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November 2011

Quote of the Day: November 30, 2011

"The number of shipwrecks in the Mediterranean declines sharply after 200, and pollution in ice cores, lake sediments, and bogs follows after. The downward slopes mirror the upward slopes in the first millennium BCE shown in 250. By then everyone was feeling the pinch. Bones from cattle, pigs, and sheep become smaller and scarcer in settlements after 200, suggesting declining standards of living, and by the 220s wealthy city dwellers were putting up fewer grand buildings and inscriptions."

--Ian Morris: Why the West Rules--for Now

Progress in Economics Education Department: Yes, a Temporary Fiscal Expansion Would Be a Good Thing

David Andolfatto, February 2009:

MacroMania: A Stimulating Lesson from Japan?: Here we go again. Economic growth is slowing. Stock markets have plunged. Banks are failing. Perennial doomsayers are basking in a glow of perverted pleasure. A plethora of pundits are earnestly explaining the dire need for "stimulative" government spending measures to reverse the course of what will otherwise be a prolonged depression. In short, par for the course.

Well, perhaps not quite par. This time around, many governments appear to be taking seriously the notion that a massive government "electric shock therapy" is needed…. Is there any merit in the view that a massive government fiscal action can rescue the day? Apparently, there must be. Why would all these learned people be advocating a policy prescription that is not solidly backed by economic theory and the historical evidence?…

[T]here are several ways in which the patterns displayed in this data might be explained or interpreted. I am especially eager to learn how this evidence might be construed as supporting the notion that fiscal policy "works"…

David Andolfatto, March 2009:

MacroMania: Multiplier Mischief: The current debate over the size of the "government spending mulitiplier" is a perfect measure of the sway that conventional economic theorizing continues to grip the minds of people who should know better. At the center of the theorizing is the income-expenditure identity: Y = C + I + G…. The government spending multiplier is dY/dG. Now all economic historians have left to do is to try to estimate the size of dY/dG. They frequently "discover" that dY/dG > 1…. Conclusion: Obama's stimulus package is a good idea. There you have it. The only puzzle remaining is why it takes 4 full years of training to receive a PhD in macroeconomic theory; and why it should take a further 6 years to become a tenured professional by publishing papers examining what we all know to be the self-evident truth embedded in this "really useful ad hoc model."

Unfortunately, I am apparently one of few who have trouble absorbing this simple theory…

David Andolfatto, November 2011:

MacroMania: A bridge over the macroeconomic divide: As you may have gathered from my previous post, I am generally sympathetic to the idea of expanding the supply of U.S. treasury debt at this time (with a commitment to unwind in the future, if and when economic conditions improve). Of course, a big question is what to do with the funds acquired in this manner. I'm with Krugman that heck, we may as well use it to build physical capital (public infrastructure). Financing a corporate tax cut to stimulate domestic private capital spending might be a good idea too (not so politically popular though).

These provisional policy recommendations suggest themselves to me by way of a class of "new monetarist" models that I like to use to organize my thinking about things…

From my perspective, the depressing thing is the 31 months it takes to remember (some of) the lessons of Knut Wicksell's (1898) Interest and Prices--and the claim that the idea that expansionary fiscal policy is a way of raising the natural rate of interest is a "new monetarist" rather than an "old Stockholm school" theoretical point…

Employment Growth Actually Fast Enough to Put Downward Pressure on the Unemployment Rate...

Joe Wiesenthal:

ADP JOBS REPORT SMASHES EXPECTATIONS AT 206K: Analysts were expecting 130K new jobs, but instead ADP just reported that there were 206K new private payrolls added in November. Also the previous month was revised up from 110K to 130K. Combine that with the big global coordinated intervention among the world's central banks, and you've got the brew for a gigantic rally today. S&P futures are up 2.7%…

Very nice to see...

The World's Central Banks Do Something

It is not clear what, however.

Joe Wiesenthal:

MARKETS SURGE AS FED/ECB/BOJ/BOE/SNB/BOC ANNOUNCE COORDINATED INTERVENTION: The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity.

