless and counterproductive. It is like the parable fo the blind philosophers and the elephant: each is touching a different piece of the elephant, and each is correctly reporting what he or she feels, but all are wrong in being voiciferously sure that the piece of the animal that they have hold of is the entire beast.

Briefly, economists looking for the origins of recessions and depressions have broken up into three schools or sects. One sect, call them "Keynesians," after the late English economist John Maynard Keynes of Cambridge University, sees the financial excess demand as an excess demand for bonds. A second sect, named "monetarists" by their intellectual leaders the late Irving Fisher of Yale and the late Milton Friedman of Chicago and Stanford, sees the financial excess demand as an excess demand for cash. And there is a third small sect which does not have a common agreed-upon name--call them Minskyites after the late Hyman Minsky, an economist at Washington University at St. Louis--sees the financial excess demand as an excess demand for safety, for high-quality places where you can put your wealth and be confident that it will not melt away and disappear.

3.2.1. Keynesians

One of the oldest sects, tracing its ancestry back to Swedish economist Knut Wicksell in the late nineteenth century, a sect now called "Keynesians" (to the great annoyance of Swedish economists) sees the financial excess demand as an excess demand for bonds. Bonds--and stocks, and loans, and other such assets--pay interest, dividends, return to you their principal or par value in the future, perhaps pay capital gains. They are all vehicles which you can use to move purchasing power from the present to the future: vehicles that people use to save. Bonds are created when businesses borrow and issue them to finance their investment spending and when the government borrows in order to finance its deficit spending.

To Keynesians--or perhaps more properly Wicksellians--downturns begin when households want to buy more bonds (and stocks, and pieces of real estate) to add to their financial wealth than businesses and the government together want to issue: when savings is greater than investment (plus the government deficit). The attempt by households to redirect their wealth from buying currently-made goods and services to buying bonds--to saving--is what produces the initial deficiency in aggregate demand that sets the downturn in motion.

Thus we reach the recommended economic policy of the Keynesians. If a downturn is the result of an excess of savings over investment plus the government deficit, take policy steps to:

  1. increase household confidence so that they are willing to spend more and save less.
  2. by reducing interest rates or otherwise improving the investment climate, induce businesses to spend more money investing to add to their capacity and so issue more bonds.
  3. expand the government deficit so that the government will issue more bonds that households can then hold.

All three sets of policies eliminate the excess demand for bonds, and so also remove the deficient aggregate demand for currently-produced goods and services that sets the downturn in motion.

3.2.2. Monetarists

The second sect, Irving Fisher's and Milton Friedman's monetarists, starts with the observation that cash is a very special asset in any market economy. It is what you use to buy things--you show up at the store with cash (or with your credit card which is a promise that VISA will pay them in cash, or with your checkbook with a live and valid balance which is a promise that your bank will pay them in cash), and the storekeeper will accept your cash as payment and let you buy your stuff. Economists call this asset "money." (Note that in so doing they deviate from normal English usage, in which "money" can mean "wealth" as well as "cash": when we say that somebody "has a lot of money" we don't mean that they have $10,000 in their pocket.) The monetarists there that downturns in production and employment are always due to an excess demand for cash money. When something has disturbed the supply or demand for liquid cash money so that households and businesses have less of it than they wish, they slow down their spending in an attempt to build their cash balances up, and it is this slowdown in spending that launches the downturn. A number of things can trigger such an excess demand for liquid cash money:

  1. Under a gold standard, the shipment of gold bars abroad to pay for imports reduces the money supply, and so creates an excess demand for money--and thus to deficient demand for goods and services.
  2. Open-market sales of government bonds by a central bank like the Federal Reserve by which the central bank trades government bonds for cash diminishes the supply of and so creates an excess demand for money--and thus to deficient demand for goods and services.
  3. A loss of confidence by households in the banking system or in finance leads them to trade interest-earning assets for cash and then to stuff that cash under their mattresses increases their demand for cash money, and so leads to an excess demand for money--and thus to deficient demand for goods and services.
  4. A failure of or runs on important banks that eliminate or freeze the checking-account deposits of households leads them to try to get more cash in their pockets and leads to an excess demand for money--and thus to deficient demand for goods and services.
  5. A loss of confidence and a failure of nerve on the part of businesses that leads them to think that they need to have larger cash balances to deal with economic uncertainty creates an excess demand for money--and thus to deficient demand for goods and services.

Everybody needs cash--and/or a checking account at a reliable bank with cash, and/or an unspent balance on a credit card--in order to carry out their normal day-to-day transactions. What happens when people find that they have less cash than they wish? They cut back on their spending and divert some of their income to trying to build up their cash balances. That cut back on their spending is, monetarists say, the thing that produces the initial fall in aggregate demand that sets the downturn in motion.

