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October 2010

Econ 1: First Very Rough Draft of Problem Set 5


In the central part of the state of Euphoria there is a small city, the home of Euphoric State University, called Avicenna--the word is a corruption of the Arabic Ibn Sina, the byname of the great eleventh century Iranian Abu Ali al-Husayn ibn Abd Allah ibn Sina: academic administrator, Quran reciter, astronomer, chemist, geologist, psychologist, theologian, mathematician, physicist, physician, poet, and paleontologist. For the next several questions, we will look at the daily market for espresso-based drinks in Avicenna. Suppose that the demand for espresso drinks is: Q = 10000 - 1000P, where P is the price of an espresso-based drink in dollars. Suppose that the supply is: Q = -5000 + 4000P, where P is the price of an espresso-based drink in dollars.

1) Calculate the market equilibrium

a) What is the market equilibrium price?
b) What is the market equilibrium quantity?
c) What is the producer surplus?
d) What is the consumer surplus?

2) Now suppose that PDC becomes alarmed at the number of strokes that are being treated at the public hospitals of Euphoria, and becomes aware of the link between caffeine consumption and blood pressure on the one hand and between blood pressure and strokes on the other. They decide to impose on consumers a $1/drink tax on espresso drinks and devote the money to hospital stroke-care units.

a) What is the equilibrium price that consumers pay?
b) What is the equilibrium price that producers receive?
c) What is the equilibrium quantity?
d) How much money is raised for hospital stroke care units?
e) What is the producer surplus?
f) What is the consumer surplus?
g) What is the change in the producer surplus relative to the market equilibrium?
h) What is the change in the consumer surplus relative to the market equilibrium?
i) What are the arguments that this tax on espresso drinks is a good idea?
j) What are the arguments that this tax on espresso drinks is a bad idea?

3) Now let us return to the market equilibrium. PDC now notes that baristas have low security of employment and often suffer from spells of unemployment. They decide to impose on producers a $1/drink tax to establish a social welfare fund for baristas.

a) What is the equilibrium price that consumers pay?
b) What is the equilibrium price that producers receive?
c) What is the equilibrium quantity?
d) How much money is raised for barista social welfare?
e) What is the producer surplus?
f) What is the consumer surplus?
g) What is the change in the producer surplus relative to the market equilibrium?
h) What is the change in the consumer surplus relative to the market equilibrium?
i) What are the arguments that this tax on espresso drinks is a good idea?
j) What are the arguments that this tax on espresso drinks is a bad idea?

4) What are the differences between your answer to (2) and your answer to (3)?

5) Return to the market equilibrium. Suppose that all the producers--and we know they are all the producers because they own all the espresso machines in Avicenna--decide that they don't want to work as hard, and that they will make their supply "inelastic": they will share demand equally among themselves and simply go home for the day when the total number of espresso drinks served hits 4000.

a) What is the equilibrium price?
b) What is the equilibrium quantity?
c) What is the producer surplus?
d) What is the consumer surplus?
e) What is the change in the producer surplus relative to the market equilibrium?
f) What is the change in the consumer surplus relative to the market equilibrium?

For the next several questions, let us remain in Avicenna but return to our yoga-lessons example. To simplify the math let's ignore the granularity in lesson supply, and say that the supply curve is simply: Q = 2 x P, where P is the price of a lesson in dollars and Q is the number of slots for yoga students in the classes that the yoga instructors teach. And to simplify the math let's write the daily demand curve as: Q = 126 - 5P, where P is the price of a lesson in dollars and Q is the number of students taking lessons.

6) Calculate the market equilibrium:

a) What is the market equilibrium price?
b) What is the market equilibrium quantity?
c) What is the producer surplus?
d) What is the consumer surplus?

7) Now suppose PDC--Production Distribution Coordination--gets into the act. Somebody gives an eloquent speech about how it is unfair that people are charged as much as $18/lesson for yoga, and PDC enacts a price ceiling: nobody is allowed to charge more than $10/lesson for yoga classes--and the lessons will be taken by those who are the first to sign up.

a) What quantity are suppliers willing to provide at a price of $10/lesson?
b) How many people will want to sign up for yoga lessons?
c) What is the average valuation the people who want to sign up place on yoga lessons?
d) Suppose that the average person who succeeds in signing up has the average valuation among all those who wish to sign up. What, then is the consumer surplus?
e) What is the producer surplus?
f) Who has gained and who has lost from this decree relative to the market equilibrium, and how much?
g) Can you think of a reason why this decree from the PDC might be popular?
h) Suppose it is your job to argue that the decree should be repealed. What would you say?
i) In ancient Athens there was a crime--punishable by death or fine--of having convinced the Assembly of Athens to pass an unjust decree: γραφὴ παρανόμων. Do you think those who persuaded PDC to pass this decree should be tried and punished for this crime? Why or why not?

8) Now suppose that somebody stands up at PDC and gives a persuasive speech that yoga is an alien fitness discipline and that we should be encouraging all-American forms of exercise--like hot-dog eating contests. As a result, PDC passes a decree that no more than 20 people should take yoga lessons a day. However, they do not restrict the price that those lucky enough to be allowed to offer the 20 lessons can charge.

a) To what price will consumers bid up the price of yoga lessons?
b) What will the consumer surplus be?
c) What is the average reservation price that the people who want to sign up to teach yoga will place on yoga lessons?
d) Suppose that the average teacher who succeeds in signing up to give the 20 lesson slots has the average valuation among all those who wish to sign up. What, then, is the producer surplus?
e) Who has gained and who has lost from this decree relative to the market equilibrium, and how much?
f) Can you think of a reason why this decree from the PDC might be popular?
g) Suppose it is your job to argue that the decree should be repealed. What would you say?
h) In ancient Athens there was a crime--punishable by death or fine--of having convinced the Assembly of Athens to pass an unjust decree: γραφὴ παρανόμων. Do you think those who persuaded PDC to pass this decree should be tried and punished for this crime? Why or why not?

9) In the far north of the state of Euphoria there is a small town called Ihavefoundit. There is one theater in Ihavefoundit--and there is no connectivity to the outside world whatsoever. This means that the 1000 or so residents of Ihavefoundit who have a fondness for watching classic Japanese cinema with subtitles have only one way to do so: somebody has to rent a copy of a movie and rent the theater--paying $1000 to do both of those things--and then show the movie, charging admission. No matter how many people show up to the theater the cost of showing the movie remains the same: $1000. And the reservation prices of the Japanese cinema-loving residents are given by the demand curve: Q = 1000 - 100P, where P is the price charged to see the movie in dollars.

a) Suppose that the profit-making Entrepreneurial Company enters the business and is the only--the monopoly--seller of opportunities to see classic Japanese cinema in the benighted, fog-bound, and redwood-infested town of Ihavefoundit. For each price between $10/ticket and $0/ticket, counting down by $1/ticket each time, what are the profits earned by Entrepreneurial Company?
b) What price maximizes profits for the monopolist Entrepreneurial Company?
c) What is the consumer surplus for that price?
d) What is the total social surplus for that price?

10) Let us remain in the far north of Euphoria, but this time classic Japanese cinema is going to be shown by the Redwood Collective for Culture. The RCC is--let us suppose--an efficient organization, able to actually rent a theater, rent a print of the movie, collect money, and not have it stolen. The only constraint on the RCC is that it has to break even.

a) At what price charged per ticket does the RCC break even--collect the $1000 it needs to run its operations?
b) What is the consumer surplus when the RCC breaks even?
c) How does that compare to the consumer surplus in problem (9), when the profit-maximizing Entrepreneurial Company showed the movies?
d) How does that compare to the sum of the consumer and producer surplus in problem (9), when the profit-maximizing Entrepreneurial Company showed the movies?
e) Which comparison--that of consumer surplus with the RCC to consumer surplus with the profit-making EC in part (c), or that of consumer surplus with the RCC to consumer plus producer surplus with the profit-making EC in part (d)--is the best one to keep in mind in guiding your analysis of whether classic Japanese cinema in Ihavefoundit should be shown by a private company or by a nonprofit organization?

11) Suppose that the government of the state of Euphoria gives the RCC a $500 grant to show a movie.

a) At what price now charged per ticket does the RCC break even?
b) What is the consumer surplus now when the RCC breaks even?
c) By how much has consumer surplus increased as a result of this $500 grant?
d) What are the arguments that this $500 grant is a good use of the government's money?
e) What are the arguments that this $500 grant is a bad use of the government's money?

The Crime of Misleading the Assembly of Athens and Causing It to Make a Bad Decision...


What was this called in Greek--the crime of misleading the Assembly?

Keith Werhan:

(1) The Athenian law against misleading the demos. Athens, like political communities before and since, adopted laws that dealt harshly with those who would overthrow or otherwise subvert the democracy. Perhaps the most distinctive Athenian provision against subversion was the law, dating perhaps from the early years of the classical democracy, that prescribed the death penalty for Assembly speakers who misled the demos. n294 Every citizen had legal standing to commence such a prosecution, which could be lodged against any rhetor who had advocated an Assembly decision resulting in harm to the polis. The Athenians regarded an Assembly action gone awry as the product of the demos having been deceived by "mischievous advice." When an action turned out badly, the speaker's deception was revealed. In the Athenian view, an Assembly speaker who misled the demos into acting to the detriment of the polis engaged in misconduct tantamount to treason, on a par with those who sought to subvert the democracy or who betrayed Athens to one of its enemies.

An early and classic example of the crime of misleading the demos involved Miltiades, the general (strategos) who had led the Athenian forces to victory at the battle of Marathon. In Herodotus' account, Miltiades, basking in the glow of that triumph, convinced the Assembly to raise an expeditionary force under his command, "without saying against what country . . . [it] would be used--only that . . . [the Athenians] would grow rich if they followed him." According to Herodotus, Miltiades' actual motive was personal. He sought revenge against the Parians for a past wrong. The Paros expedition was an embarrassing failure. Miltiades returned to Athens wounded and humiliated, whereupon the Assembly tried and convicted him for having misled the demos into approving the expedition. Miltiades avoided the death penalty, but he died of his wounds before he could pay the substantial fine that the Assembly had levied upon him...

Keith Werhan (2009), "The Classical Athenian Ancestry of American Freedom of Speech" Supreme Court Review 293.

There must be a single Greek word for this, or at the very least a short phrase. What is it? Is this the graphe paranomon?

Who Are You and What Have You Done with Our Ben Bernanke?


Edmund Andrews asks a question of the Fed Chair:

My theory on Ben Bernanke: [O]ne has to ask: what took Bernanke so long to reach this decision.  At the end of the day, his rationale boils down to something that critics -- even laymen like me -- have been saying and writing for months: unemployment is higher than the Fed wants and inflation is lower than the Fed wants, so there is no good reason for not easing policy further.

One explanation is politics.  Fed governors and regional Fed presidents have been split between hawks and doves, and the Fed likes to maintain as much consensus as possible.  But I think there's a more basic reason: Bernanke has been worried that another round of easing might not accomplish much.   And he has good reason to worry.   Spectacularly low interest rates have done little to spark demand, as evidenced by the massive volume of excessive reserves that banks are parking at the Fed.  I think Fed officials are worried that they will be seen as powerless, that they have run out of tricks and that the central bank's authority and mystique will suffer a long-term blow.

If that's the case, it's a bad reason.  Bernanke was brilliantly bold in his initial responses to the financial crisis and the downturn.  But he lost his nerve more recently, and held back when he should have forged ahead.

Parroting Supply and Demand: Department of "Huh?!"


Myron Scholes appears not to understand the basics of supply and demand:

Guest Contribution: Myron Scholes on Whether QE2 Will Work: Myron Scholes, the Nobel Prize-winning retired Stanford University finance economist, contemplates the prospects for another round of Federal Reserve quantitative easing, and wonders if it’ll work as well as the Fed hopes.

Some possibilities:

(1) Maybe in short run, QE reduces the risk premium and encourages investment. Encouraging investment is good. The problem is that this isn’t a rational argument. The risk premium can’t be affected by flows. Investors will sell risky assets to government and buy bonds. The Fed could end up holding all risky assets; investors will hold safe assets. The risk premium stays the same...

If the Federal Reserve holds all the risky assets, then the risk associated with them is borne by taxpayers as a whole.

Taxpayers as a whole are different from investors as a whole.

Thus if the Fed buys risky assets for safe assets, it reduces the quantity supplied of risky assets to be held by private investors. As quantity goes down, price goes up. As the price of risky assets rises, the spread between their expected returns and those of safe assets goes down.

In other words: the risk premium does not stay the same. It goes down.

This is not rocket science, people.

I can still hear Milton Friedman:

Brad. Supply and demand curves are never horizontal. They are never vertical. If somebody says that quantities change without changing prices, or that prices change without changing quantities, hold tightly onto your wallet--there is something funny going on.

To claim that shifting risk off of investors and onto taxpayers has no effect on risk premia because "U.S. persons own the Fed.... society still has the risk. The risk doesn’t go away, any more than the risk of holding subprime mortgages went away before the crisis. We cannot structure the risk such that it disappears..." is the kind of mistake that--well, that not even a parrot would make.

We can (and do) argue about how much quantitative easing would reduce risk premia. But the assumption that the relevant demand curve is flat--that seems to me to be a mistake that a properly-trained parrot would not make.

Taxed More And Work Less?

Stan Collender:

Taxed More And Work Less? Barry Ritholtz Slices Up Greg Mankiw: Over at The Big Picture, Barry Ritholtz asks former Bush 43 Chairman of the Council of Economic Advisors Greg Mankiw a bunch of tough questions and, IMHO, shows that the economist is wearing no clothes.