These central banks have agreed to lower the pricing on the existing temporary US dollar liquidity swap arrangements by 50 basis points so that the new rate will be the US dollar Overnight Index Swap (OIS) rate plus 50 basis points. This pricing will be applied to all operations conducted from 5 December 2011. The authorisation of these swap arrangements has been extended to 1 February 2013. In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant. At present, there is no need to offer liquidity in non-domestic currencies other than the US dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise. These swap lines are authorised through 1 February 2013.

European Central Bank Decision

The Governing Council of the European Central Bank (ECB) decided in co-operation with other central banks the establishment of a temporary network of reciprocal swap lines.  This action will enable the Eurosystem to provide euro to those central banks when required, as well as enabling the Eurosystem to provide liquidity operations, should they be needed, in Japanese yen, sterling, Swiss francs and Canadian dollars (in addition to the existing operations in US dollars).

The ECB will regularly conduct US dollar liquidity-providing operations with a maturity of approximately one week and three months at the new pricing. The schedule for these operations, which will take the form of repurchase operations against eligible collateral and will be carried out as fixed-rate tender procedures with full allotment, will be published today on the ECB’s website. In addition, the initial margin for three-month US dollar operations will be reduced from currently 20% to 12% and weekly updates of the EUR/USD exchange rate will be introduced in order to carry out margin calls. Those changes will be effective as of the operations to be conducted on 7 December 2011. Further details about the operations will be made available in the respective modified tender procedure via the ECB’s Website.

Information on the actions to be taken by other central banks is available...

How Does the Economy Choose Which Equilibrium to Settle at?: Praying for the Confidence Fairy to Rescue Italy Edition

Martin Feldstein claims that Italy does not need anybody else's help:

Italy can save itself and the euro: The euro currency may soon collapse even though there is no fundamental reason for it to fail. Everything depends on Italy, because financial markets now fear that it may be insolvent. If the Italian government has to continue paying a seven or even eight per cent interest rate to finance its debt, the country’s total debt will grow faster than its annual output and therefore faster than its ability to service that debt. If investors expect that to persist, they will stop lending to Italy. At that point, it will be forced to leave the euro. And if it does, the value of the “new lira” will reduce the price of Italian goods in general and Italian exports in particular. The resulting competitive pressure could then force France to leave the euro as well, bringing the monetary union to an end.

But this need not happen. Italy can save both its own economic sovereignty and the euro if it acts decisively and quickly to convince the financial markets that it will balance its budget and increase its rate of economic growth…. It already has a “primary budget surplus”…. [I]f it cuts spending and raises revenue by a total of just three per cent of its GDP…. If reforms to strengthen incentives and reduce regulatory impediments raise [its economic] growth rate to two per cent, that together with a long-term balanced budget would cause Italy’s public debt to decline from today’s 120 per cent of GDP to about 65 per cent over the next 15 years [if Italy can borrow at the 4% it borrowed at before the crisis began]….

Italy’s situation is totally different from Greece’s. The latter has a budget deficit of nine per cent of GDP and its real GDP is declining at seven per cent [per year]…. The over-valued exchange rate results in a current account deficit of ten per cent of its GDP. Greece would be better off if it abandons the euro, devalues its new currency, and defaults on its debt.

A decision by Athens to leave the euro and default could cause a run on the euro and on Italian debt in particular. That’s why it is so important for Italy to stress that its conditions are totally different….

Italy can do all of this itself. It does not need assistance from Frankfurt, Brussels, or Washington. The proposed policies for help from the European Central Bank, the European Commission, and the International Monetary Fund would ultimately weaken Italy and undermine its economic independence….

Any of these proposed programmes would create new conflicts within Europe as borrower governments are forced to relinquish their ability to set their own national tax and spending policies…. The riots and political upheavals in Greece are a symptom of what would happen more generally if the Brussels bureaucracy and the German Chancellor came to dominate national economic policies.

Fortunately, none of this is necessary if Italy now acts forcefully to create budget and growth conditions that imply sustainable debt outcomes. But impatience and scepticism in financial markets may cause a deeper financial crisis before Italy has time to prove itself.