Thus we reach the recommended economic policy of the Monetarists: have a central bank that uses open-market operations to keep the supply of cash money in balance with demand, they say. Without any excess demand for cash, there will be no deficient aggregate demand for goods and services. And so there will be no downturns: no depressions, no recessions, no "general gluts."

3.2.3. Minskyites

There is a third sect, until recently too small and too disorganized to have a name. We call them Minskyites. This sect says that, for big downturns at least, the key is not that the economy has too little cash money or too few bonds, but instead that it has too few high-quality safe assets. It is not that people are cutting back on spending on currently-produced goods and services because they want to have more cash in their pockets or more bonds in their portfolio than exist. Instead, people are fearful that their wealth is unsafe: that they need to sell their risky assets and buy safe ones or else their wealth might simply melt away overnight as whatever partnerships, companies, banks, or governments they have invested in shut their doors, fail, and default on their debts.

Thus the policy recommendation of the Minskyites: bailout. The problem is that the economy does not have enough safe high-quality assets, and the private sector cannot create more because nobody trusts any partnership, company, or bank to be good for its current debts let alone for any new ones it might create. The solution is for the government to step in: to support shaky banks so that they can meet their obligations, to take over shaky companies and recapitalize them, to issue its own safe high-quality bonds and use the proceeds to buy up risky private assets, to generally calm the panic.

There are many problems with bailout as a policy. It is unfair, and it sets the stage for more trouble down the road. It is unfair in that it enriches those very financiers and investors whose reckless, speculative, and heedless portfolio strategies that triggered the panic and the general rush by everybody to move a greater proportion of their portfolio into safe, secure, high-quality assets. Those whose actions set the stage for the downturn should not profit. It sets the stage for more trouble down the road because every time Minskyite policies of bailout are adopted risk-loving financiers become more confident that the government will bail them out the next time as well, and so see even more of an incentive to engage in reckless, speculative, and heedless portfolio strategies.

As the late MIT economist Charles Kindleberger put it, writing of the need for a "lender of last resort" to perform the bailouts, but:

if the market is sure that a lender of last resort exists, its self-reliance is weakened.... The lender of last resort... should exist... but his presence should be doubted.... This is a neat trick: always come to the rescue in order to prevent needless deflation, but always leave it uncertain whether rescue will arrive in time or at all, so as to instill caution in other speculators, banks, cities, or countries.... some sleight of hand, some trick with mirrors... [because] fundamentalism has such unhappy consequences for the economic system...

Or as former Federal Reserve Vice Chair Don Kohn put it, the lender of last resort should act because teaching a few thousand investment bankers a lesson that they deserve is not worth doing if the cost is the jobs of millions.

Back in the nineteenth century, London Economist editor Walter Bagehot had a plan for how to deal with such panics and crises. The central bank and the government should, he argued, support the market by buying up risky assets and issuing safe ones and so satisfying the market demand for extra safe-high quality assets. But it made sure that those whose excessive speculation had caused the problem did not profit. "Lend freely" to banks and other financial institutions that needed safe assets in order to avoid banruptcy themselves, "but at a penalty rate"--at a high rate of interest which would make them poor in the long run as they were forced to hand over their cash or ownership stakes in their firms to the government, and would make them wish that they had not been so reckless in the first place.

In the late financial crisis central banks and governments have followed the first half of Walter Bagehot's plan. They have indeed "lent freely" in order to increase the supply of safe, high-quality financial assets. But they have been unable or unwilling to implement their policies in such a way that their support for financiers is "at a penalty rate," and leaves financiers poor and wishing they had been more prudent before the crisis.

3.2.4. Who Is Right?

Which of these three sects is right?

All of them--sometimes. Each has been right at at least one moment in the past generations.

We can see when there is an excess demand for liquid cash money that you can use to purchase things in the economy. When there is an excess demand for liquid cash money, savers and investors are trying to sell all their other financial assets at whatever prices they can in order to get their hands on cash. Thus the prices of stocks, real estate, and bonds are low--which means that the interest rates on all kinds of bonds are very high, for when the price of a bond is low the interest coupon it pays every six months is a large proportion of its value. In 1982 there was such a liquidity squeeze in the U.S. economy: pretty much everybody was attempting to build up their cash balances and trying to sell other financial assets to do so, and interest rates reached their highest levels of the post-World War II period.