This all started with Mankiw's piece in The New York Times on October 9 in which he said he will work less if the federal tax cuts on those earning over $250,000 enacted during Bush 43 are not extended.  Yesterday, Ritholtz responded by asking Mankiw a number of questions.... I've long thought that the argument that higher taxes always lead to less work was more a political statement designed more for sound bite purposes than a proven fact.  It has been a staple of GOP political rhetoric ever since, during his 1980 presidential campaign, Ronald Reagan very effectively used the completely unproven story about his deciding not to do any more movies in years when his income got to certain levels because it would have put him into a higher tax bracket to convince people that taxes should be cut.

It's not at all clear to me that not having another movie featuring Ronald Reagan was bad for the country, the economy, or U.S. culture.  It's also not clear to me that the movie Reagan say he didn't want to do because of the tax rates wasn't made anyway with some other -- and possibly much better -- actor.   In other words, the country as a whole, movie theaters and distributors, and movie watchers in particular were not necessarily worse off in any way because Reagan may have decided not to make another movie.

It should be noted that the same is true of Mankiw.  If he turns down the (presumably) hypothetical opportunity he mentions in his column to write an article because of federal tax rates, it's safe to assume that the opportunity will be passed along to some other economist (I'm sure that CG&G's own Andrew Samwick, Bruce Bartlett, and Pete Davis would like to be approached).  This is especially the case if the opportunity Mankiw turned down was for a print rather than an online publication that had to fill the space whether or not Mankiw wanted to write a thousand words or so....

Unless you are in the I-have-all-need-to-spend-on-what-I-need-and-want place in life, I can easily make the argument that a higher tax rate is more likely to lead to more rather than less work because you have to work longer and harder to get to the same overall bottom line.

Barack Obama Needs to Get Back on Message

Why Have Deficits Exploded? -

Paul Krugman:

The Boehnerization of Barack Obama: Why has stimulus become a dirty word? Many reasons, I guess: an inadequate plan combined with a wildly overoptimistic forecast was more or less guaranteed to create the impression of a failed program. But it’s also true that the president himself has had a deeply self-destructive tendency to echo his opponents’ arguments. My original invisible bond vigilantes post was inspired, in part, by Obama’s decision to go on Fox News and declare that we needed to cut the deficit to avoid a double dip. Then, in July, he repeated almost verbatim John Boehner’s justly mocked claim that since the private sector is tightening its belt, the government should do the same.

And he’s done it again:

Nonetheless, Obama said that just as people and companies have had to be cautious about spending, “government should have to tighten its belt as well. We need to do it in an intelligent way. We need to make sure we do things smarter, rather than just lopping something off arbitrarily without having thought it through.”

As I wrote back in July,

We’ll never know how differently the politics would have played if Obama, instead of systematically echoing and giving credibility to all the arguments of the people who want to destroy him, had actually stood up for a different economic philosophy. But we do know how his actual strategy has worked, and it hasn’t been a success.

Liveblogging World War II: October 16, 1940


Time magazine:

NAVY: Fleet Ready? - TIME: Into the sunny bays at San Pedro and San Diego last week stood 24 ships of the U. S. Fleet, back from Honolulu to give officers and men shore leave in California. At the docks their women waited—wives with babies their husbands had not yet seen, wives whose honeymoons had been cut short when the Fleet sailed to Pearl Harbor six months ago, sailors' girls, sailors' mothers. The air jangled with the familiar sounds of "the Fleet's in"—the rattle of anchor chains, the shrill of boatswains' pipes—finally the lilting bugle notes of liberty call. Over the sides of the stern grey ships, up from the bowels of four submarines poured officers and men, into motor launches, gigs, barges. Ashore they disappeared like snow in spring. The grey ships, manned by skeleton crews, quieted down.

High above the battleship New Mexico still floated the four-starred flag of the CINCUS. And below decks, for the next five days, tall, slow-spoken Admiral James Otto Richardson, Commander in Chief U. S. Fleet, worked at his desk, writing, reading, conferring. At week's end the blue flag came down and the CINCUS, in mufti, went over the side. That day he took a plane for Washington, this week sat down to talk with Secretary of the Navy Frank William Knox.

What SECNAV and CINCUS had to say to each other they kept to themselves. They had plenty to talk about. Across the Pacific the clouds massed darkly. Japan, junior member of the Axis, was talking of war if the U. S. didn't like her idea of running the Orient (see p. 40). What goat-faced Fleet Admiral Prince Hiroyasu Fushimi had up his Oriental sleeve, neither Frank Knox nor Jo Richardson knew. But Frank Knox had talked tough too, had said that "if a fight is forced upon us we shall be ready." At week's end he called up the naval reserve.

Theoretically, the Fleet is always ready, but for 1940 warfare its readiness had qualifications. On the credit side, the Fleet had never before had the top-flight personnel that now man its ships. A majority of its enlisted men are high-school graduates. Its officers are well educated, carefully selected, bear down hard on training. It has a substantial sprinkling of oldtime sailormen, does a crack job of gunnery, engineering, flying, seamanship. In tonnage and gun power it is superior to anything Japan can put on the seas.

On the debit side, the Navy was undermanned by 15%. Jo Richardson needed men faster than the training stations can turn them out. Although officers say that new Navy men learn in three months what took oldtimers three years, the Fleet needs more training—for its gun crews, its engineering forces, even for the hard-eyed, diligent young officers that Navy expansion promoted to the command of battleship and cruiser gun turrets long before their time. With an expansion of 70% ahead of it for the two-ocean Navy, it will need intensive training for a long time to come.

Barack Obama Goes Off Message

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This is bad. Very off message. He ought to know better.

As long as the jobless recovery continues and as long as interest rates on federal debt remain very low, the U.S. government should be filling jobs rather than leaving them vacant.

Joe Davidson:

Obama says federal jobs may stay vacant, doesn't rule out furloughs: Facing Republican complaints about big government and federal salaries, President Obama said Friday that agencies might leave some vacancies unfilled as his administration looks for ways to save money. He did not rule out furloughing employees, as has happened in some states, but he warned that such action could result in loss of services.

Speaking to members of the Trotter Group, an organization of black columnists, Obama deflected complaints, by Republicans on Capitol Hill and conservative think tanks, that federal employees are overpaid. He said his team has examined pay levels, "and the data we get back indicates that high-skilled workers in government are slightly underpaid. Lower-skilled workers are slightly overpaid relative to the private sector. "That's not surprising," he added, "because it's a unionized workforce."

Nonetheless, Obama said that just as people and companies across the country have had to be cautious about spending, "government should have to tighten its belt as well. We need to do it in an intelligent way. We need to make sure we do things smarter, rather than just lopping something off arbitrarily without having thought it through." Obama has asked agencies to develop plans for cutting budgets 5 percent. But how that would be done would be decided on a case-by-case basis, he said. "In some cases, they may say we don't need to fill vacancies," he said...

Can I please go back to my home timeline now?

Ezra Klein on Fixing the Mortgage Mess


Four ways the foreclosure mess could be used to help homeowners: Foreclosures have paused. There's renewed recognition that the business practices behind the housing bubble were a mixture of insane and fraudulent. The banks will probably need some government help again.... Our response to the financial crisis had three parts: The bank and auto bailouts, the stimulus, and the efforts to help homeowners facing foreclosure. The bailouts worked pretty well. The stimulus was much too small, but at least did what it said it was going to do.

The help for homeowners, however, has been a disaster.

Blame the Home Affordable Modification Program. It's a voluntary program in which participating mortgage servicers can renegotiate terms with struggling homeowners.... Most of the homeowners who were eligible for the program were never told of it. Many of those who did enroll were bounced out.... Most of the program's money hasn't even been spent.... [W]e're on track to see a record number of foreclosures this year, and then we're predicted to set another record in 2011.

We can do better.... Repair HAMP: The problem with HAMP is that it leaves mortgage modifications up to the banks, and they're not much interested in modifying those mortgages.... [H]ave the Treasury Department empower housing counselors to modify the mortgages... and banks would have three months in which to challenge the new terms.... Cramdown: The original theory of HAMP was that it would be the carrot... but there'd also be a stick. That stick was cramdown... empowering bankruptcy judges to modify the principal.... Mandatory mediation.... A mandatory mediation program would force [banks] to sit down with homeowners... make a good-faith effort to figure out a way forward. A program along these lines has been extremely successful in Philadelphia. Right-to-rent: Under a right-to-rent program, foreclosed homeowners would have the option of renting their home at fair-market value for five years...

The failure of HAMP is a big black eye for the Obama Treasury Department. So far it is batting two for five--the stress tests were a success, the auto rescue was a success, but HAMP and PPIP have not been and the bank rescue failed in its task of making sure that government help was charged to banks at "a penalty rate."

Will the Partisan Republican Supreme Court Rule That RomneyCare Is Unconstitutional?

Henry Farrell directs me to Orin Kerr, who pulls up a quote from Justice Kennedy, who would be the swing vote in any such declaration:

The Volokh Conspiracy » One Perspective on the Scope of Federal Power “In the Commercial Sphere”: I recently was reminded of this quote about Commerce Clause doctrine and I thought I would put it out there for comment in light of the recent debates on the constitutionality of the individual mandate:

[T]he Court as an institution and the legal system as a whole have an immense stake in the stability of our Commerce Clause jurisprudence as it has evolved to this point. Stare decisis operates with great force in counseling us not to call in question the essential principles now in place respecting the congressional power to regulate transactions of a commercial nature. That fundamental restraint on our power forecloses us from reverting to an understanding of commerce that would serve only an 18th century economy, dependent then upon production and trading practices that had changed but little over the preceding centuries; it also mandates against returning to the time when congressional authority to regulate undoubted commercial activities was limited by a judicial determination that those matters had an insufficient connection to an interstate system. Congress can regulate in the commercial sphere on the assumption that we have a single market and a unified purpose to build a stable national economy.

CNN's preeminent legal analyst points out that this quote is from Kennedy's concurring opinion in Lopez (1995).

That was the opinion that struck down the no-guns-near-schools law.

So for all of Kennedy's fancy rhetoric about not destabilizing the post-New Deal legal structure of commerce cause jurisprudence, Kennedy nonetheless voted in that case for a narrow conception of the commerce clause that... destabilized the post-New Deal legal structure of commerce clause jurisprudence

Jo Walton Is Smart


She is driven round the bend by Robert Heinlein's failure to understand the Law of the Reverend Thomas Bayes:

Jo Walton: A self-aware computer and a revolution on the moon: Having said that, I have two problems with Mike. One is the figuring the odds for the revolution. I’d have bought it if he did it once. It’s the complex refiguring and odds changing and--no. People complain about the Dust hypothesis in Permutation City, that you can’t calculate things out of order, and this is worse. You can’t work out odds of 7 to 1 against and then say they will keep getting worse until they get better. It makes no sense...

She is right. It makes no sense at all. It shows a deep fundamental confusion about probability at a core level.

Indeed, if I believed in franchise restrictions (which I don't) I would be much more eager to exclude people who fail to understand probability at this level from the franchise than--Heinlein's favorite hobbyhorse--to exclude people who cannot do a quadratic equation. A book in which (a) things are going better than expected but (b) the odds of success are going down is an intellectual atrocity.

Monetary Policy: Ryan Avent Is, I Think, Grasping at Straws

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Ryan Avent, I think, misreads Bernanke. Quantitative easing 2 will begin in November, but it will be tuned to be too small to do much to affect unemployment.


Monetary policy: Time to go to work: [Bernanke] then wraps up drily but tellingly:

In short, there are clearly many challenges in communicating and conducting monetary policy in a low-inflation environment, including the uncertainties associated with the use of nonconventional policy tools. Despite these challenges, the Federal Reserve remains committed to pursuing policies that promote our dual objectives of maximum employment and price stability. In particular, the FOMC is prepared to provide additional accommodation if needed to support the economic recovery and to return inflation over time to levels consistent with our mandate. Of course, in considering possible further actions, the FOMC will take account of the potential costs and risks of nonconventional policies, and, as always, the Committee's actions are contingent on incoming information about the economic outlook and financial conditions.

Having said that inflation is too low and is likely to remain too low for some time and that unemployment is too high and is likely to remain too high for some time, Mr Bernanke says that the Fed is prepared to take action to prevent precisely that eventuality. And that's why most observers feel confident in predicting new easing come November. But questions still loom over precisely what the Fed will do.

Having said that the Federal Reserve will take action if the sky is blue, and having said that the sky is blue, Ben Bernanke then says that the Federal Reserve will take action "if needed," that it will return inflation to "levels consistent with our mandate," but will do so "over time."

Even if "levels consistent with our mandate" does mean an inflation rate a hair below 2%, that is not a declaration that the Federal Reserve is going to act now to accomplish that goal. It is a statement that the Federal Reserve will take steps to accomplish that goal "over time," and only "if needed"--thus stating that such steps are not now needed.

This is very bad.

This is a declaration that whatever quantitative easing program the Federal Reserve embarks on after the election will be designed to be too small to push the annual inflation rate back up to 2%.

Can I please return to my home timeline now?

Liveblogging World War II: October 15, 1940


Time magazine:

INTERNATIONAL: Thunder in the East - TIME: The Fascist Alliance was one week old last week. The capitals of the world had had time to digest it, to react. The reactions were various, ranging from frank jubilation in Berlin and Rome to London's grim decision to reopen the Burma Road in the face of a muttered Japanese threat that this would bring war. From Moscow, where the balance of world power now lies, there was no news.

Washington still held to its tortuous course midway between appeasement and action, while the Navy itched for a go at the little yellow men in their big boats (see p. 32). As usual U. S. public opinion was slow to react, because its leaders had as yet to give it clue or cue. The State Department, in this month before election, was even charier than usual of taking a firm stand until it knew what the reaction was. But in Tokyo, where the Government not only informs but makes public opinion, there were many signs that Japan intended to force the U. S. to take its stand. Every official and semi-official spokesman who opened his mouth—and the Japanese talked plenty last week—let it be known that Japan considers the Fascist Alliance a challenge to the U. S.