Yes, if Italy cuts spending by 1% of GDP, improves tax compliance by 2% of GDP, and manages to boost its economic growth rate from 1% per year to 2% per year, then if it can borrow at 4% per year then its debt is sustainable--and if you bet in financial markets that Italy will default, you will lose your money.

But even if Italy cuts spending by 1% of GDP, improves tax compliance by 2% of GDP, and manages to boost its economic growth rate from 1% per year to 2% per year, if it nevertheless finds that it can only borrow at 8% per year then its debt is unsustainable--and if you bet in financial markets that Italy will default, you will lose your money.

There are two equilibria out there if Italy reforms its policies: There is one in which investors lose money if they bet Italy will default even if Italy undertakes minor policy reforms--and if investors believe that we are in this equilibrium we will indeed be in this equilibrium and investors who bet Italy will default will lose their money. There is another equilibrium in which investors lose money if they bet Italy will not default if Italy undertakes minor policy reforms--and if investors believe that we are in that equilibrium we will indeed be in that equilibrium, and investors who bet Italy will not default will lose their money, and all the policy adjustments Italy can undertake by itself will not help.

What can the world do to make financial markets--and Italy, and the eurozone--settle at the first equilibrium?

Martin Feldstein appears to argue that the world should let Italy undertake its economic policy reforms by itself, and otherwise it should stand back and pray for the appearance of the Confidence Fairy.

I don't think that the Confidence Fairy is guaranteed to show up.

I think that if the assembled credit-worthy sovereigns of the globe--the money-printers: the BOJ, the ECB, the FRB, the BoE, and the IMF--show up and say that if you bet on the bad equilibrium we will ruin you, because we will buy up as many Italian government bonds as needed to cut Italy to the good equilibrium, and if they then start buying, then we do not need to pray for the Confidence Fairy because we are in the good equilibrium whether the Confidence Fairy shows up or not.

And by one of the arcana imperii of monetary and financial policy, the best way to guarantee that the Confidence Fairy will show up is not to need to pray for it--and so if the money-printers show up, they probably won't have to buy Italian government bonds because everybody will see that holding Italian government bonds is a way to profit and selling Italian government bonds short is a way to bankruptcy.

The problem, of course, is what if the money-printers show up but Italy does not undertake its structural adjustment...

Understanding Jon Corzine's Big Bet on Europe

I do find it somewhat gratifying what a large proportion of the tie my guesses turn out to be correct. But I really do wish that, if I was going to be right so much of the time, I were more optimistic:

Miles Weiss, Cristina Alesci and Matt Leising, November 29:

Corzine Pushed Europe Bet to $11.5 Billion: Jon Corzine bet $11.5 billion on European sovereign debt in his bid to rebuild profits at MF Global Holdings Ltd., almost twice the net amount disclosed to investors, and relied on short-term hedges that left the firm exposed to larger losses if they couldn’t be rolled over… overcame resistance from directors, senior traders and risk managers to accumulate the bonds…. He repeatedly ratcheted up his wager on the debt of countries including Italy and Spain, booking gains along the way, according to filings. The short-term hedges matured before the bonds, meaning the net amount at risk could increase if investors lost confidence in either European sovereigns or MF Global and new hedges couldn’t be bought.

“If that assumption does not come to pass, their risk mushrooms,” said Matthew Pieniazek, president of Darling Consulting Group, a Newburyport, Massachusetts, firm that advises banks on managing their balance sheets….

On earnings conference calls with investors, Corzine described the debt, which matured at various points in 2012, as a low-risk way to profit from “dislocations” in Europe’s sovereign-debt market…. At multiple meetings, Corzine reassured directors that the trades would work out, said the person, who asked not to be identified…. Corzine said the European countries he selected wouldn’t default before the bonds matured, and that the market was mis-pricing the debt….

The deal began to unravel in August when the Financial Industry Regulatory Authority told MF Global to add capital to its U.S. brokerage to back the trades…. Corzine’s strategy may ultimately have proven “very profitable” had the firm been able to hold the trades to maturity, said Josh Galper, the managing principal at Finadium, a Concord, Massachusetts, investment research and consulting firm. The firm’s collapse stemmed from a cash shortage, with trading partners and lenders seeking more collateral after the credit downgrade, rather than actual losses on the bonds, Galper said. “If MF Global had bought the same trade without leverage, there would have been no issue,” Galper said in an interview.