Where did this liquidity squeeze--this excess demand for liquid cash money--come from in 1982? It had been deliberately created by the Federal Reserve, which believed that it had to break the cycle by which Americans had come to expect that each year would see 10% inflation. The only way to do that, then Federal Reserve Chair Paul Volcker and his colleagues concluded, was to create a situation of high unemployment, slack capacity, low production, and depression economics so that neither firms nor workers would dare to ask for the price and wage increases that they had planned. It worked: the 1970s had been a decade of accelerating and the 1980s were a decade of low inflation. It came at a high cost: the unemployment rate peaked at 10.8% at the end of 1982.

We can see when there is an excess demand for bonds--for vehicles to carry purchasing power forward from the present into the future, when there is a savings glut. When there is an excess demand for bonds, savers are willing to pay almost any price for bonds and as a result the interest rates on pretty much all kinds of bonds are very low, for when the price of a bond is high the interest coupon it pays every six months is a low proportion of its value. In 2003 there was such a savings glut in the U.S. economy and indeed worldwide: pretty much everybody was attempting to buy up bonds to hold so that they could shift spending on goods and services from the present into the future, and interest rates as a group reached their lowest levels of the post-World War II period.

And over the past three years we have seen an excess demand for safe, high-quality assets. That has been the excess demand that has triggered pretty much everybody to cut back on spending on current goods and services as they try to build up more wealth in vehicles in which they can be confident it will not melt away. When there is an excess demand for high-quality assets, then the prices of risky assets-- stocks, real estate, and corporate and other bonds seen as possible candidates for default--will be low, which means that the interest rates on risky bonds will be high, for when the price of a bond is low the interest coupon it pays every six months is a large proportion of its value. By contrast when there is n excess demand for high-quality assets, then the prices of safe assets--bonds issued by governments regarded as credit worthy, and private loans guaranteed or backed in some way by governments or by ample collateral--will be high because savers are willing to pay almost any price for high-quality bonds, and as a result the interest rates on high-quality bonds will be low, for when the price of a bond is high the interest coupon it pays every six months is a low proportion of its value. Credit spreads--the difference between the interest rates on high-quality bonds and risky bonds--will be extraordinarily high. And whenever a set of bonds shifts in investors' expectations from being high-quality to low-quality--as the bonds of the government of Greece did--the interest rate on those bonds will jump massively. That is what we have seen over the past three years.

No pure types...

3.3. Calculating Deflationary Gaps

3.3.1. Savings-Investment Gaps

The Keynesian framework focuses on excess quantity demanded for bonds as a source of pressure making for economic downturns. The quantity demanded of bonds is equal to whatever the current stock of bonds held by households is, plus the flow of savings into financial markets. What is the flow of savings? It has two components. First, there is domestic savings Sd: the difference between households' incomes Y and the sum of what they spend on consumption goods C and what they pay in taxes T to the government:

Y - C - T = Sd

Second, there are foreigners' savings: whenever next exports are negative, foreigners are selling us more goods and earning more dollars via imports than they need to pay for what we export. They take the difference and invest it in the United States. This difference is net savings from abroad: it is equal to the negative of our net exports: -NX.

The quantity supplied of bonds is equal to whatever the current stock of bonds issued by businesses and the government is, plus the flow of new issues into the bond market. Businesses' issues of bonds are equal to the amount I they spend on investment adding to their productive capacity. Governments' issues of bonds are equal to the difference between government purchases G and taxes T.

Since the current stock of bonds held by households is equal to the current stock issued by businesses and the government, the flow-of-funds in financial markets will be in balance if the rate at which funds are flowing into financial markets from households and foreigners is equal to the rate at which funds are flowing out to businesses and the government, if:

Sd - NX = I + (G-T)

If the quantity demanded of bonds is greater than the quantity supplied, if:

Sd - NX > I + (G-T)

then households and firms will be to cutting back on their spending, and there will be downward pressure on output and incomes Y--and downward pressure on employment.

How far will output and incomes fall if there is a Keynesian deflationary gap, an excess of planned savings over planned investment? We can draw a graph with planned savings and planned investment plotted on the vertical axis and with the level of incomes Y on the horizontal axis.

We see that if incomes are lower, planned savings are lower as well--and eventually if incomes fall low enough planned savings fall low enough to be equal to investment. At that point there is no longer downward pressure on spending, output, and incomes, and the economy is in equiibrium balance.