First official to sound off was Foreign Minister Yosuke Matsuoka, who has a big reputation for talking. In an interview given to International News Service's Larry Smith, the Foreign Minister was quoted as follows:

Japan will be compelled to fight the United States if our sister nation on the shores of the Pacific enters the war in Europe. I fling this challenge to America: If she in her contentment is going to blindly and stubbornly stick to the status quo in the Pacific, then we will fight America. For it would be better to perish than to maintain the status quo. I have always considered America my second home land. I have always known the American people as a good and decent people, so it grieves me to realize that today America is the most unprogressive nation on earth. ... It is nice for the United States to say that we must settle everything peacefully, but if we wait for America we must perish in the years of waiting. So I say to America: Now is the time for action, and Japan will not hesitate when its hour arrives.

It was not until two days later, after Washington had unofficially called the interview an insult, that Foreign Minister Matsuoka decided that perhaps he had talked too much. The Japanese Foreign Office explained that Mr. Matsuoka had been talking off the record to a "magazine artist," gave its "official" version of the interview:

The treaty speaks for itself. Japan would have to fight America if America entered the European War. But that is an eventuality that I shudder even to think of.

Next speaker to take the stump was sleepy-eyed Premier Prince Fumimaro Konoye himself. Said he:

Should the United States refuse to understand the real intention of Japan, Germany and Italy, and persist in challenging them in the belief that the pact among them represents a hostile action, there will be no other course open to them than to go to war.

Foreign Office Spokesman Yakichiro Suma chimed in with the assertion that the U. S. is "taking step after step in the wrong direction, which might precipitate her into the vortex of armed conflict." Spokesman Suma paid his respects to a suggestion by Publisher Roy Wilson Howard that the U. S. send a commission to Japan to improve U. S.-Japanese relations. Such a commission could be effective only if the two Governments were in agreement on fundamentals, said Yakichiro Suma, "and they have no mutual grounds any more."

Japanese newspapers went all the way out on the limb. In Nichi Nichi, Nationalist Leader Seigo Nakano proposed that Japan take over the foreign concessions in Shanghai and Tientsin, restore Hong Kong to China (i.e., to Japan's puppet Government at Nanking) and "restore The Netherlands Indies as an Asiatic country." In a telegram to Publisher Howard, Director Hoshio Mitsunaga of the Nippon Press Association suggested that the U. S. can prevent a crisis if it "abandons its fortifications at Pearl Harbor, Guam and the Midway Islands, gives up its support of Chiang Kai-shek and restores trade to normalcy."

By such words as those spoken last week, as well as by fundamental disagreements, wars are made. Officially the U. S. kept silent, but there were those who talked back. Arrived in the U. S. from Shanghai, Publisher Cornelius Vander Starr of the Shanghai Evening Post & Mercury did his bit to fan the smoldering crisis by telling Manhattan reporters that Japan was a fifth-rate power whose principal weapon was bluff. "Regardless of her bombast, Japan will under no circumstances risk actual war with America," said lean Publisher Starr, whom the Japanese have separated not only from his newspaper but from the largest insurance business in the Far East.

At week's end lights burned late in the old grey State Department building in Washington. If Cordell Hull & Co. were not talking, at least they were pondering —perhaps preparing to act. Unless the U. S. was willing to go all-out against Japan, it would be useless to slap an embargo on oil, because that would be an invitation to Japan to take the East Indies. But an agreement with Britain for a string of Far Eastern naval bases from New Zealand to Singapore was worth pondering, as were the chances of Japan's risking war to keep the U. S. out of Singapore. While Washington pondered, the Japanese continued to consolidate their gains in French Indo-China, moving southward toward Singapore (see p. 50). They worked to reach an agreement with Russia that would enable them to close the China Incident. The little yellow men were out to see whether the U. S. would scare. A firm U. S.-British stand on aid to China via the Burma Road, plus naval cooperation in the Far East, might scare them instead. If neither side would scare, there was a better than even chance of war.

The Curious Incident of the Government Purchases Expansion in the Nighttime

Big Spender Update -

"But, Holmes, the government did not expand its purchases!" "That was the curious incident."

Paul Krugman:

Big Spender Update - Menzie Chinn takes on the same territory I’ve examined here and here.... That uptick in transfers at the end is mainly unemployment insurance, plus some Medicaid — that is, it’s safety-net spending in the face of high unemployment. It’s kind of interesting to read Menzie’s comments — many of which assert that he must have left something out. You see, they know that there has been a huge expansion of the government, and any facts suggesting otherwise must be wrong.

Ben Bernanke's Speech Was... Disappointing


I am still surprised at the Fed Chair we have. Where is the Fed Chair who was willing to try to get ahead of the problems in late 2008? Or the "Helicopter Ben" of 2003? Or the student of big downturns in Japan in the 1990s and the U.S. in the 1930s.

It's a very different animal we have today. And this speech didn't do much to convince me that he is going to do what ought to be done.

Bernanke forecasts that growth next year "seems unlikely to be much above its longer-term trend"--that is, that unemployment is likely to rise in the near term and then stay essentially stable through the end of 2011 before it even starts to think about heading down.

In this environment, now is not the time for Bernanke to talk about the costs and risks of expanding the Federal Reserve balance sheet.

And it is also not the time to talk about how monetary policy can be carried out via the Federal Reserve's communications strategy.

Political Economy Major: Request for Student Input



From: J. Bradford DeLong, Chair, Political Economy Major; Alan Karras, Associate Director, International and Area Studies
To: Past and Present Political Economy Majors
Subject: University Review of the Political Economy Major

Up to now the interdisciplinary majors here at the University of California at Berkeley have been omitted from the normal program review process--which means that we have never had a formal chance to make the administration aware of what we are doing well and what we are doing poorly, of whether our resources are in balance with our needs, and of what structural changes need to be made in the major for it to do its job.

Thanks to the initiative of Dean Tyler Stovall, this academic year will see a campus review of the Political Economy major": A written report by the major, an evaluation committee including members from outside the University, and discussions with staff, students, faculty and alumni.

We need you current students in the major to do two things. First, we need you to come to the IAS office, at your leisure, to read the written report. Second, we need you to communicate your views of the major, and of its problems and successes. Therefore we need you to write down your take on the major and to give to us, and we hope you will be willing to meet with the outside committee when it digests all the information and decides who it wants to talk to.

The issues on which we most seek your views are the questions of (i) advising, (ii) admission of Political Economy students to impacted courses run by social science departments, and (iii) the intellectual focus of the major.

Please feel free to ask any questions to either of us at or

Does Globalization Relieve Poverty?



From: J. Bradford DeLong, Chair, Political Economy Major
To: Political Economy Majors and Other Interested Students
Subject: Blum Center Lecture: Jan de Vries: Does Globalization Relieve Poverty? Comparing 19th Century and Contemporary Globalization Processes

I have to teach Monday afternoon, or I would go, but our very own Jan de Vries is speaking Monday at 2 PM on the Plaza Level of the brand-new Blum Hall on Northside about globalization and poverty in historical perspective.

It will certainly be worth hearing--and Berkeley's newest building is also worth checking out.

Jan de Vries is Sidney Hellman Ehrman Professor of History and Economics here at the University of California. He is also a Past President of the Economic History Assocation, and was Vice Provost for Academic Affairs of the University of California at Berkeley.

Robert Skidelsky on the Pointless Pain Caucus


Robert Skidelsky:

Britain’s austerity apostles duck the debate: What macroeconomic theory do the budget hawks have to subscribe to, to believe that taking £100bn out of the economy in the next four years will produce recovery? And what do the budget doves need to believe to claim the cutters are wrong?

David Cameron, Mr Osborne, and Nick Clegg appear to believe in something called “crowding out”... for every extra pound the government spends, the private sector spends one pound less. Jobs created by stimulus spending are jobs lost by the decline of private spending. Any stimulus to revive the economy is doubly damned: not only does it fail to stimulate, but, because government spending is less efficient than private, it reduces the economy’s longer term recovery potential.... A refinement of this argument is “psychological crowding out”. In this version it is not a shortage of saving, but a shortage of confidence in the government’s creditworthiness – due to a fear of default – which causes interest rates to rise. Either way the deficit “crowds out” private investment. Net stimulus: zero. The supposed implication of this type of argument is that in the short-run the deficit can do no good; and that in the slightly longer term it harms the potential for recovery....

Keynesians say is that when resources are unemployed, government borrowing is not deferred taxation: it brings resources into use that would otherwise be idle.... When the government borrows money for which there is no current business use, this increases people’s incomes and therefore the saving needed to finance the borrowing without interest rates having to rise... the “crowding out” argument is false.... The deficit is the stimulant the economy needs to start growing again: its withdrawal guarantees stagnation or worse.

Why aren’t we having this argument? The reason is that, against its instincts, the last Labour government accepted the pre-Keynesian economics of the cutters.... To promise to cut a little less, and a little slower, than the coalition is an improvement, but not an alternative economic strategy. Only Ed Balls has the economic confidence and pugnacity to argue the Keynesian case. For political reasons he has been denied the shadow chancellor’s job....

[W]hen [an economy] has large unemployed resources, the Keynesian theory is best, and the government should not be ashamed of running a deficit. A properly Keynesian opposition would say that the budget balance should be dictated by economic circumstances, not by some arbitrary timetable.... But I doubt if this opposition will have the courage to do so.

The Underperforming U.S. Health Care System

Matthew Yglesias writes:

Yglesias » Life Expectancy at 65: Aaron Carroll looks instead at life expectancy at 65.... Strong evidence of systematic underperformance in the American system. And yet since we’re talking about Medicare-eligible people here that also suggests that the issue can’t be solved by messing with who has insurance or how insurance-provision is organized. You need to actually delve down into the delivery of health care services.

Liveblogging World War II: October 14, 1940


The Balham Blitz Tube Disaster:

The 14th of October 1940: On the night of October 14 1940 some 500 civilians were sheltering from the bombing in Balham tube station. Two minutes after eight o'clock a 1400kg armour-piercing fragmentation bomb blew a huge crater in Balham High Road above the northern end of the station. A bus then crashed into the crater and ruptured the water and sewage mains. Sand, sludge, sewage and water suddenly gushed into the station. Water-tight doors designed to keep such floods out instead kept this one in. The lights fused, adding to the chaos.

The station was a scene of panic, and though more than 400 managed to escape, 65 or by some account 68 people died in the disaster, most of them drowning. A rescue attempt with a boat sent from Clapham South failed to get through.

News of the event was as far as possible kept under wraps, the government fearing that the grisly death of so many would be a huge propaganda blow and possibly put civilians off using the underground as shelter. Word of mouth spread about the deaths, however, and the work to open the station again lasted until January of 1941, the last bodies being found at the end of December.

An account of the disaster features in Ian McEwan 's novel Atonement, and in the film.

Mortgage Markets: "A Mutant, 20-Tentacled Octopus of FAIL Squirting Poisonous Ink..."


I tell you, intellectual life is certainly more fun since the invention of weblogging...

Ryan Avent:

Mortgage markets: The tangled web they wove: IF YOU want to give yourself a headache and/or become both very confused and very concerned about the state of the financial world, I recommend you attempt to figure out the developing foreclosure mess. It's like a mutant, 20-tentacled octopus of fail squirting poisonous ink at those trying to pin it down.

Those interested in a relatively detailed account of the issues involved are encouraged to read through Mike Konczal's work on the subject. I'll give a ludicrously short version of the story here.

During the housing boom, there was an explosion in the process of mortgage securitisation.... [M]ortgages... would wind up at banks, who would group pools of mortgages together to be chopped up into securities... payments... were filtered through servicers and out to holders of various mortgage bonds. Each step of the way, a lot of paperwork was involved... as the boom geared up and the pace of buying and securitising became frenetic, this important trail of paperwork frequently fell apart.... This is a problem, because some of those documents become very important when a loan goes into default and a foreclosure is sought.... [M]any of the foreclosures... may have been done improperly, or without appropriate paperwork, or with improperly (or perhaps fraudulently) generated paperwork.

And so a real mess has developed....

All that is bad enough as it is. The situation is unlikely to inspire confidence in potential buyers, whom the housing market desperately needs. Congressional action may be necessary (which is a terrifying phrase to utter these days). And there is a very small but real chance that things could get really ugly...>.

And that's just one side of the problem.

The other side... concerns the mortgage securities.... If some share of the loans that went into a particular security weren't properly handled, then the bank that created it could be forced to repurchase it.... Banks could also be targeted in related lawsuits.... People are now spinning scenarios in which the mess adds up to another systemic risk crisis, complete with weekend crisis interventions and, one presumes, a nice blow to the real economy.

Estimates of what this all will actually mean for the broader American economy range from "nearly nothing" to "the end as we know it"...

Failure to Brainwash...

Results Chart-1.png

My last iClicker question from today's Econ 1: Principles of Economics lecture:

Ladies and Gentlemen, to your iClickers...

Suppose PDC—Production and Distribution Coordination—decided that we were going to offer four yoga classes at a price of $20/lesson for each student and $200/lesson for each teacher. As before, each class has a capacity of ten students. PDC finds that there are only 25 students and 4 teachers. What should PDC do?

A. Split up the students among the four teachers and announce that the teachers will only be paid $120/lesson.

B. Split up the students among the four teachers and announce that the students will each have to pay $32/lesson

C. Pick one of the teachers by lot and send him or her home, and then go draft 5 passers-by and force them to take the class, charging each student $20/lesson and paying each teacher $200/lesson

D. Draft 15 passers-by and force them to take the class, charging each student $20/lesson and paying each teacher $200/lesson

E. Lower the price charged to $19/lesson and the price paid to $190/lesson, and see if any more students are willing to pay that price and if any of the teachers say they would rather go do something else.

The answer I am looking for, of course, is that PDC should mimic the market by choosing option (E). It should use the price system because that way it can balance capacity and attendance by drawing those 5 potential students whose values of yoga classes are between $19/lesson taken and $20/lesson taken into the activity and excluding the one instructor whose reservation price is $200/lesson taught from the activity, and so be sure that (a) everyone taking yoga values it at more than $19/lesson and (b) everyone teaching yoga has a disutility of less than $190/lesson.