Me, November 2:

What Went Down at MF Global?: I Think I Am Less a Bear of Little Brain Today Than I Was Yesterday…

Untitled 6

Okay. I think I have got it. I seem to be smarter, with a better-functioning brain, this morning then I was last night in analyzing what may be the eighth-largest bankruptcy in U.S. history:

We need a three-stage model:

In stage zero MF Global sets up the financing with its counterparty and buys southern Europe's bonds.

In stage one we learn whether the market is tolerant or intolerant of southern Europe risk: if the market is tolerant the bond prices stay high; if the market is intolerant the bond prices collapse. In stage two southern Europe either pays off its bonds or defaults. We have four possible outcomes: 1--market risk tolerance and bond payoff; 2--risk intolerance and payoff; 3--risk tolerance and default; and 4--risk intolerance and default.

Untitled 6 1

MF Global wins substantially in Outcome (1), if the market remains risk-tolerance and if southern Europe pays off. They have then made a large leveraged bet on southern Europe and on the market's risk tolerance, and have won.

The counterparty also wins in Outcome (1), the tolerance-payoff scenario. But it does not win as big as it would have won had it simply bought the bonds out right.

In the other three outcomes MF Global is toast.

The counterparty is toast in both of the southern Europe default scenarios--in Outcomes (3) and (4).

In Outcome (2), however, in the intolerant-payoff scenario, the counterparty wins big and wins bigger than MF Global wins in Outcome (1). In Outcome (2) the counterparty gets its bonds paid off, and they acquired the bonds for an initial payment less by the initial collateral margin than they would have had they simply bought the bonds outright themselves in stage 0.

MF Global is thus making two directional bets: the bet that southern Europe will pay off, and the bet that the market will remain tolerant of southern Europe risk in the meantime.

If either of those bets fails, MF Global is toast.

The counterparty is making a more complex bet. Its best scenario is if the market loses its tolerance for southern-Europe risk but southern Europe nevertheless pays off is bonds. It profits if the market remains risk-tolerant and if southern Europe pays off. It loses if southern Europe defaults--but it loses less badly than if it had bought southern Europe debt itself.

MF Global's bet is (i) highly leveraged, and (ii) requires both southern Europe to payoff and the market to remain risk-tolerant. The counterparty is making a lower-leverage bet on southern Europe--and within that bet is also making a directional bet that in the meantime the market will lose its tolerance for southern-Europe risk.

The counterparty's bet is attractive to somebody who is (1) confident in southern Europe, and (2) patient capital that believes that fluctuations in market risk tolerance do not carry much fundamental information.

MF Global's bet is attractive to… (a) rogue traders (and rogue CEOs) speculating with other people's money, (b) those who are highly confident in their ability to switch from highly-leveraged speculators to patient well-capitalized investors in fundamentals if necessary, and (c) those who don't believe that there are shocks to risk tolerance that are orthogonal to shocks to fundamentals.

Lend Freely BUT AT A PENALTY RATE!! Blogging: Yes, the U.S. Government Ought to Own the Banks Now

Chart of the day Morgan Stanley bailout edition | Felix Salmon

Without the Fed and the Treasury, the shareholders of every single money-center bank and shadow bank in the United States would have gone bust.

Felix Salmon:

Chart of the day, Morgan Stanley bailout edition: Ladies and Gentlemen, this is what a lender of last resort looks like…. The black line is Morgan Stanley’s market capitalization, which… fell as low as $9.8 billion in November 2008. The orange line is the amount that Morgan Stanley owed to the Federal Reserve… which peaked at $107 billion on September 29, 2008. And the red line is… Morgan Stanley’s debt… as a percentage of its market value. That ratio… peaked… north of 750%.

Many congratulations are due to Bloomberg, for extracting this information…. [I]f the ECB wants to avert a liquidity crisis, charts like this give a sobering indication of just how far it might have to go, and how quickly it might have to act…. The Fed didn’t blink: it kept on lending, as much as it could, to any bank which needed the money, because, in a crisis, that’s its job.