How to calculate where that point is? The requirement that savings equals investment (plus the government deficit) is our equiibrium condition:

Sd - NX = I + (G-T)

Subsitute our expression for the level of domestic savings into this equation:

Y - C - T - NX = I + (G-T)

Note that a -T appears on both sides, so we can cancel it:

Y - C - NX = I + G

Recall our consumption function:

C = c0 - cy x Y

And substitute it into our equation, thus breaking consumption spending down into its components c0 + cy x Y:

Y - c0 - cy x Y - NX = I + G

We want to determine the value of total output and incomes Y at which this equilibrium condition is satisfied, so collect the terms in Y on th eleft hand side

Y x (1 - cy) - c0 - NX = I + G

Move the other terms on the left over to the right:

Y x (1 - cy) = c0 + NX + I + G

and then solve for Y:

Y = (c0 + NX + I + G)/(1 - cy)

That tells us the level of output and incomes Y at which the excess demand for bonds, the excess of savings over investment, is eliminated. That tells us what the equilibrium level of Y will be in this Keynesian framework.

If you cast your minds back to an earlier section, you remember an alternative expression for the equilibrium level of Y, calculated from the consumption function and the equilibrium condition that expenditure equalled output (and incomes):

Y = (c0 + O)/(1 - cy)

and if you remember the definition of "other spending" O:

O = NX + I + G

you see that these two are the same thing.

At this point you should ask how this can be: one is a result of the equilibrium condition that firms be happy with their level of production--that expenditure equalled production so that inventories were neither rising nor falling--while the other is a result of household savers being happy with their holdings of bonds--that there be no excess demand for bonds and that the flow-of-funds through financial markets be in balance. How is it that these two lines of argument lead to exactly the same conclusions? The answer is: it is because of the circular flow principle. Whenever expenditure = output = incomes, then the flow-of-funds through financial markets will be in balance and savings will be equal to investment (plus the government's budget deficit). Whenever the flow-of-funds through financial markets will be in balance and savings will be equal to investment (plus the government's budget deficit). then expenditure = output = incomes. That one is the same as the other is a requirement of the accounting identities we used to set up this system of national income, a requirement of, as John Stuart Mill put it, "the metaphysical necessity of the case."

Our depression-economics formula for the level of output Y when the source of the downturn is a Keynesian excess demand for bonds:

Y = (c0 + NX + I + G)/(1 - cy)

suggests policies to get us out of recession or depression:

  1. Have the central bank lower the interest rates at which businesses can borrow, and thus make businesses increase their investment spending I--when you can borrow money to expand capacity more cheaply you borrow more of it because the cost of expanding capacity is lower.
  2. Provide businesses with other incentives, like special tax credits, to increase investment spending I
  3. Increase government purchases G--expansionary fiscal policy.
  4. Have the central bank lower the interest rates international currency speculators receive on their portfolio investments in the United States, thus making your currency worth less in terms of other currencies, thus making foreigners more eager to buy domestically-made products and increasing net exports NX
  5. Encourage businesses to export more, thus raising net exports NX.
  6. Encourage--via taxes, quotas, or other policies--wholesalers and retailers to import less, thus raising net exports NX.
  7. Claim that prosperity is just around the corner, and thus make businesses more confident about the future and hence raising investment spending I.
  8. Claim that prosperity is just around the corner, and thus make households more confident about the future, hence raising the baseline consumption-spending confidence term c0, and so cut saving.
  9. Cut taxes, thus giving households more money in their pockets and hence raising the baseline consumption-spending confidence term c0--but be careful, for if the tax cut convinces households that the government has no plan for financing itself in the long run, a tax cut will not improve but diminish confidence and will not raise but lower c0: under those conditions it is actually a tax increase that is expansionary.

In normal times, when central banks have the freedom of action to raise and lower interest rates, most Keynesian economists would say that the best tool to try to use to fight recession and depression is option number (1). The first line of defense against downturns--and usually the only one that is needed--is for the central bank to respond by lowering interest rates and thus providing businesses with incentives to boost their investment spending. Such expansionary monetary policies are the easiest to put into action, likely to be among the most rapidly working, least likely to become footballs for destructive political games, and tend to have fewer adverse side effects than the other policies.

But when--as has been the case since 2008--the central bank has lowered the interest rates it controls as far as it possibly can, governments must either wash their hands of the situation or resort to one or more of the other policies for fighting a Keynesian downturn.

3.3.2. Money Demand-Money Supply Gaps

The monetarist framework focuses on excess quantity demanded for liquid cash money as a source of pressure making for economic downturns. Take the total liquid cash money supply in the economy--cash, reserve deposits at the twelve regional Federal Reserve banks, deposits in checking accounts, unspent VISA authorizations--and call it M, for money. Divide it by the average price level, which we will call P, in the economy. The quotient M/P we call the real money stock.