And so social surplus is maximized. (With distributional impacts to be cleaned up later on by other societal mechanisms.)

By contrast, all of the alternatives--down to and including the Stalinoid draft-fifteen-innocent-passersby-at-gunpoint-and-force-them-to-unwillingly-do-the-downward-facing-dog--involve (i) teaching the wrong number of classes and/or (ii) having the classes taught and taken by the wrong people who really would rather be doing something else.

Yet those alternatives attract 24% of responses, even after a full fifty-minute brainwashing session in Wheeler Auditorium.

I am clearly going to have to slow down, and try to brainwash them once again.

Next Monday I am going to have to hit them with the entire argument again, and add to it:

Properties of competitive market equilibrium:

  • It is where the supply and demand curves cross
  • Nobody who wants to pay or work is rationed out of the market (poor people may be rationed out because they have low money-metric willingness to pay even though they have high desire)
  • It is stable
  • It produces the maximum dollar-value social surplus
  • Other arrangements have
    • Some of the wrong people teaching the classes
    • Some of the wrong people taking the classes
    • Too few classes being offered
    • Too many classes being offered

Other allocations leave open side-deals on the table:

  • Some of them have some of the wrong people teaching the classes
    • Suppose Greg320--with his reservation price of $200/lesson taught--is assigned to teach one of the three classes.
    • Suppose Greg305--with his reservation price of $50/lesson taught--is not.
    • Then: "Psst. Will you teach my class?”
    • There’s $150 of surplus for them to split
  • Some of the wrong people taking the classes
    • Suppose yogastudent#10 is not assigned to take a class
    • Suppose yogastudent#30 is
    • Then—“Psst. Will you take my place?”
    • There is $4 of surplus for them to split
  • If too few classes are offered, there are side deals
    • Suppose only two classes are being offered
    • Then yogastudent#21 through yogastudent#30 meet Greg315 outside
    • They set up a class
    • There is $100 of surplus for them to split
  • If too many classes are offered, there are side deals
    • Suppose four classes are offered
    • Yogastudent#31 through yogastudent#40 meet Greg320 for their class
    • They look at each other
    • They say: “Let’s just pretend we did this and go home”
    • And they split $20 of surplus
  • Allocations that do not mimic the market allocation leave money on the table
  • Allocations that do mimic the market do not leave any money on the table
    • You may not like where the money goes, but it is not on the table.

David Romer: Ed Glaeser had some nice stuff about this--where he did random assignment in markets with excess demand and showed the Posner rectangles of welfare loss as well as the Harberger triangles. I think it had some very nice graphs...

Brad DeLong: Should I Google it? Or email Ed?

Christy Romer: (Walks in.) Neither. I can put my finger on it in fifteen seconds. Here it is.

Yep. Ed Glaeser and Erzo Luttmer (2003), "The Misallocation of Housing Under Rent Control"

Extra Credit Question: If you want to put your finger on a piece of the literature quickly, you should:

A. Email the author
B. Google it
C. Hope Christy Romer is walking by

All R Investment Banks May Belong to Bankruptcy Court...

NewImage.jpgFelix Salmon:

The enormous mortgage-bond scandal: [M]ortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred. But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors....

[T]he risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits.... The key firm here is Clayton Holdings, a company which was hired by various investment banks — Goldman Sachs, Bear Stearns, Citigroup, Merrill Lynch, Lehman Brothers, Morgan Stanley, Deutsche Bank, everyone — to taste-test the mortgage pools they were buying from originators. Here’s how it would work....

[T]he bank would put in a winning bid for the pool of mortgages, with the intention of slicing it up into mortgage bonds and selling those bonds off to investors at a profit. After submitting the winning bid, the bank would commission Clayton to take a closer look at a representative sample of loans in the pool. Clayton controlled as much as 70% of the market for this service, which is known as third-party due diligence. But Clayton’s not at fault here, and the problem is likely to apply no matter who performed this service.... Clayton would go back to the loans, one by one, and re-underwrite them after the fact, checking that the originator’s underwriting standards were in fact being upheld. Clayton would either accept or reject the loans it was looking at, according to whether or not they met underwriting standards....

I’m just using Citi as an example, here; all banks behaved in basically exactly the same way.... Clayton reviewed 1,280 loans on behalf of Citigroup in the first quarter of 2006. Of those, it accepted 554 outright: they lived up to the originator’s underwriting standards. It also waived another 144, on the grounds that there were mitigating factors (a large downpayment, say). And it rejected 582 for a rejection rate of 45%. This kind of information was valuable to Citigroup: it showed them that the quality of the loan pool.... Armed with this information, Citigroup would do two things.... [I]t would take those 582 rejects and put most of them back to the underwriter.... But remember that Clayton had tested only a small portion of the loans in the pool. So Citi knew that if there were a bunch of bad loans among the loans that Clayton tested, there were bound to be even more bad loans among the loans that Clayton had not tested.... If there had been any common sense in the investment banks, that would have been the end of the deal. But... the investment banks would instead renegotiate the amount of money they were paying for the pool....

The investment banks didn’t mind buying up loans they knew were bad, because they considered themselves to be in the moving business rather than the storage business.... Now here’s the scandal: the investors were never informed of the results of Clayton’s test. The investment banks were perfectly happy to ask for a discount on the loans when they found out how badly-underwritten the loan pool was. But they didn’t pass that discount on to investors.... I talked to one underwriting bank — not Citi — which claimed that investors were told that the due diligence had been done: on page 48 of the prospectus, there’s language about how the underwriter had done an “underwriting guideline review”, although there’s nothing specifically about hiring a company to re-underwrite a large chunk of the loans in the pool, and report back on whether they met the originator’s standards.... [B]anks had price-sensitive information on the quality of the loan pool which they failed to pass on to investors in that pool. That’s a lie of omission, and if I was one of the investors in one of these pools, I’d be inclined to sue for my money back.... The bank was essentially trading on inside information about the loan pool: buying it low (negotiating for a discount from the originator) and then selling it high to people who didn’t have that crucial information...

Matthew Yglesias: Steve Pearlstein Doesn't Understand the Economics of Exchange Rates

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Indeed. Exchange rate depreciation is the best solution to a country that has priced itself out of export markets. I wonder why Steve Pearlstein doesn't say that a weaker dollar is in America's interest?

Matthew Yglesias comments:

Yglesias » Pearlstein on Wage Cuts: [A] lot of people are going to despite today’s Steven Pearlstein column advocating lower wages for American workers especially since he throws in a gratuitous paragraph suggesting that highly compensated newspaper columnists are the reason the US outperformed the USSR. But this is the paragraph with analytic weight:

Which brings us back to the story of GM’s Orion plant. There are lots of reasons why American companies like GM have lost market share (yes, I wrote about currency manipulation last week), but one is that in too many industries, our labor costs are now too high to be globally competitive. Reducing wages and benefits in those industries would not only help to create and save jobs, but would also force a further reduction in consumption and living standards that is necessary to bring the U.S. economy back into balance....

Pearlstein... [does not] understand that Yuan revaluation is the same thing as lower wages for American workers.... [I]f dollars become less valuable relative to other important currencies, our real compensation declines. By the same token, if the Federal Reserve succeeds in raising the price level, our real compensation declines. These are all related concepts.... [O]f the three, nominal wage cuts are... least attractive.... If you force nominal wage cuts on an indebted population, you get an unbalanced deflation where existing debt obligations come to consume a larger and larger share of income. Alternatively, if you reduce real compensation via currency devaluation or higher inflation you reduce income and debt alike, allowing us to dig out of the balance sheet hole more quickly.

It is getting to the point where I don't believe that Matthew Yglesias wasn't an economics major...

Steven Pearlstein Wages Class War!

Google Image Result for

Hoo boy. The usually reliable Steve Pearlstein strikes out:

Wage cuts hurt, but they may be the only way to get Americans back to work: I'm sure many of you are reading this and thinking that if anyone is forced to take a pay cut to rebalance the economy, surely it ought to be overpaid investment bankers, corporate executives and newspaper columnists. That's how things would work in a socialist paradise, but not in market economies, which are much better at producing efficiency than fairness.

I must say that when I look at the Washington Post's newspaper columnists, I see no efficiency there.

The public debate would be more elevated and do much less harm to America if all of them were fired immediately.

Indeed, only the subsidy from Stanley Kaplan keeps Steve Pearlstein employed today--and I see no strategy open that gives the print Post even a 50% chance of ever returning to permanent profitability.

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

Linda Beale: Boost Greg Mankiw's Marginal Tax Rate. Andrew Gelman: I'm Not Impressed with an Argument That Doesn't Work on Its Example

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

There were many things wrong with Greg Mankiw's "Going Galt" column in the New York Times. They biggest was that Greg blames high future tax rates on his income on Obama, rather than piercing the veil--that is, noting that to spend is to tax--and blaming the true architects of higher future taxes: Greg Mankiw himself and the others in the Bush administration who unbalanced America's public finances in the 2000s with Medicare Part D and their wars of choice.

Those of us who worked very hard in the 1990s for eight long years to try to bring America's fiscal policy back toward long term balance did not like Greg Mankiw and company's casual destruction of our extremely valuable work. And we like his current evasion of responsibility for his role in our admittedly dismal fiscal future even less.

Linda Beale, however, thinks that it is socially optimal to raise Mankiw's marginal tax rate. If he works less, more young economists have an opportunity to build their own sklls and their own reputations so they can add to the public debate.

Linda Beale:

ataxingmatter: Greg Mankiw's anti-tax arguments: [H]aving a bigger tax bite should work as an incentive to work more, not less, if his goal is really to provide more for his kids. 

But let's assume... he would turn down more... were an incremental increase in his tax rates.... [D]oes that mean that the economy suffers...?  He suggests that when stars turn down additional earning opportunities, the not-rich bear the burden because the service provided is simply not available.  But in fact that is when competition increases.... For every speaker who turns down a speaking engagement, another with competent qualifications is waiting in the wings to become a star (or at least receive this incremental increase to compensation).  The economy is in fact served by spreading the service opportunities across more people and allowing more people to develop a level of expertise that is worthy of higher compensation, instead of allowing a few "stars" to garner all the income.  That is the way we achieved dramatic growth in the post-war years. 

So go to it, Mankiw.  Turn 'em all down, so that budding young economists--maybe even some women and people of color for a change--will have their chance in the limelight.

Andrew Gelman:

Mankiw's marginal tax rate (which declined from 93% to 80% in two years) and the difficulty of microeconomic reasoning: First, the good news! Obama's tax rates are much lower than Mankiw had anticipated! According to the above quote, his marginal tax rate is currently 80% but threatens to rise to 90%. But in October 2008, Mankiw calculated that Obama's would tax his marginal dollar at 93%.... According to Mankiw's calculations, he is currently keeping almost three times the proportion of his income that he was expecting to keep under the Obama administration....

Now, the bad news. I don't think Mankiw has fully thought this through. He writes as if he's writing newspaper articles for the money.... I think he's writing the articles because he has views that he thinks are important and he wants to share them with the world. Like blogging, but with more readers. As you all know, we blog for free. And, for people like Mankiw (or even me), when we write newspaper articles it's pretty much for free too.... [T]he marginal tax rate doesn't have anything to do with it....

The last time this came up, a couple of years ago, Mankiw wrote the following in response to Obama's threatened 93% marginal tax rate:

The bottom line: If you are one of those people out there trying to induce me [Mankiw] to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.

And here's what I wrote at the time:

To start with, it does sound like Mankiw's kids are already well provided for, and, although I'm sure they'd disagree with me on this, it's not clear that they would benefit from having more money in the bank when their parents are gone. So, from that point of view, the question is why Mankiw isn't already spending more time playing with his kids?

I can't speak for him, but for me, I have to say that it can be fun to work (or even to write blog entries). But, more than that, I feel a sense of obligation to get things done...

[H]is division of waking hours into "working" or "playing with kids" is, I would guess, not very sensitive to the marginal tax rate....

The irony is that Mankiw (like so many people, particularly economists!) is conditioned to be hard-headed and think that it's all about the benjamins, when, really, he's writing newspaper articles for the completely sane reason that he wants to make the world a better place, and he'd like to do this by presenting cogent arguments that can help convince people that his views are correct. I assume that Mankiw sincerely believes that higher taxes on the rich are a bad thing and will ultimately make everyone less well-off (just as Krugman, say, believes the opposite). But he feels uncomfortable characterizing his actions as idealistic and, as a result, ends up placing his work and child-care decisions into a nearly nonsensical framework of dollars and cents.

Andrew Gelman:

Update on Mankiw's work incentives - : The discussion of Mankiw's column seems to have caused him to rethink one of his ideas. Two years ago, he framed his decision as follows:

On a regular basis, I am offered opportunities to make some extra money. It could be giving a talk, writing an article, editing a journal, and so on. . . . The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. The choice was clear: make money or play with the kids. At the time, I suggested that perhaps Mankiw is working not for the money but for the fun and also out of some sense of moral obligation (for example, to do his part to stop a proposed government policy that he opposes).

For whatever reason, Mankiw has added some of these motivations into his calculus and now writes:

I [Mankiw] face a choice among a wide range of activities, each of which offers some combination of pecuniary and non-pecuniary benefits. . . . When the government taxes pecuniary benefits, I spend more time on those activities that yield non-pecuniary benefits. Some of those activities may look like leisure, but others may be better described as "fun work" rather than "income-producing work."