The Fed likes to say that it wasn’t taking much if any credit risk here: that all its lending was fully collateralized, etc etc. But it’s really hard to look at that red line and have a huge amount of confidence that the Fed was always certain to get its money back. Still, this is what lenders of last resort do….

The Fed’s argument against publishing the data was that it “would create a stigma”, and make it less likely that banks would tap similar facilities in future. But I can assure you that at the height of the crisis, the last thing on Morgan Stanley’s mind was the worry that its borrowings might be made public three years later…

In the fall of 2008, counting the Fed and the Treasury together, a peak of 90% of Morgan Stanley's equity--the capital of the firm genuinely at risk--was U.S. government money. That money was genuinely at risk: had Morgan Stanley's assets taken another dive in value and blown through the private-sector's minimal equity cushion, it would have been taxpayers whose money would have been used to pay off the firm's more senior liabilities. "Fully collateralized" the loans may have been, but had anything impaired that collateral there was no way on God's Green Earth Morgan Stanley--or any of the other banks--could have come up with the money to make the government whole.

When you contribute equity capital, and when things turn out well, you deserve an equity return. When you don't take equity--when you accept the risks but give the return to somebody else--you aren't acting as a good agent for your principals, the taxpayers.

Thus I do not understand why officials from the Fed and the Treasury keep telling me that the U.S. couldn't or shouldn't have profited immensely from its TARP and other loans to banks. Somebody owns that equity value right now. It's not the government. But when the chips were down it was the government that bore the risk. That's what a lender of last resort does.

That's why Bagehot's rule is to lend freely but at a penalty rate. The bankers should not profit from the fact that they were over leveraged, and compelled the government to act as a lender of last resort.

DeLong Smackdown Watch: Grebmörts on Auri Sacra Fames

Hoisted from the comments:

Department of "Huh?!": Unclear on What Central Banks Are Department: Grebmörts said: You are being disingenuous. You know damned well why Steil thinks that it's a "big problem". He's a wingnut ( Deep inside his brain, beneath his primate neocortex, beneath even his reptilian basal ganglia, there stands a goldbug homunculus crying out "Bullion! Bullion! Must have bullion!"

The real questions are how does a guy get a doctorate from Oxford while preserving that level of primitive thinking, and why does the Council on Foreign Relations snap up these clowns? Wish I knew.

Quote of the Day: November 29, 2011

"This book is about the second half of that story, the demarche, and the political ideas—variously called conservative, reactionary, revanchist, counterrevolutionary—that grow out of and give rise to it. These ideas, which occupy the right side of the political spectrum, are forged in battle. They always have been, at least since they first emerged as formal ideologies during the French Revolution, battles between social groups rather than nations; roughly speaking, between those with more power and those with less…"

--Corey Robin, The Reactionary Mind : Conservatism from Edmund Burke to Sarah Palin

Can the Office of the Associate Vice Chancellor and Chief Information Officer Run an Information-Age Infrastructure System

Or should Berkeley be outsourcing it?

Vote! Vote! Vote!

Shelton Waggener, Associate VC - IST and Chief Information Officer (Campuswide)

I very much appreciate that it is unacceptable to have a core campus system like CalMail offline for any length of time. Today`s continued problems with CalMail have been particularly difficult for all involved. We work hard to design and operate systems that can handle the needs of our community and when we fail to meet that standard we bring in outside experts to help us improve. We have added additional outside experts from other campuses, vendors and new team members from the Berkeley technical community as we work through this crisis. This is our highest priority and will remain so until we have the environment fully stabilized. The following message provides current information. You can also check for the latest status.

Shel Waggener
Associate Vice Chancellor and CIO

CalMail Performance Issues
Date Submitted: Monday, November 28, 2011 – Tuesday, November 29, 2011
Outage Start/End Time: 1145 – TBD
Groups Impacted: CalMail

Description: UPDATE – Tuesday, November 29, 4:00PM: The web clients are currently available, but expect brief periods of unavailabilty due to heavy load.