The monetarist version of depression economics says that when M/P goes up households and businesses try to get rid of their excess cash by spending more faster, and they do until the higher rate of their spending makes them think that they need all the liquid cash money they are holding. Conversely, when M/P goes down households and businesses try to build up their cash balances by spending less slower and they do until the lower rate of their spending makes them think that they have enough liquid cash money and do not need to be holding any more. Monetarist founder Irving Fisher hypothesized that the relationship between total expenditure E and the real money stock M/P would be more-or-less a proportional one:

E = (M/P) x V

and he named the factor of proportionality V, calling it the "velocity" of money through the economy. Combine this behavioral relationship with our businesses-neither-expanding-nor-contracting-production equilibrium condition:

Y = E

and you have the monetarist theory of downturns: the economy is in recession or depression because the real money stock M/P or V or both are too low. The way to cure a downturn is for the central bank to buy bonds for cash, thus raising the real money stock until spending, output, and incomes--and employment--are once again back at normal levels.

According to the monetarists the Keynesians were looking at the tail and thinking it was wagging the dog. The Keynesians talked about how Federal Reserve open-market purchases of bonds for cash in a downturn decreased the supply of bonds and so restored equilibrium to financial markets. They, the monetarists said, ought to have talked about how Federal Reserve open-market purchases of bonds for cash in downturns increased the supply of money and so restored equilibrium to financial markets.

When I started in this business in 1978-1979, the monetarists had a good case. In the post-WWII United States, at least, the velocity of money looked amazingly stable: it looked like when the real money stock fell production fell, and when the real money stock rose production rose, and that little else had much if any effect on spending, production, incomes, and employment. As a result, at the end of the 1970s Federal Reserve Chair Paul Volcker announced that the Federal Reserve was going to pay more attention to the monetarists--with their focus on the supply of money and on the money market--than it had on the past.

St. Louis Fed: FRED Graph

This may have been his biggest mistake. The close correlation between the real money stock on the one hand and production and income on the others almost immediately broke down. Before 1979 there were very few times when velocity was more than 4% away from its trend. After 1979 it has been that far away from trend more often than not. Thus it is difficult now to trust monetarist analyses of depression economics--and their claim that if only the Federal Reserve would engage in more open-market purchases of bonds for cash things would rapidly return to normal.

St. Louis Fed: FRED Graph

Since 1979 the velocity of M2 in the United States has usually been more than 5% away from its long-run trend...

3.3.3. Panic and Flight to High-Quality Assets

If you are a monetarist or a Keynesian stating why the economy is in a downturn and recommending what should be done to fight depression is very easy and straightforward. In each case all you have to do is to remember and apply one equation. In the monetarist case you have to remember and apply:

Y = (M/P) x V

In the Keynesian case you have to remember and apply:

Y = (c0 + NX + I + G)/(1 - cy)

But what do you do if you are a Minskyite, if you think that downturns--big downturns at least--are the result not of an excess demand for cash (which would produce high interest rates across the board) or of an excess demand for bonds (which would produce very low interest rates across the board) but of an excess demand for safe, high-quality assets which produces very low interest rates on low-risk securities like the debt of fiscally-sound governments and very high interest rates elsewhere in the economy?

Unfortunately for you, there is no single-equation Minskyite counterpart to the single-equation income-expenditure formulation of the Keynesian model or the single-equation quantity-theory-of-money formulation of the monetarist model. The Minskyites have been a small sect rather than a large school, and so have not had the intellectual firepower to determine how to strip their theory down to its essentials so that it can be taught via a single equation to Econ 1 students.

Unfortunately for me, the past three years have been overwhelmingly a "Minskyite" downturn. There has been no general shortage of liquid cash money--interest rates on safe alternative assets like short-term U.S. Treasury bonds have remained low. If we were in a primarily "monetarist" downturn with a cash shortage those interest rates would have skyrocketed, as they did in the early 1980s. There has been no general shortage of bonds either--prices of corporate bonds have in fact fallen and interest rates risen. If we were in a primarily "Keynesian" downturn with a savings glut those interest rates would have plunged, as they did in the early 2000s. We are in a more complicated and confused situation, one that is hard to teach to Econ 1 students...

3.4. What We Hope You Have Learned

Where Oh Where Are the Bond Market Vigilantes?