I think he's most of the way there. But he still needs to recognize that he does some things for motivations that are neither familial (saving money for his kids), pecuniary, or for fun. Again, I think his formal framework is too narrow and I would find it refreshing if he were to state that he does some things (such as column-writing) because he thinks they will benefit the public good. I'm not saying he needs to be taxed at 93% on these efforts, though; he could perhaps set up a special cookie jar for his extra income and spend it in a productive way on his research so it won't get swallowed up by inheritance taxes in 30 years. He could, for example, set up a nonprofit foundation for economic analysis, or endow a fellowship at the American Enterprise Institute, or something like that. This could have the effect of furthering his advocacy and policy goals and give him the sense that his extra money is going somewhere useful.

P.S. Cowen argues that details-oriented commenters like me are missing the point: the issue is not Mankiw's particular circumstances but rather the larger issues of the efficiency and morality of high tax rates. I take Cowen's point, but, as a statistician, I'm not impressed with an argument when it doesn't work on the example it's been applied to.

Somehow I Am Now Wishing I Had Read More Nietszche When I Was Younger...


Last week I spent some time with a group of people I don't usually spend much time talking to. They were not rich--by which I don't mean that they had overstretched themselves by buying a seven-figure principal residence but rather that they weren't rich: their household income was in the five or, for some of them, perhaps the very low six figures. And (which is unusual for Berkeley) they were not lefties, neither cultural nor sociological. They were deeply concerned with the future of our country. And they were desperate to figure out how to engage in effective political action--but had few illusions that the politicians they would vote for in November were their kind of people with their interests at heart.

I suppose that in a previous era, back when there were private-sector unions, they might have been union stewards. But now we have no private-sector unions.

And so they are activists from the California Tea Party.

So I went through my standard spiel. Housing bubble. 5 million excess houses built in the desert between Los Angeles and Albuquerque, and on all of them the least $100K of mortgage debt will not be repaid. A $500B loss in an $80T world economy. Shouldn't have been a problem—securitization exists to spread risks. But the banks pretended that the AAA MBS issued by other banks were high-quality Basel capital even though they knew full well the dreck that they were issuing. A financial multiplier of 40. A flight to safety. A big shift away from spending on currently-produced goods and services and on currently-employed labor as people tried to build up their stocks of safe assets. A multiplier as people who lost their jobs stopped spending, and the situation snowballed.

It could have been worse, I said. Without all of the rescue policies we would probably now have an unemployment rate of 16 percent rather than 10 percent.

But they question is what to do now with the economy. The idea is not to go to socialism—not to nationalize large chunks of the economy and have everybody work for the government—but to conduct strategic interventions in financial markets. Relieve the excess demand for safe high-quality assets and you remove the pressure on people to spend less than they earn as they try to build up their stocks of safe assets, and you get a virtuous circle of strong recovery.

So, I said, the right thing to do is the Bagehot rule: lend freely at a penalty rate. The government should throw huge amounts of money at the financial markets and in the process take a large chunk of the upside in equities and options.

SOCIALISM, they said. We don't want SOCIALISM.

But it's not socialism, I said. It's an attempt to avoid socialism—it's an attempt to conduct a strategic intervention into the market economy so that it can rebalance itself.

SOCIALISM, they said.

Well, I said, how about lending freely to the financial sector but forget Bagehot's "penalty rate" stuff?


Well, I said, how about pushing off taxes into the future, bringing forward infrastructure spending we know that we will want to do, and financing it by issuing more government debt? The spending should put some people to work, and the extra government bonds we print up will increase the supply of safe assets, decrease the excess demand, and so remove some of the downward pressure that is inducing people to spend less than they earn/


But, I said, the U.S. government now can borrow at unbelievable terms. If you could borrow at such terms, you would bust out the top of your house and add a second story immediately.


OK, I said. How about having the federal government aid the states. We want to keep our police and our fire and our road maintenance and our schools running at their efficient levels, don't we? It's stupid to cut back on the long-term foundations of our economy and its growth because of recession, isn't it. How about a large program of federal aid to the states so that teachers, sewer workers, police officers, and firefighters can keep their jobs, keep protecting us—and keep spending and so provide employment for the rest of us?






So what do you think we should do?


But you have just rejected every idea I have for boosting employment—short of nationalizing the means of production and employing everybody by the government, that is. What are your ideas?


Joachim von Ribbentrop Liveblogs World War II: October 13, 1940


Letter from the German Foreign Minister to Stalin (excerpts), Oct. 13, 1940:

My Dear Herr Stalin : Over a year ago, through your decision and the Führer's, the relations between Germany and Soviet Russia were examined and put on a completely new basis. I believe that the decision to reach an understanding between our two countries—which resulted from the realization that the Lebensräume of our peoples adjoin each other but need not necessarily overlap, and which led to a delimitation of mutual spheres of influence and to the German-Soviet Russian Nonaggression and Friendship Treaties—has proved advantageous to both sides. I am convinced that the consistent continuance of this policy of good neighborliness and a further strengthening of the political and economic collaboration will redound to the greater and greater benefit of the two great peoples in the future. Germany, at any rate, is prepared and determined to work to this end. With such a goal, it seems to me, a direct contact between the responsible personalities of both countries becomes particularly important. I believe that such a personal contact through other than the customary diplomatic channels is indispensable from time to time in authoritarian regimes such as ours. Today I would, therefore, like to review briefly the events since my last visit to Moscow. Because of the historical importance of these events and in continuation of our exchange of ideas of last year, I would like to review for you the policy which Germany has pursued during this period.

After the conclusion of the Polish Campaign we became aware—and this was confirmed by many reports which were received during the winter—that England, faithful to her traditional policy, was building her whole war strategy on the hope of an extension of the war. The attempts made in 1939 to win over the Soviet Union to a military coalition against Germany had already pointed in this direction. They were frustrated by the German-Soviet Russian Agreement. Later on, the attitude of England and France in the Soviet Russian-Finnish conflict was similar.

In the spring of 1940, these concealed intentions became quite evident. With this began the active phase of the English policy of extending this war to other peoples of Europe. After the end of the Soviet Russian-Finnish War, Norway was selected as the first target. By the occupation of Narvik and other Norwegian bases, Germany's iron ore supplies were to be cut off and a new front established in Scandinavia. It was only due to the timely intervention of the German leadership in Berlin and to the quick blows of our troops—who chased the English and the French out of Norway—that all of Scandinavia did not become a theater of war.

Several weeks later this Anglo-French game was to be repeated in Holland and Belgium. And here, too, Germany was able at the eleventh hour to prevent the contemplated thrust of the Anglo-French armies against the Ruhr Region (of which we had been informed some time before) by decisive victories of our armies. Today, even France, "England's continental sword," it has become apparent to most Frenchmen that their country in the last analysis had to bleed to death as a victim of this traditional "humanitarian" policy of England. As to the present English rulers, who declared war on Germany and who thereby plunged the British people into misfortune, even they themselves were finally no longer able to conceal their traditional British policy and their contempt for their own allies. On the contrary, when fate turned against them, all their hypocritical protestations ceased. With true English cynicism, they have treacherously forsaken their friends. In fact, in order to save themselves they slandered their erstwhile allies, and later on they even openly opposed them by force. Andalsnes, Dunkerque, Oran, Dakar, are names which—it appears to me—could sufficiently enlighten the world on the value of England's friendship. However, on this occasion we Germans, too, learned a lesson: that the English are not only unscrupulous politicians, but also bad soldiers. Our troops have routed them wherever they accepted battle. The German soldier was superior to them everywhere...


In this final phase of the war, to guard against any moves which England might yet make in her desperate situation, the Axis, as an obvious precaution, was forced to secure its military and strategic position in Europe as well as its political and diplomatic position in the world. In addition, it had to safeguard the requirements for maintaining our economic life. Immediately after the end of the campaign in the West, Germany and Italy started with this task, and now they have carried it out in its broad outlines. In this connection there may also be mentioned the—for Germany—unprecedented task of securing her Norwegian coastal positions all the way from the Skagerrak to Kirkenes. Germany has therefore entered into certain purely technical agreements with Sweden and Finland, of which I have already fully informed you through the German Embassy. They are exclusively for the purpose of facilitating supply of the coastal cities in the North (Narvik and Kirkenes)—which are difficult for us to reach by land—by shipping supplies via the territory of these countries...


In summing up, I should like to state that, in the opinion of the Führer, also, it appears to be the historical mission of the Four Powers—the Soviet Union, Italy, Japan, and Germany—to adopt a long-range policy and to direct the future development of their peoples into the right channels by delimitation of their interests on a world-wide scale.

In order further to clarify issues of such decisive importance for the future of our peoples and in order to discuss them in concrete form, we would welcome it if Herr Molotov would pay us a visit in Berlin soon. I should like to extend a most cordial invitation to him in the name of the Reich Government. After my two visits to Moscow, it would now be a particular pleasure for me personally to see Herr Molotov in Berlin. His visit would then give the Führer the opportunity to explain to Herr Molotov personally his views regarding the future molding of relations between our two countries. Upon his return, Herr Molotov will be able to report to you at length concerning the aims and intentions of the Führer. If then—as I believe I may expect—the opportunity should arise for further elaboration of a common policy in accordance with my foregoing statements, I should be happy to come to Moscow again personally in order to resume the exchange of ideas with you, my dear Herr Stalin, and to discuss—possibly together with representatives of Japan and Italy—the bases of a policy which could only be of practical advantage to all of us.

With best regards I remain

Respectfully yours,


What Law Is This? It's Not Godwin's Law. It's Not Gresham's Law. But It Is Somebody's...

Joseph Nocera once again proves that all columns accusing others of engaging in breaches of ethical conduct will themselves be a breach of ethical conduct--in this case, Joseph Nocera's breach.

Seems to me that there is not "the appearance of a conflict of interest" here. Seems to me that Nocera has a genuine conflict of interest here...

We pick up the story at TalkingBizNews:

NYT columnist Nocera adds conflict note to Saturday column: New York Times business columnist Joe Nocera, who wrote his Saturday column about the new Hewlett Packard CEO and his involvement in an intellectual property theft lawsuit, has had to add an editor’s note to the column on Tuesday. The reason? His fiancee is director of communications for the law firm that is involved in suing the CEO.

The editor’s note states:

In the Talking Business column in Business Day on Saturday, Joe Nocera wrote about a lawsuit by Oracle against a division of SAP, claiming theft of intellectual property. Mr. Nocera learned after the column was published  that Oracle was represented by the law firm of Boies, Schiller & Flexner, where his fiancée works as director of communications. To avoid the appearance of a conflict of interest, Mr. Nocera would not have written about the case if he had known of the law firm’s involvement.

John Paczkowski of All Things Digital writes:

Odd to learn that Nocera, the Times’ star business columnist, was unaware that his own fiancée was a flak for the law firm repping Oracle in the suit (see screenshot above) that provided so much of the subject matter for his column. But it seems he was not, up to today, when he made a CNBC appearance on the subject...

We continue the story with John Paczkowski:

HP Scandal Sucks in New York Times Columnist Over Conflict of Interest: Another reputation smeared in the Hewlett-Packard/Oracle slag-fest. Turns out Joe Nocera... penned that scathing piece on former SAP chief and incoming Hewlett-Packard (HP) CEO Léo Apotheker... has a conflict of interest. Nocera’s fiancée, Dawn Schneider, is director of communications for Boies, Schiller & Flexner, the law firm that just so happens to represent Oracle in its very same suit against SAP...

And Joe Nocera:

Talking Business: For H.P. Board, a Double Standard: And so it came to pass that on the 55th day — 55 days, that is, after firing its chief executive, Mark V. Hurd, for playing footsie with a consultant and fudging his expense accounts — the board of directors at Hewlett-Packard proudly announced it had found a new man to lead the company out of the wilderness. His name is Léo Apotheker, a suave European — how many American C.E.O.’s have an accent aigu in their name? — who had spent most of his career at SAP, the giant German maker of business software. SAP has one primary competitor: Oracle, the very same company that hired Mr. Hurd barely a month after H.P. let him go, in a move clearly intended not only to bolster Oracle but to humiliate H.P....

There were other things about the appointment that seemed a bit odd.... [H]aving written two unflattering columns recently about the H.P. board, I was inclined to take a pass on Mr. Apotheker’s hiring. But then I learned something about him that caused me to shake my head in disbelief. Next month, Oracle and SAP are scheduled to go to trial in a case involving the wholesale theft of Oracle’s intellectual property by an SAP division. SAP has acknowledged its guilt; the only issue being litigated is the size of the damages. (Oracle is asking for $2 billion; SAP says it should have to pay only “tens of millions” of dollars.) As a member of SAP’s executive board, Mr. Apotheker clearly knew about the theft.

It takes your breath away, really: the same board that viewed Mr. Hurd’s minor expense account shenanigans as intolerable has chosen as its new C.E.O. someone involved — however tangentially — with the most serious business crime you can commit. If it were anybody besides the H.P. directors, the situation would be unbelievable. With these guys, though, it’s all too believable...

Ignore All Other Versions and Use This Webpost

Charlie Brooker:

Jonathan Franzen's Freedom has been pulped: Like anyone who's ever suffered the traumatic loss of the only copy of a crucial file... I tend to end up saving about 1,500 different versions along the way, leading to a directory full of bewildering titles such as FINALSCRIPT2a.DOC and FINALSCRIPT1b-IGNORE-ALL-OTHERS-AND-USE-THIS.DOC and FINALSCRIPT1c- I-AM-SPARTACUS.DOC.

Sometimes the documents themselves are radically different; sometimes the differences consist of a few missing commas here and there. Disappointingly, it seems the disparity between the "right" and "wrong" drafts of Franzen's book chiefly consists of minor typographical errors and typesetting changes. It'd be far more interesting if they'd accidentally printed a version in which, halfway through the 19th chapter, the whole thing ends abruptly with the words MORE BOOK TO GO HERE. But that didn't happen.