As a way to help mitigate the load on the system until the new storage arrives, the decision has been made to only allow access to accounts via the web clients. Desktop email clients, as well as smartphones using their native email clients, will not be able to access CalMail.

Please go to the CalMail Home Page and use one of the web clients to access your account. Web and NotifyLink will be unaffected. This is only temporary, once the storage is in place, we will reopen access.

Tuesday, November 29, 2:00PM: Students interested in forwarding, please click here, you can set forwarding now.

Tuesday, November 29, 1:00pm: CalMail is down. The current problems are related to extremely heavy load combined with little available capacity on the current storage system. The result is constant timeout errors which ultimately add to the load problem. While Faculty and Staff mail must reside on a university email platform, when CalMail returns to service later this afternoon, we are recommending students who have external email addresses forward their CalMail accounts by going to the CalMail Home Page, click on Manage Your Account and login. You will see a link for Forwarding. Removing some of the student email and login volume will help reduce load and allow the CalMail system to catch up to its current backlog.

Tuesday, November 29, 10:30AM: CalMail is currently experiencing severe issues. Users cannot send or receive mail at this time. The IST calmail team is working on the issues and will update the page as information become available.

Tuesday, November 29, 7:00 AM: The IST Service Center has received reports that users are unable to access email using the web clients. The IST calmail team are investigating the problem.

Several backend servers are being throttled to avoid larger scale outages. Until the storage is completely replaced, staff will be managing server loads and expect there will be brief login and delayed delivery issues.

If you receive a login error, please retry later. If you are unsure of the status of Calmail, please check There is an exceptionally high load at this time due to outage over the weekend.

Econ 24-1: Readings for Final Week's Meeting

Twitterstorm delong: November 29, 2011

  • rortybomb Mike Konczal "Somebody owns that equity value right now. It's not the government." @Delong on Fed lending. 2 hours ago

  • PaulHRosenberg Paul Rosenberg MT @delong The U.C. Berkeley Faculty... ...condemns the over-reaction of police... 2 hours ago

  • Joe Weisenthal: The Rosetta Stone of the Sovereign Debt Crisis 4 hours ago

  • JustinWolfers Justin Wolfers What Do We Know About the Effects of Fiscal Policy? Christy Romer provides a very readable summary. Dig in. HT @delong 20 hours ago

  • @umairh @delong Come on guys, I'm unemployed and I'm living the life of my dreams! Don't got no cash, No girl, No problems. 21 hours ago

  • delong J. Bradford DeLong Juliet Eilperin: World on track for nearly 11-degree temperature rise, energy expert says - 5 minutes ago

  • DougHenwood Doug Henwood @ @alanbeattie Are the ECB and the German elite living on Planet Earth, or is there some rationality to their behavior we can't see? 42 minutes ago Retweeted by delong

  • alanbeattie Alan Beattie Regling: don't need a lot of EFSF leverage over next days and weeks. How long does he think Italy and Spain are going to last? 51 minutes ago Retweeted by delong

  • tanehisi Ta-Nehisi Coates Done with race and IQ. Actually stooping to defend the intellect of black people is a personal low. #badlook #neveragain 38 minutes ago Retweeted by delong

  • AdamSerwer AdamSerwer If you're not opposed to indefinite military detention of citizens, how can you claim with a straight face to support "limited government?". Constitution was written to limit arbitrary power. What could be MORE arbitrary than indefinite imprisonment on suspicion of a crime? Besides just offing people based on a conclusion reached by a secret unaccountable panel of course! 14 minutes ago Retweeted by delong

  • econjared Jared Bernstein Paul Krugman on why higher taxation on those at the top of the income scale must be part of any sustainable budget plan 5 hours ago Retweeted by delong

  • econjared Jared Bernstein Two important questions (and answers) about income inequality and economic growth via Piketty and Saez 6 hours ago Retweeted by delong

  • ThePlumLineGS Greg Sargent Whoa. Top financial firm says failure to extend payroll tax cut would lead to 1.5% drop in growth forecast: 6 hours ago Retweeted by delong

  • drgrist David Roberts 100 Twitter points to the one who combines pizza, Baptist ministry, infidelity & sexual harassment into the ultimate Herman Cain joke. 21 hours ago Retweeted by delong