Floyd Norris:

Rates Fall as Market Fears Economic Weakness: As 2010 began, there was nearly unanimous agreement in financial circles on at least one thing: Interest rates were sure to rise during the year. That turn of events, which has shocked savers and stunned investors, appears to indicate that financial markets’ worries are turning in a very different direction from those of many governments. The governments are seeking ways to bring down budget deficits, fearing that without austerity they could go so far into debt that they would never be able to borrow again. Investors in the financial markets seem to be much more concerned by the possibility of renewed recession and a general deflation that could send asset values and prices down.... [F]ar from showing a reluctance to finance the American government, investors are seeking safety and evidently believe American government debt is the safest possible investment. They have rushed to send money to the Treasury, thereby reducing borrowing costs for the government.

By late 2009, interest rates had fallen to levels previously thought inconceivable. The annual yield on a two-year Treasury note dipped below 1 percent. But it has since traded barely above one-half percent. Perhaps investors are nervous because they fear governments will swing too far toward austerity. When economies weakened three years ago, talk immediately turned to economic stimulus. This time, much of the discussion in Washington, as well as in many European capitals, has focused on the need to reduce spending and deficits, rather than on the possibility that additional stimulus might be needed to avert a new worldwide downturn....

The growing disenchantment with government spending has led to talk of the world reaching a “Keynesian endpoint,” as Anthony J. Crescenzi, a strategist for Pimco, a large investment firm, put it this summer. At such a time, countries needing to rescue banks and stimulate their economies would be unable or unwilling to do so. The Federal Reserve’s move last week, in which it committed to buying up a small amount of Treasury securities, showed its determination to act but “may have exacerbated the fears,” said Dean Maki, the chief United States economist for Barclays Capital. “The Fed seemed to have significantly downgraded its economic outlook,” but its policy change “appeared fairly minor in comparison.”...

[F]or now, the financial markets seem to fear recession and deflation much more than they fear deficit spending.

Dangers of Extrapolation...

Alison Schraeger writes in the Economist:

Pensions: The retirement solution: If equities continue to perform the same way they have the last ten years...

No, no, no, no no. No. NO!

Naive straight-line extrapolation is rarely your friend.

Over the past ten years...

  • Cyclically-adjusted real earnings have grown at a rate of 2.5% per year.
  • Stocks have paid dividends at a rate of 2.5% per year.
  • Price-to-cyclically-adjusted earnings ratios have collapsed at an average rate of 6% per year.

producing average real equity returns of -1% per year.

If this were to continue for the next two decades, the S&P composite would stand in 2030 at 6 times its cyclically-adjusted earnings, which would be 56% higher than they are now.

My mind, at least, boggles at the idea of an S&P Composite where the earnings yield is 17%.

The Velocity of M2 in the United States

St. Louis Fed: FRED Graph

From 1959-1979 the velocity of M2 in the United States was never more than 5% away from its long-run trend...

St. Louis Fed: FRED Graph

Since 1979 the velocity of M2 in the United States has usually been more than 5% away from its long-run trend...

The first graph accounts, I think, for the rise of post-WWII monetarism in the United States. The mystery raised by the second graph is why there are still any monetarists--anyone using money stock movements to forecast spending movements--around at all...

Why Oh Why Can't We Have a Better Press Corps? Yet Another "Opinions on Shape of Earth Differ" Edition

Josh Marshall explains why Mark Halperin would be more useful to society as a cosmetics testing subject than a reporter:

Talking to the Void: Mark Halperin has a highly unusual and painfully quaint column today imploring the GOP not to demagogue the Mosque issue for votes in the mid-term election. The reason simply being that it's not right. This is "your moment", he writes and commends Republicans for having "restricted yourself as much as possible to an economic message, eschewing social issues and foreign policy as you try to establish contrasts for the electorate between your brand and the Obama-Pelosi-Reid record."

What stands out most is not only Halperin's general aping of Republican language but his seemingly genuine belief that there's anyone there to appeal to. As Eric Cantor might say, C'mon. The institutional Republican party has fully (though with some notable and honorable exceptions) hoisted its sale to xenophobia and religious hatred. And as Halperin notes, at least for motivating their own voters, it's simply good politics. This is not something anybody happened into.

I've given a lot of thought to how we're going to cover this... some of what's required is simply to provide witness.... We're in a midst of a spasm of nativist panic and raw and raucous appeals to race and religious hatred. What effects this will have on the November election strikes me as not particularly relevant. What's important is compiling some record of what's afoot, some catalog for understanding in the future who was responsible and who was so willing to disgrace their country and their principles for cheap advantage.