Early drafts are rougher and baggier and less disciplined than the polished final product, but can be more entertaining as a result.... [T]he original cut of Ridley Scott's recent retelling of the Robin Hood legend contained a puzzling interlude during which Russell Crowe recited the URL for a pornographic website. The scene was dropped from the theatrical release at the last minute when it was discovered that a script supervisor had inadvertently pasted the contents of their clipboard into the script while trying to find the keyboard shortcut for "print". Neither of these stories is true, incidentally, but that doesn't necessarily make recounting them here any less worthwhile.

I'm assuming the Franzen error doesn't affect readers who bought digital copies of the novel to read on Kindles and iPhones and eReaders and the like – but then again, even if it did, it should be possible to remotely and automatically update them all without anyone really noticing. In fact, the advent of digital books blurs the whole notion of "final drafts" and "revised editions" into a confusing futuristic smudge. Freed from the physical limitations of a paper-and-ink edition, authors can continue tinkering with the text way beyond the date of publication, maybe even for ever. Perhaps before too long, you'll be midway through an especially underwhelming paragraph, and it'll start deleting itself before your very eyes, just like this one should have. Or your favourite character will die or reappear under an assumed name and have sex with themselves. Any notion of permanence will be a thing of the past. Even the individual letters will crawl around while you look at them, like agitated ants.

Worst of all, without the crushing finality of a concrete deadline looming over them, authors won't be forced to make up their minds about anything any more, and before long all books will open like this:

James Bond strode into the casino. Actually, no he didn't. He walked into a blazing warehouse. Except he wasn't on foot. He was in a car. Or on a horse. Whatever. The important thing is, it was all really exciting.


UC Berkeley: Webcasts and File Uploads: J. Bradford DeLong: Economics 1, Fall 2010

File Uploads:

August 30: Introduction to Macroeconomics: Audio | Slides | Notes

September 1: Introduction to Depression Economics: Audio | Slides | Notes

September 8: Downturns and Financial Markets: Keynesians and Monetarists: Audio | Slides | Notes

September 13: Dealing with the "Great Recession": Audio | Slides | Notes

September 15: Inflation Economics: Audio | Slides | Notes

September 20: Inflation Economics II: Slides | Audio

September 22: Budget Economics: Slides | Audio

September 27: Budget Economics II: Slides | Audio

September 29: Growth Economics: Background: Slides | Audio

October 1: Pre-Midterm Review Session:

October 6: Economic Growth II: Slides | Audio

October 11: Introduction to Microeconomics: Slides | Audio | Lecture Notes

October 13: Fundamentals of Supply and Demand: Slides | Audio | Lecture Notes

October 18: Supply and Demand: Audio | Slides

Three audio files of the first Econ 1 lecture: Lecture 1, August 30: Introduction to Macroeconomics.

One at:

The others at:

Comments on audio quality?

The consensus seems to be that the "SP" files are the best...

Barry Ritholtz Asks: Are WSJ OpEd Writers Clueless or Liars?

The answer is "yes."


Are WSJ OpEd Writers Clueless or Liars? | The Big Picture:

“We’re not aware of a single case so far of a substantive error. Out of tens of thousands of potentially affected borrowers, we’re still waiting for the first victim claiming that he was current on his mortgage when the bank seized the home. Even if such victims exist, the proper policy is to make them whole, not to let 100,000 other people keep homes for which they haven’t paid.”

-The Politics of Foreclosure, WSJ OpEd

I used to think that the partisan, money-losing screeds that are WSJ OpEds were written by intelligent idealogues. Their errors were thought to be a function of a variety of cognitive mishaps and biases. These are typically associated with sports fans, but afflicts partisans as well.

I am no longer convinced of this.

I now believe they some combination of heavy metals or other pollutants has somehow rendered the judgment centers of their brain inoperative. They function in ways indistinguishable from other human beings, except when it comes to anything involving judgment. This includes complex mathematics, a new or unusual fact pattern, or simply something that conflicts with prior experience. It is beyond them.

If they are not clueless, then the alternative conclusion is that they are liars (a third possibility is they are developmentally disabled — i.e., high functioning morons –  but I doubt that). That conclusion is based on an October 9th editorial, from whence the above quote was derived.

As has been widely circulated and discussed in the media, Man’s home sold out from under him in foreclosure mistake. The gentleman in question DID NOT HAVE A MORTGAGE.

If that is not substantive error, then WTF is?

Duncan Black: Another Obama Unforced Error in Bank Supervision and Regulation

Duncan Black:

Eschaton: HAMP Hell: This program did not require President Snowe to sign off.

He is referring to this, from David Dayen:

Portrait of HAMP Failure: How HAMP Connects to Foreclosure Fraud: Now that the foreclosure fraud scandal has deepened, I wanted to show how it connected to the problems with HAMP, using some reader stories as an illustration.... Tina Kimmel is an epidemiologist in California who saw her salary cut by Arnold Schwarzenegger to balance the budget, and this reduction in income put her in trouble with her mortgage. She tried to get into the HAMP program in June 2009, when it began, through her lender, Citi Mortgage. I’ll reprint the follies from there from her email:

Meanwhile I heard about the HAMP program.... I asked Citi to consider me for it. They asked me for dozens of documents... put me on the trial program for October – December 2009. My payments were only $1350, which was a great relief. In January, they told me me to keep paying that lower amount while they finished processing my paperwork, which I did. Then suddenly in April, they said I was in default, and that I owed them $13,000. They said that I was no longer in HAMP, so I owed the difference between what they had asked me for and I had paid ($1350), and what they were saying I actually owed them ($2800), for those 7 months, plus interest and late fees.

Citi’s explanations for why I didn’t qualify for HAMP were first, that I hadn’t submitted the right documents (but they couldn’t find any that were missing), then, they claimed that I had turned THEM down (but had no evidence of that), then, they said my credit was bad (but my credit was perfect when I applied, plus there is no credit requirement for HAMP). So in other words, I totally qualify for the program.

In May, I received an odd statement from Citi, where buried among the $13k “past due amount” and various fees, was an indication that my mortgage amount was now $2100, NOT $2800 as it had been. I found one lone person at Citi who said that inexplicably, my mortgage had been permanently modified. The only thing I can figure is that NACA got to someone there, which was great. But it didn’t stop the foreclosure train.

BTW I made, and continued to make, these mortgage payments, despite Citi saying they would have no place to put my money if I sent it in, since I was in the foreclosure process. (Huh??) But they did cash the checks anyway.

I contacted my congressperson, who put me in contact with the federal HAMP office. They told me to request Citi to give me a traditional modification (in-house) while they figured out what was going on. Citi spent all of July and August supposedly working on this new modification, which they said would “catch me up”, as well as lower my payment to around the $1350 HAMP payment.

But instead of hearing back from Citi, I was notified that on September 2, Citi had sold my account to a subprime lender, Carrington Mortgage Services (which seems to be associated with something called Quality Loan Service Corp).

I called Carrington, who told me that they had received no paperwork with my mortgage, that they were only told that I had over $16k “past due” at that point and that I was in foreclosure. I told them I had never missed a payment and had no plans to leave my house.

They then asked ME for copies of my HAMP agreement, all my qualifying docs, CitiMortgage statements, and bank statements showing all my mortgage payments, which I supplied. I asked to be considered for any in-house modification and/or forbearance and/or deferral of the “past due amount”, and they agreed to look into it. I got Carrington to accept September’s payment from me.

BUT on Sept 21, someone from the County taped an auction notice to my door: Carrington/ Quality Loan had set an auction date for my house, October 12.

That’s today. Kimmel eventually borrowed the $13,000 from friends needed to stave off the subprime lender, and saved her home. Now, let’s count the violations in this all-too-typical account:

1) Trial modifications are supposed to be 90 days only, according to HAMP policy. This stretched more than twice that long.

2) Per HAMP, the lenders are not supposed to include late fees and interest onto the amount owed if the borrower doesn’t qualify for a permanent modification. This is part of an epidemic of extra fees tacked onto the mortgage that don’t follow the specific instructions of the note. Too many homeowners accept what the banks tell them is the total amount owed to stop a foreclosure, and the terms of the note would provide that information very clearly.

3) The bank falsely accused the borrower of having bad credit when the credit would only have been damaged by the trial modification program, which is seen as a partial default on credit reports.

4) Citi improperly informed the borrower that she was denied a permanent modification when she actually succesfully received one. This is basically document fraud, designed to extract a higher payment out of the borrower.

5) Per California law, Citi must make a reasonable effort to modify the loan to prevent a foreclosure, and that does not include selling the loan to a subprime lender. In addition, Citi sold the loan without giving the new lender the paperwork, which is at the hub of the foreclosure fraud scandal.

6) Instead of getting back in touch with the borrower to notify her of the outcome of the effort to modify the mortgage, Quality Loan Service/Carrington just had the county tape a foreclosure notice to the door. I believe this also violates California law under the Foreclosure Prevention Act.

All of these casual violations of accepted standards, state and federal law, and the terms of the HAMP program, mirror exactly the violations of the the legal process governing foreclosures. The servicers would rather foreclose at this point, after a period of extending the borrower and squeezing out some more payments, because they extract fees on a successful foreclosure and have every incentive not to help modify the loan. Add to this that no federal regulator has oversight specifically over the servicers (though they do over the parent companies) and what you have is a Wild West Show, where the servicers can put borrowers through hell, trap them using HAMP, and foreclose with impunity.

In both cases, the lender could ask for their note and determine what they actually owe, and whether they would quality for a short sale, have more equity in the home than they think, etc. Homeowners are being taken advantage of by being in the dark, and allowing the servicer to have all the balance of power in the transaction. This is true in foreclosure fraud and it’s true in HAMP.

This is why we need to stop the evictions for now.

For years, mortgage loan servicing companies have engaged in shoddy business practices, ranging from misapplied payments to evicting homeowners who have never missed a payment. Now employees of these companies have admitted to falsifying thousands upon thousands of affidavits used to toss families out of their homes.

The fraudulent documents indicate a problem well beyond the “technical glitches” that the industry describes. If servicers had accurate records, there would be no need to invent paperwork. The entire system is rife with unfairness, and the mistakes and omissions have serious consequences in terms of unnecessary or even mistaken foreclosures.

Document fraud. False statements. Misplaced notes. Value to the servicer over the borrower. This distinguishes both HAMP and foreclosure fraud.

Can I PLEASE Go Back to My Home Timeline Now?


The unemployment has been above nine percent for eighteen months now.

So far there is no sign that the bulk of our excess unemployment is in any sense "structural"--no sign that the so-called "natural" rate of unemployment around which the economy should oscillate has risen from its normal 5%. If it has risen at all so far, it is very unlikely that it has risen above 6%: we still have a huge amount of "cyclical" unemployment that would melt away without inflation if only spending were higher.

But if unemployment remains above 8%, more and more of cyclical unemployment will become structural unemployment, and the natural rate of unemployment will rise.

Ezra Klein:

An ugly word for an ugly economy: You may not know the term "hysteresis." It's the "lagging of an effect behind its cause," and it's an ugly word that sounds like a foot fungus. It's also an ugly thing to have happen to your economy. And it may be what's happening to ours. We understand that our economy is growing too slowly and that our labor market is taking too long to recover.... What gets less attention is the way that slow job growth begets slow job growth.... hysteresis.

Adam Posen... doesn't think we're taking the threat of an extended period of crummy growth nearly seriously enough. When people worry about what comes next for the economy, he said in a speech to the Bank of England, they worry about a double-dip recession or a temporary period of deflation. Those, he explained, are not close to how bad things can get. "The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy," Posen said, "and/or inducing a political reaction that could undermine our long-run stability and prosperity."

To see what he means, consider a Michigan construction worker laid off in early 2008. He didn't lose his job because he was bad at it but because his firm lost access to credit. He hasn't been able to find another job, because no one is hiring in his area, and he can't sell his house, because it's now worth less than what he owes on his mortgage.

Right now, he's an example of what economists call "cyclical unemployment." He's unemployed because of the business cycle. But if his stretch of joblessness lasts for too long, that might change. His skills might deteriorate, and so too might his confidence. He might join an altogether more troubled group: the "structurally unemployed" -- the out-of-work who can't get jobs because they're not suited for the jobs that employers are offering. The long-term unemployed, Posen warns, can become "de facto unemployable over time."

Then there's the political consequences of extended economic distress. Troubled countries do not always make wise decisions. Financial pain empowers demagogues and opportunists. Trade wars are begun, and borders closed. And we're beginning to see signs of this in our own polity.

It's not just that this year's crop of challengers for Congress -- notably Christine O'Donnell, Sharron Angle and Rand Paul -- have more extreme views than you'd normally find in the two major parties. It's that the voters are drifting as well. In 1999, only 30 percent of the country thought free trade had hurt America. Now it's 53 percent -- and among both tea partiers and union members, it's above 60 percent.

You can tell a similar story on immigration....

Remember that we're only three years into this economic crisis. Goldman Sachs Group chief economist Jan Haltzius is projecting that we'll see growth in the range of 1.5 to 2 percent next year and that unemployment will rise above 10 percent....

But even if we recognize that slow growth is an overriding problem that requires an aggressive response, what's there to do about it?... Congress seems to have given up on fiscal policy, as the insufficient stimulus spending it authorized in 2009 hasn't done the trick. And though the Federal Reserve seems likely to mount another round of quantitative easing after the election, it's coming late, and it's not likely to be enough...


Economics of Contempt: Steve Rattner Does Not Like Sheila Bair


Economics of Contempt writes:

Economics of Contempt: Steve Rattner on Sheila Bair: As I noted in my review of Overhaul, Steve Rattner absolutely savages Sheila Bair. I think Rattner treats Bair a little too harshly, but I agree that in this case, Bair was extremely unprofessional, and almost comically petty to boot. But I'm posting the full excerpt of Rattner's experience with Bair below the fold (it's long), so that you can make up your own mind.

The reason I think Rattner is a little too harsh on Bair is that, as head of the FDIC, she had the right to be concerned about the capital buffer at GMAC's bank (Ally), and to require higher capital levels. After all, it's the FDIC that would be on the hook if GMAC/Ally ever failed.

On the other hand, it's not at all clear that GMAC's capital level was her real concern (in fact, it's pretty clear that it wasn't her primary concern). Moreover, her stated cause for concern about GMAC — dealer floorplan loans — strongly suggests that her concern was less than genuine. Rattner is right that dealer floorplan loans are among the safest type of loans out there. Dealer floorplan ABS, which have a revolving structure similar to credit-card ABS, have miniscule historical loss rates (i.e., less than 1%), and have held up extremely well throughout the crisis. The fact that Bair cited dealer floorplan loans as her reason for requiring unusually high capital levels suggests that she either (a) didn't understand dealer floorplan loans (which would be bad in its own right), or (b) was being disingenuous.

I've always been surprised that Bair managed to become something of a hero among progressives. When Bair was the head of the CFTC in the 1990s, she fended off attempts to regulate OTC derivatives. And immediately after leaving the CFTC, she became a lobbyist for the New York Stock Exchange. Not exactly the profile of a progressive hero.

Anyway, here is Rattner's account of his experience with Bair:

From Overhaul: An Insider's Account of the Obama Administration's Emergency Rescue of the Auto Industry, by Steve Rattner (pp. 168–172, 236–237).

The new headache was Sheila Bair, the powerful chairwoman of the FDIC, which we needed to complete the GMAC and Chrysler Financial deal. Everything else in our charter depended on that. Without GMAC’s help, Chrysler would have no way to finance ongoing sales and the restructuring would fall through. General Motors’s survival would also be jeopardized.

I’d become aware of Bair’s central role gradually, while arranging for GMAC to take over Chrysler Financial’s lending activities. I had expected that obtaining the regulatory approvals would be easy. After all, didn’t we work for the same government? Didn’t we all want to save the economy from further shocks? That naiveté fell away quickly.

GMAC had three regulators: the Fed, the FDIC, and the state of Utah, where its Internet bank, Ally, was chartered. Since the Federal Reserve and the FDIC were independent agencies, for the first time in our “caper,” we could not use executive authority to direct the bureaucracy. No one—not the secretary of the Treasury, not even the President—could tell Ben Bernanke or Sheila Bair what to do. So the potential impediment at this point was not the recalcitrance of outside stakeholders but that of government colleagues.

We didn’t need much from the Fed, primarily just relief from something called Rule 23A, a Depression-era regulation prohibiting banks from lending money to “affiliated companies.” GM still had a significant stake in GMAC, but from our first meeting with Fed general counsel Scott Alvarez, we sensed a desire to help. Scott and his colleagues were diligent and careful—they made clear that they wouldn’t support a full merger of Chrysler Financial and GMAC. Yet they also signaled that they shared our desire to solve the auto crisis.

The FDIC, more directly and intimately involved with the bank subsidiary, had the authority to lift limits on deposits that GMAC had agreed to at the end of 2008 and controlled access to the TGLP. Its cooperation on both fronts was essential to GMAC’s plan for providing financing to GM and Chrysler customers. Our initial encounters were worrisome. Two Team Auto members, Brian Stern and Rob Fraser, had a Sunday session with the Fed also in attendance, where the FDIC was unyielding. A few days later, Deese and I accompanied Brian and Rob to FDIC headquarters to try to make some progress. But Bair’s lieutenant Chris Spoth and her deputy general counsel Roberta McInerney listened, gave away little, and promised no cooperation beyond checking with their boss.

The only specific objection raised by Spoth was GMAC’s financing of dealer inventories, which he viewed as excessively risky. The irony was that of all the possible reasons to worry about GMAC, “floor plan” was the least of them. In theory, GMAC can lose money on floor plan if a dealer won’t or can’t pay, but the deck is stacked in favor of GMAC. If a dealer defaults, GMAC has the right to seize the unsold cars and return them to GM for full value. What’s more, most dealers are personally liable for floor-plan loans, a tremendous incentive to make good on the debts. The historical loss rates on floor plan had been close to zero. The new risk, or course, was that GM itself might no longer be around to honor its repurchase agreement. But the President of the United States had just stood up to tell the world that a GM liquidation was unthinkable. What was the FDIC so worried about? We couldn’t figure it out.

It took me a while to understand that we were caught in the web of Sheila Bair’s own agenda. She was a lawyer from Kansas who, like Ben Bernanke, was a Bush administration appointee. Like Bernanke, she had also been an academic, though of lesser distinction. Unlike Bernanke, she was a politician too—in the 1990s she’d lost a Republican congressional primary in her home state.

Bair made her mark at the FDIC as an articulate early advocate of forceful action in the subprime mortgage crisis. At a time when the Bush administration was still wedded to its free-market, noninterventionist stance, she stood her ground. In 2008 Forbes named her the second most powerful woman in the world after Germany Chancellor Angela Merkel. A few pundits even touted her as a possible Treasury secretary for President Obama. But inside the bureaucracy she had a reputation for being a sharp-elbowed, sometimes disingenuous self-promoter. My colleagues who dealt with Bair during the banking crisis found the experience frustrating.

Bair’s concern was the safety and soundness of GMAC. We had told the regulators that we intended to recapitalize the company based on the results of the stress tests then under way. The goal of the stress testing, orchestrated by Tim for the nation’s nineteen largest bank holding companies, including GMAC, was the restoration of confidence in the banking system. If a company’s capitalization was found wanting, it would be required to raise enough additional money to weather a full range of economic storms. Ideally, investors would put up the funds, but implicit was the assurance that Washington would provide capital if the private market wouldn’t. GMAC was in such weak shape that its only possible source of capital would be TARP.

Based on the stress test results—not yet public but available to us—we had budgeted $13.1 billion of new capital for GMAC. Of that, $4 billion was to support the lending it would take over from Chrysler Financial. Bair didn’t believe those sums were enough. She suspected GMAC to be weaker than the stress test revealed, and didn’t trust de Molina’s ability to deliver what he promised. She also shared the FDIC members’ antipathy toward GMAC for its aggressiveness in Internet banking.

So the FDIC withheld its approvals, muttering about more capital. Making things worse, Spoth hinted at but would not spell out his boss’s demands. We made so little progress with him that I finally asked Tim to intercede. A summit meeting was booked for April 28, just two days before the President was to speak on television. It was in Tim’s small conference room, in the early evening of another unseasonably warm day, that I first came face-to-face with Sheila Bair—a small, trim woman about my age with brown hair, brown eyes, and an unsmiling, sour demeanor. According to Washington protocol, this was a “principals plus one” meeting. Sheila brought Spoth. Tim and I represented Treasury, leaving me without my finco experts Brian and Rob. Bernanke and Alvarez participated by phone.

One could hear bemusement in Bernanke’s soft voice coming through the speaker. His tone suggested that he was wondering, “Why are we even here?” The Fed was already prepared to meet a key demand by Bair, that GMAC be able to use dealer loans as collateral to borrow at the Fed’s “discount window.” But this meeting was about Bair’s needs. An effort was under way in Congress to increase from $30 billion to $100 billion the credit line at Treasury used by the FDIC to backstop its deposit-insurance fund. Bair made it clear that in exchange for helping GMAC, she expected Treasury’s support for the legislation. Such horse-trading is routine, and I didn’t question it. I just wished that she or Spoth had been more straightforward and had brought it up weeks earlier. But Tim readily acquiesced.

Next came a recital of grievances about GMAC. Weirdly, Bair attacked dealer financing anew, making it sound as if floor-plan lending were the reincarnation of subprime. It was as though we had not, just days before, explained to Spoth why floor-plan financing is about the least risky activity an auto finance company undertakes. He remained silent, and though I was incensed, so did I. As a “plus one,” I didn’t think it was my place to take on Bair in the presence of Bernanke and Geithner. The moment the meeting ended, I rushed down to see Brian Stern and Rob Fraser, wondering if I had somehow misunderstood everything I had heard about floor plan. They assured me that I hadn’t.

Clearly, the issue of the auto finance companies—which two months earlier we had viewed as the rail of the dog—was now a Great Dane of a problem. Soon to come was the news that Bair did not merely want Tim’s support for expanding her credit line; she wanted the legislation passed by Congress before she would agree to help GMAC. That wasn’t going to happen in the next forty-eight hours.

We agonized. It seemed insane to let Chrysler go down over her agenda. But Chrysler could not stay in business unless its dealers and customers got financing, and without FDIC approval, there was no way to provide it. We had fallen short on a key condition for not pulling the plug.

In close consultation with Larry and Tim, we decided the rescue was worth another gamble. We committed $7.5 billion of TARP funding to GMAC without waiting for the FDIC’s cooperation. In exchange, de Molina agreed to take on Chrysler Financial’s lending for two weeks so that the automaker could continue to sell cars. Two weeks would be long enough, we hoped, for the FDIC’s legislation to pass or for Bair to come around.

I reckoned the odds were on our side. For one thing, we’d held back $5.6 billion of the $13.1 billion earmarked for GMAC—additional capital that both de Molina and Bair wanted to see invested in the auto lender. Even if the GMAC arrangements fell through and we had to liquidate Chrysler in another two weeks, the consequences of having waited would not be severe. Keeping Chrysler on the dole for the extra days would cost taxpayers perhaps $500 million — a mere rounding error in the context of TARP’s $700 billion. And the people who bought Chryslers in the interim would be protected—we had a warranty guarantee program already in place.

Above all, I was banking on Bair’s self-interest. Being obstructionist had worked for her up to now. But as soon as she realized she was in danger of becoming the visible face of GMAC’s paralysis and Chrysler’s demise—as well as of the potential collapse of GM because it, too, depended on GMAC—I hoped that the hostages would be released... (pp. 168–172)


GMAC hung over me as a huge piece of unfinished business that could torpedo everything we were accomplishing. I spent days with Brian Stern and Rob Fraser figuring out how to structure and value the capital infusion that GMAC was going to need. Even more frustrating was continuing to do battle with the FDIC. As a way to keep the pressure on, we had proposed that GMAC take on the Chrysler financing business for only two weeks, seemingly plenty of time to tie up loose ends with the FDIC.

But the FDIC kept retrading and piling on new asks. Sheila Bair’s designated negotiator was Chris Spoth, the rather meek career FDIC official whom we had previously encountered. He seemed to have no authority whatsoever. More than once, we would come to an understanding on a point that we would confirm by e-mail, only to receive an e-mail back the next morning denying that an understanding had been reached. At another juncture, the FDIC asked for a letter saying that Treasury would stand behind GMAC no matter what, and then kept changing the language. Tim thought the new language would make the FDIC look weak and tried, unsuccessfully, to reach Bair. “I’ll write whatever you guys want, but I really think this is counter to your objective,” he told Spoth. Of course Spoth needed to check with Bair. “You’re right, let’s go back to the other language,” he responded a few minutes later. (Bair would duck even Tim when she wanted to; once her office said she was on a plane when in fact she wasn’t.) Bair also wanted a letter from Tim thanking her for assisting our effort; we took to calling this the “great American letter.”

Most frustrating was that after agreeing to provide the help we were seeking, the FDIC came back and increased the amount of capital that it wanted GMAC’s bank (Ally) to maintain to far beyond that required of any other bank. The excessive capital requirement would have many negative repercussions. It would reduce GMAC’s liquidity at the holding company and therefore its financial flexibility. Perhaps most importantly, it lowered the bank’s lending capacity, the opposite of what we were trying to achieve. And it reduced GMAC’s profitability and therefore the value of the $13.1 billion of new TARP money that we were preparing to invest. So the FDIC’s unreasonable requirement would cost U.S. taxpayers significant money. Whose side was the FDIC on, I wondered. We whittled back the duration of the higher capital requirement a bit but ultimately had to swallow and agree. We had no alternative... (pp. 236–237)

What Government Expansion?


Paul Krugman is, as usual, correct:

Op-Ed Contributor - Hey, Small Spender: Here’s the narrative you hear everywhere: President Obama has presided over a huge expansion of government, but unemployment has remained high. And this proves that government spending can’t create jobs. Here’s what you need to know: The whole story is a myth. There never was a big expansion of government spending. In fact, that has been the key problem with economic policy in the Obama years: we never had the kind of fiscal expansion that might have created the millions of jobs we need. Ask yourself: What major new federal programs have started up since Mr. Obama took office? Health care reform, for the most part, hasn’t kicked in yet, so that can’t be it. So are there giant infrastructure projects under way? No. Are there huge new benefits for low-income workers or the poor? No. Where’s all that spending we keep hearing about? It never happened.

To be fair, spending on safety-net programs, mainly unemployment insurance and Medicaid, has risen — because, in case you haven’t noticed, there has been a surge in the number of Americans without jobs and badly in need of help. And there were also substantial outlays to rescue troubled financial institutions.... But when people denounce big government, they usually have in mind the creation of big bureaucracies and major new programs. And that just hasn’t taken place.... The total number of government workers in America has been falling, not rising, under Mr. Obama.... Now, direct employment isn’t a perfect measure of the government’s size, since the government also employs workers indirectly when it buys goods and services from the private sector. And government purchases of goods and services have gone up. But adjusted for inflation, they rose only 3 percent over the last two years — a pace slower than that of the previous two years, and slower than the economy’s normal rate of growth.

So as I said, the big government expansion everyone talks about never happened....

[T]he stimulus wasn’t actually all that big compared with the size of the economy. Furthermore, it wasn’t mainly focused on increasing government spending... more than 40 percent came from tax cuts... another large chunk consisted of aid to state and local governments.... And federal aid to state and local governments wasn’t enough to make up for plunging tax receipts in the face of the economic slump....

The answer to the second question — why there’s a widespread perception that government spending has surged, when it hasn’t — is that there has been a disinformation campaign from the right, based on the usual combination of fact-free assertions and cooked numbers. And this campaign has been effective in part because the Obama administration hasn’t offered an effective reply.