Why Friends Don't Let Friends Read the Wall Street Journal

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

David Weigel complains, righly, that James Taranto has no business writing for any publication of reputation:

Weigel : Socialism With a Corporate Face: James Taranto spent the first section of yesterday's "Best of the Web" drilling me over this blog post, in which I asked why more Americans thought Obama had signed TARP than (correctly) thought Bush had. Taranto's point:

Whereas TARP was necessary but hateful in Obama's telling, the stimulus was necessary and lovable--though unemployed Americans who are not economists on the left or the right might question whether it really averted disaster or was worth $862 billion. Then, of course, they crammed ObamaCare down our throats, which was both unpopular and unnecessary. Because of Obama--and according to Obama's own narrative--TARP turned out to be not an aberration, a one-off emergency response, but the start of a new era of ever-growing government. That's why voters are angry, and it's why they mistakenly guess that he rather than Bush signed TARP.

So: Voters shouldn't be challenged for thinking Obama passed TARP, because he made it a turning point instead of an aberration.

We disagree on whether it's important for voters to understand which party/politician did what, and what the effect was.

I just think it's fascinating that TARP has been the entry point for Republicans bashing Obama's social democratic economic agenda. It's one of the reasons I disagree with liberals who say the tea party is rooted in racism. Now, there's a case to make that some opposition to big spending, welfare programs is rooted in fear of money being redistributed to non-whites. But every big initiative of the Obama era has been slammed with that new pejorative word "bailout." It conjures images of wealthy Wall Street executives and wealthy bankers, not images of ACORN volunteers.

links for 2010-08-15

Herman Goering Liveblogs World War II: Aug 15, 1940

Eagle Day:

Directive by Herman Goering Aug 15th 1940:

  1. The fighter escort defences of our Stuka formations must be readjusted, as the enemy is concentrating his fighters against our Stuka operations. It appears necessary to allocate three fighter Gruppen to each Stuka Gruppe: one of these fighter Gruppen remains with the Stukas and dives with them to the attack; the second flies ahead over the target at medium altitude and engages the fighter defences; the third protects the whole attack from above. It will also be necessary to escort Stukas returning from the attack over the Channel.

  2. Night attacks on shipping targets are only fruitful when the night is so clear that careful aim can be taken.

  3. More importance must be attached to co-operation; forces are not to be broken up except in cases of utmost urgency.

  4. The incident of VILGI on August 13 shows that certain unit commanders have not yet learnt the importance of clear orders.

  5. I have repeatedly given orders that twin-engined fighters are only to be employed where the range of other fighters is inadequate, or where it is for the purpose of assisting our single-engined aircraft to break off combat. Our stocks of twin-engined fighters are not great, and we must use them as economically as possible.

  6. Until further orders, operations are to be directed exclusively against the enemy Air Force, including the targets of the enemy aircraft industry allocated to the different Luftflotten. Shipping targets, and particularly large naval vessels, are only to be attacked where circumstances are especially propitious. For the moment, other targets should be ignored. We must concentrate our efforts on the destruction of the enemy Air Forces. Our night attacks are essentially dislocation raids, made so that the enemy defences and population shall be allowed no respite. Even these, however, should where possible be directed against Air Force targets.

  7. My orders regarding the carrying out of attacks by single aircraft under cover of cloud conditions have apparently not been correctly understood. Where on one afternoon 50 aircraft are despatched without adequate preparation on individual missions, it is probable that the operation will be unsuccessful and very costly. I therefore repeat that such sorties are to be undertaken only by specially selected volunteer crews, who have made a prolonged and intensive study of the target, the most suitable method of attack, and the particular navigational problems involved. By no means all our crews are qualified to undertake such tasks.

  8. KGr100 (bombers) are also in future to operate against the enemy Air Force and aircraft industry.

  9. It is doubtful if there is any point in continuing the attacks on radar sites, in view of the fact that not one of those attacked has so far been put out of operation.

  10. The systematic designation of alternative targets would appear frequently to lead to certain targets being attacked which have absolutely no connection with our strategic aims. It must therefore be achieved that even alternative targets are of importance in the battle against the enemy Air Force.

  11. The Commanders-in-Chief of the Luftflotten are to report to me on the question of the warnings to be given during enemy air penetrations over the Reich. At present, the warnings are causing a loss of output whose consequences are far graver than those caused by the actual bomb damage. In addition, the frequent air raid warnings are leading to nervousness and strain among the population of Western Germany. On the other hand, we must take into account the risk of heavy loss of life should an attack be launched before a warning has been given.


links for 2010-08-14

Dave Winer Hacks Twitter's New URL Shortener

Dave Winer:

Scripting News: Ain't "fat" tweets sweet? (they were): 1. Twitter has a new url-shortener, called  2. When it displays a tweet with a url that was shortened by, it expands the url, so you get to see the url it is pointing to. That way you know in advance where you're going. This is a good thing, it's one of the nice things about the web that url-shortening screws with. 3. But doesn't check to see that the thing you're shortening is actually a url. You can shorten things that aren't. 4. doesn't have a 140-character limit for urls. 5. So when it shows the full url, it shows as many as were there. Even if there were more than 140, and even if it wasn't a url. 6. Heh.  