Actually, the administration has had a messaging problem on economic policy ever since its first months in office, when it went for a stimulus plan that many of us warned from the beginning was inadequate.... You can argue that Mr. Obama got all he could... that an inadequate stimulus was much better than none at all (which it was). But that’s not an argument the administration ever made. Instead, it has insisted throughout that its original plan was just right....

And a side consequence of this awkward positioning is that officials can’t easily offer the obvious rebuttal to claims that big spending failed to fix the economy — namely, that thanks to the inadequate scale of the Recovery Act, big spending never happened in the first place.

But if they won’t say it, I will: if job-creating government spending has failed to bring down unemployment in the Obama era, it’s not because it doesn’t work; it’s because it wasn’t tried.

The claim that the scale of the recovery programs were right-sized for the problem--or would have been right-sized for the problem if not for the Greek financial crisis--is another unforced error by the Obama administration.

A "Structural Unemployment" Nobel Prize

The Prize in Economic Sciences 2010-1.png

Very nice to see:

Diamond, Mortensen, Pissarides Share Nobel Prize (Update1) . By Rich Miller and Toby Alder

Oct. 11 (Bloomberg) -- Peter A. Diamond , Dale Mortensen and Christopher Pissarides shared the 2010 Nobel Prize in Economic Sciences for research into the difficulties of matching supply and demand, particularly in the labor market.

“This year’s three Laureates have formulated a theoretical framework for search markets” such as ones where buyers look for sellers and applicants look for jobs, the Royal Swedish Academy of Sciences, which selects the winner, said today in Stockholm.

Diamond, 70, is a Massachusetts Institute of Technology professor and a candidate for the Federal Reserve Board whose nomination has been held up by Senate Republicans. Pissarides, 62, teaches at the London School of Economics, and Mortensen, 71, is on the faculty at Northwestern University.

“Peter Diamond has analyzed the foundations of search markets,” the academy said. “Dale Mortensen and Christopher Pissarides have expanded the theory and have applied it to the labor market. The laureates’ models help us understand the ways in which unemployment, job vacancies, and wages are affected by regulation and economic policy.”

Search theory tries to explain such conundrums as how high unemployment can be accompanied by a large number of job openings. One conclusion is that more generous jobless benefits lead to higher unemployment as those who are looking for work take longer to find it, the academy said.

links for 2010-10-11

links for 2010-10-10

Liveblogging World War II: October 10, 1940


The British Middle Eastern Command reports on the situation in Egypt's Western Desert:

10th October 1940: The Italians consolidate in the Desert: It is now over three weeks since the Italian forces moved into Egyptian territory and advanced to Sidi Barrani. Since then there has been no further eastward movement except for the advance, and subsequent withdrawal, of a column of M.T. and tanks which was probably making a reconnaissance in force. Despite continued harassing by our aircraft, there has been considerable M.T. activity in the L. of C. area. The slowness of the advance indicates that Marshal Graziani is taking every step to bring up supplies and improve his communications. Further advance by the Italians would involve greater difficulties of supply, particularly of water, and the lengthened lines of communication will become increasingly vulnerable to our air and naval bombardment.

Cramdown and Foreclosure Fraud


Marcy Wheeler:

Remember Cramdown? | Emptywheel: Remember cramdown? It was a proposed change to bankruptcy law that would have allowed judges to modify the mortgages on primary homes for people entering bankruptcy.... Under the proposal, the banks would be allowed to work out their terms with borrowers first, before resorting to a bankruptcy judge. This is how it worked in the House version of cramdown, which passed in March 2009; the homeowner had to negotiate a voluntary loan mod with the lender before going to the bankruptcy judge. And this may have worked, but only because, for the servicers, cramdown would have loomed in the background as a big stick, forcing a negotiation with a level playing field for the borrower....

[C]ramdown... doesn’t show up in this WaPo story at all. The WaPo allows some anonymous administration officials to claim they couldn’t do anything about the abuses now being exposed in the foreclosure process because they wanted servicers’ voluntary help on modification programs (basically, the famously unsuccessful HAMP).

In an interview this week, a senior administration official confirmed that the White House and Treasury Department had received warnings that the mortgage industry employed inexperienced staffers to oversee foreclosures, had problems handling documents and communicating with borrowers, and often failed to comply with regulations. But... the official said... the administration was also seeking the servicers’ help with modifying the home loans of millions of borrowers to help them avoid foreclosure. In addition, a Treasury official said the federal government’s power to tackle problems in the servicer industry is limited because foreclosure law is largely the domain of states. Both officials, who were not authorized to speak on the record but were providing the administration’s views on the matter, said problems in the foreclosure process were largely the result of mortgage servicers being overwhelmed.

The massive foreclosure fraud that is about to seize up the economy again wasn’t the Administration’s fault, these anonymous sources want you to know, because they couldn’t do anything about it when they first got warning of it. Oh, and the servicers aren’t engaged in fraud, these anonymous sources want you to know, they’re just overwhelmed.... Key to this story of the Administration’s helplessness is the claim that the only tool they had to get servicers to modify loans was the servicers’ good will.... [T]hey had to let the servicers (who are also some of the biggest banks) engage in what amounts to fraud, because it was the only way they had to get servicers to participate in HAMP....

Back in July 2009, when the Administration was sitting on its hands as cramdown failed in the Senate and as Dick Durbin was observing that the banks own the Senate, the Treasury Department’s Assistant Secretary for Financial Stability, Herb Allison, testified to Congress that the Administration had all the tools it needed to slow the flood of foreclosures.

As housing foreclosures top the 1.5-million mark this year, the Obama administration has openly abandoned cramdown as a strategy for tackling the crisis. That approach — which would empower homeowners to avoid foreclosure through bankruptcy — was once a central element of the administration’s plans to stabilize the volatile housing market. Some financial analysts say the strategy would prevent 20 percent of all foreclosures. But, appearing before a Senate panel Thursday, two White House officials said that current policies are enough to address the problem. “We have enough tools,” Herbert Allison, the Treasury Department’s assistant secretary for financial stability, told members of the Senate Banking Committee. “The challenge is to roll them out.” The tools Allison invoked are several federal programs that offer financial incentives to mortgage lenders and servicers — the companies that buy the rights to manage loans — to modify the terms of mortgages in efforts to help homeowners escape foreclosure.

Fifteen months ago, according to the Assistant Treasury Secretary, the Administration had all the tools it needed. Now, as the problem of foreclosure fraud is about to explode, a Treasury official and a senior Administration official claim they didn’t have the right tools, they were helpless.... [A]fter fifteen months of trusting banksters to do the right thing for homeowners hasn’t worked out so well, the Administration is changing its story about whether it needed more tools to motivate those banksters.

in Which Brad DeLong Loses His Nerve...


A question I did not ask Condi Rice from the audience last night:

I am thinking about the post-Cold War foreign policy of the GHW Bush administration...

It was that the U.S. would bind itself to use its military to execute the will of the U.N. Security Council, so that no other potential power would think it cost-effective to build a military, and no smaller power would think nukes necessary to protect itself from the U.S. its highest priority. The hope was that that would preserve the U.S.'s status as the world's hyperpower for another generation or so.

We broke that. You broke that.

Now all of the BRIC powers think that a weaker, distracted, and more troubled America is in their interest. And people like George Shultz are very pessimistic about the non-proliferation outlook.

Is there a way to get back from where we are now to the foreign policy world we hoped to live in back in 1992?

Greg Mankiw Quits the New York Times?


An email from Mark Thoma saying that it sounds like Greg Mankiw is giving up his New York Times Economic View column because President Obama does not want to extend the temporary Bush tax cut on the marginal rates applied to high incomes.

It certainly sounds like it. The New York Times pays $650 a column and, Greg says, at anything less than the temporary Bush marginal rates on high incomes, that just is not enough:

Greg Mankiw:: AN important issue dividing the political parties is whether to raise taxes on those earning more than $250,000 a year. Democrats say these taxpayers can afford to chip in a bit more. Republicans say raising taxes on those who already face the highest marginal tax rates will hurt the economy. So I thought it might be useful to do a case study on one of these high-income taxpayers. Fortunately, I have one handy: me....

I can afford to pay more in taxes.... I have been very lucky.... I don’t have trouble making ends meet.... I am almost completely sated.... I don’t aspire for much more than a typical upper-middle-class lifestyle....

[B]ut I [do] hope to put some money aside for my three children. They will never lead lives of leisure, but I hope they won’t have to struggle to find down payments to buy their own homes or to send their kids to college. Suppose that some editor offered me $1,000 to write an article.... If I invested it in the stock of a company that earned, say, 8 percent a year on its capital, then 30 years from now... assuming that the Bush tax cuts expire, I would pay 39.6 percent in federal income taxes... the phaseout of deductions adds 1.2 percentage points... Medicare... 3.8 percent... 5.3 percent in state income taxes... the corporation in which I have invested pays a 35 percent corporate tax.... the estate tax.... Most likely... my kids will get... $1,000....

[W]ithout the tax increases advocated by the Obama administration... that writing assignment would yield my kids about $2,000....

Now you might not care if I supply less of my services to the marketplace — although, because you are reading this article, you are one of my customers. But I bet there are some high-income taxpayers whose services you enjoy.... Like me, these individuals respond to incentives. (Indeed, some studies report that high-income taxpayers are particularly responsive to taxes.) As they face higher tax rates, their services will be in shorter supply...

I think that this is a big mistake for two reasons: one moral-political and one economic-analytical.

Let me deal with the economic-analytical reason first:

First, start with the fact that tax on Greg's current writing earnings because he wants to leave more to his children in thirty years will be higher than today's current Bush-era tax rates. But they will not be higher because of anything Barack Obama has done or failed to do. They will be higher for three reasons. First, George W. Bush and his advisors--of whom Greg Mankiw was one--failed to find any spending offsets in order to pay for the temporary Bush reductions in tax rates. Second, George W. Bush and his advisors--of whom Greg Mankiw was one--enacted a very large long-term spending increase without figuring out any way to pay for it: Medicare Part D. Third, George W. Bush and his advisors--of whom Greg Mankiw was one--enacted a second very large spending increase when they responded to Al Qaeda by greatly increasing the size of a conventional military which is of not much use in our current struggle, and also did so without figuring out any way to pay for it.

As Milton Friedman liked to say, and as he did say when he--I am told--yelled at George W. Bush during his 90th birthday celebration at the White House--to spend is to tax. Will the spending, and you will the taxes. If somebody claims to have cut your taxes without cutting spending, do not believe them: all they have done is to shift taxes forward into the future, and made taxes on current consumption lower while making taxes on long-term transfers of wealth into the future higher.

The sooner taxes are raised in order to pay for Medicare Part D, the expanded U.S. military, other pieces of Medicare and Medicaid spending growth, and to offset the revenue lost over the past decade of the Bush temporary tax cuts, the lower the taxes on Greg's saving for his children's inheritance will be. That Barack Obama is taking some steps to restore fiscal sanity should diminish his view of the risk-adjusted taxes his long-run savings will pay, and make him more willing to write for the New York Times--not less.

But there is more. The two biggest long-run policies that Barack Obama has set in motion over the past two years have been (a) the entrenchment of future reductions in Medicare spending growth designed by the Independent Payment Authorization Board so that they can only be overturned by affirmative congressional supermajority votes to prevent them, and (b) the enactment of a growing and eventually very large tax on high-cost health-insurance plans. Now these policy changes may not survive--the Republicans are pledged, to a sophont, to repeal both of them. But if they do they greatly reduce the amount by which income and other taxes must rise over the next generation. And so they make the expected taxes on Greg's saving-for-his-children's-inheritance significantly lower.

If Greg wrote one column a month before Obama took these big steps to restore long-run fiscal balance to the U.S. federal government, the prospect of lower tax rates on his saving-for-his-children's-inheritance should induce him to write three columns a month now.

Second, Greg says that it's worth it for him to write columns if they generate $2000 in net bequeathed wealth in 2040 but not if they generate $1,000. But that shouldn't be why anybody writes columns. Indeed, if people write columns not because they are driven to inform and educate their readers but rather because it is a way to make money to leave to their children--well, then those columns will be written not to inform but to entertain, and so they will be worthless as sources of information and education (rather than as sheer entertainment) to their readers.

I do not think society can survive if the voices writing on political-economic issues in our public sphere are doing so not to inform but merely to entertain. I think that society can only survive if those who write columns are driven by a geas to make Americans better-educated citizens but rather to leave more wealth to your children. We ought to write columns not because we think our children will need extra money in thirty years, but because we think our fellow-citizens need better information now.

Indeed, I don't think America can long survive if we treat our contracts with newspapers merely as ones in which we craft words qnd they pay us money, and in which we craft our words to make as much money as we can.

Edmund Burke, I think, put it best when he said that society can only survive if at the very least it is a long-term partnership, and ought to have much more of social gift-exchange than that. As Burke wrote, we ought not to speak of a "social contract" in which each narrowly counts their contributions and benefits. And if we do speak of a "social contract," we must recognize that that is far from being a complete description:

Subordinate contracts for objects of mere occasional interest may be dissolved at pleasure; but the state ought not to be considered as nothing better than a partnership agreement in a trade of pepper and coffee, calico or tobacco, or some other such low concern, to be taken up for a little temporary interest, and to be dissolved by the fancy of the parties. It is to be looked on with other reverence; because it is not a partnership in things subservient only to the gross animal existence of a temporary and perishable nature. It is a partnership in all science, a partnership in all art, a partnership in every virtue and in all perfection. As the ends of such a partnership cannot be obtained in many generations, it becomes a partnership not only between those who are living, but between those who are living, those who are dead, and those who are to be born. Each contract of each particular state is but a clause in the great primeval contract of eternal society, linking the lower with the higher natures, connecting the visible and invisible world, according to a fixed compact sanctioned by the inviolable oath which holds all physical and all moral natures each in their appointed place...

links for 2010-10-10

links for 2010-10-09