What Is the Federal Reserve Doing?

From Chris Hayes:

Twitter / Christopher Hayes: @justicegorilla the econom ...: @justicegorilla the economy is like a burning house. The Fed is the fireman. They're watching the house burn so they can conserve water.

We are going to have to have a talk soon: is the economy experiencing a flood and is the Fed acting like a fire department? Or is the economy on fire and the Fed refusing to turn on the hoses?

Uwe Reinhardt on Kenneth Arrow on Health Care

Uwe Reinhardt:

Health Care, Uncertainty and Morality: In last week’s post I discussed Kenneth Arrow’s exploration of whether special characteristics set health care apart from other commodities — whether it had a “moral dimension.”... Professor Arrow... concluded that virtually all the special features of the medical care industry — the role of nonprofit institutions; the expectation that physicians, although vendors of medical services, would always put the interests of their patients above their own self-interest; professional licensing and many other forms of government regulation — could “be explained as social adaptations to the existence of uncertainty in the incidence of disease and in the efficacy of treatment.”...

First, physicians may not agree on the medical condition causing the symptoms the patient presents. Second, even if physicians agree in their diagnoses,  they often do not agree on the efficacy of alternative responses — for example, surgery or medical management for lower-back pain. Third, information on both the diagnosis of and the likely consequences of treatment are asymmetrically allocated between the sell-side (providers) and the buy-side (patients) of the health care market. The very reason that patients seek advice and treatment from physicians in the first place is that they expect physicians to have vastly superior knowledge.... That makes the market for medical care deviate significantly from the benchmark of perfect competition.... Wherever asymmetry of information is present, there exists the potential for the better-informed market participants to exploit the ignorance of the less well informed. How society responds to this flaw in markets depends on the severity of its consequences....

Professor Arrow explained many of the nonmarket social institutions and regulations characteristic of medical care that he had identified as “attempts to overcome the lack of optimality resulting from asymmetry of information and the inability of competitive markets to allocate efficiently all of the risks inherent in health care.” Pointedly, he said, “It is the general social consensus, clearly, that the laissez-faire solution for medicine is intolerable.”...

In a recent interview with Conor Clarke in The Atlantic, Professor Arrow was asked how much of his 1963 paper “is still an accurate representation of the problems the health market faces.” He responded:

I think the basic analysis hasn’t changed. There are wars over the details, but the basic analysis is accepted. Some specifics have changed. If you look closely at my argument there is a sociological structure. There is a kind of sociological thesis. The market won’t work – it doesn’t work well in the health context. But something else supplements the market, and the thing I put stress on in the paper are the elements that put a non-economic influence on the market: professional commitments to provide a service, to engage in services that aren’t self-serving. Standards of caring decided by non-economic actors. And one problem we have now is an erosion of professional standards. In a way there is more emphasis on markets and self-aggrandizement in the context of health care, and that has led to some of the problems we have today.

Coming from one of the most revered economists of our age, these are sobering thoughts. Next week, I shall return to Professor Arrow’s comments on the concept of “efficiency,” as economists define and use the term. In my view, when economists wax mushy on the virtue of what they call “efficiency,” it is time to run for the hills, for they are selling a preferred moral doctrine in the guise of science.

Fiscal Policy: Felix Salmon Asks a Question

How Obama wants to cut taxes on million-dollar incomes | Analysis & Opinion |

How Obama wants to cut taxes on million-dollar incomes: What happens to people on seven-figure incomes when they pay lower taxes on their first $250,000 income, but higher taxes on the rest, as the Obama administration is proposing? It turns out that they end up paying fewer taxes altogether: $6,349 less per year, on average.... This is definitely not what I would have expected. For households in the $200k to $500k range I can see that the benefits from the lower-income tax cuts might outweigh the costs from the higher-income tax hikes — but once you’re earning over $1 million, the vast majority of your income is subject to higher, not lower, taxes. And still you end up saving money with this bill! I’m sure there comes an income point — $2 million? $5 million? more? — where the Obama bill ends up being a net money-loser for the ultra-wealthy. But it would be good to publicize that point, and say that the bill being called a tax hike actually lowers taxes for everybody up to (say) $3 million a year, or whatever it is. That would surely make it harder to oppose, no?