  • digby56 digby It doesn't matter if they're certifiably nuts as long as they aren't hippies 19 hours ago Retweeted by delong

  • calculatedrisk Bill McBride NY Times: "Crisis in Europe Tightens Credit Across the Globe" 19 hours ago Retweeted by delong

Department of "Huh?!": Unclear on What Central Banks Are Department

I see that Benn Steil, a student of geoeconomics at the Maurice R. Greenberg Center for Geoeconomic Studies at the Council on Foreign Relations, is trying to scare his listeners into thinking that something very bad might happen because (i) the ECB is undercapitalized and (ii) the ECB is busy buying up the bonds of europeriphery sovereigns:

The Future of the Eurozone: The ECB only has 81 billion euros in capital. That could easily be wiped out with, say, just a 25 percent haircut in PIG debt -- Portugal, Ireland and Greece. That's it. Gone.

Now, a central bank can operate for a brief period without any capital. But eventually any central bank will have to tighten monetary policy at some point in the future. And in order to do that, they need assets to sell. And unless the market believes that the ECB is going to be credibly recapitalized, there will be a god-almighty run against the euro and it will, quite frankly, collapse.

That's not the same situation as the Feds in the United States. In fact, if you look at the Fed's reported capital, it's only $58 billion…. But nobody doubts that the U.S. government is ultimately going to stand behind the Fed. But investors do doubt that the German taxpayer is ultimately going to stand behind the ECB. And that's a big, big problem…


It is not.

A central bank--like the ECB--is a very, very different animal than a normal bank.

A normal bank needs capital to prevent runs precisely because its depositors can force it to shrink its balance sheet whenever they wish. Depositors can come to it and demand their money. It then needs to sell some of its assets in order to raise the cash to pay its depositors. And if assets are less than liabilities--if there is no capital--then depositors can see the endgame, and so they all rush to pull their money out because the last ones in the queue don't get anything. There is a run on the bank. The bank goes bankrupt. That is why a normal, commercial (or shadow) bank must be well-capitalized.

But, as economists have known for centuries, a central bank is different.

If you go to a central bank and say "I want to pull my money out", the central bank says "OK". It then prints up a number of banknotes. It then hands the banknotes to you. It doesn't need to sell assets to give you your money. All it needs to do is to transforms one of its liabilities--a reserve deposit--into another one of its liabilities--a bank note.

There is nothing anybody can do to force a central bank to shrink its balance sheet.

A central bank shrinks its balance sheet only when it wishes.

At the moment, if the ECB wanted (and if it could transact at accounting values), the ECB could shrink its liabilities--the monetary base of the eurozone--to zero and still have 81 billion euros of assets left over. (Of course, the ECB would never want to do that.)

Suppose that the ECB were to take a big haircut of 200 billion euros on its PIIGS asset holdings. What would that mean? Well, it would mean that the ECB could only shrink the eurozone monetary base down to 119 billion euros before it would have to stop. But there is no conceivable situation in which the ECB would ever want to shrink the eurozone monetary base that much. So taking losses on its PIIGS bonds is not, as Steil claims, a very worrisome thing. Taking losses on its PIIGS bonds is a nothingburger.

So why does Steil think it is a "big problem"?

I have no clue.

He says there will be a "god-almighty run against the euro and it will, quite frankly, collapse" but I have no idea what he could possibly mean...

I think it was in April 2009 that Christina Romer told me that the most astonishing thing about the situation was the number of people confidently pronouncing on issues they could not or had not thought through, and that she wished they would just sit down and be quiet, and then we would all be much better off...

The U.C. Berkeley Faculty...

…hereby condemns the over-reaction of police to demonstrations on our campus on November 9; formally alerts the Chancellor and those who report to him that this incident has greatly diminished confidence in the Campus’s leadership; calls upon the Chancellor to institute special training for police forces employed on campus to deal with acts of political expression and civil disobedience in the University and, more generally, to immediately implement the recommendations of the Police Review Board (The Brazil Report) as issued on June 14, 2010.

Whereas, The “right of the people peaceably to assemble” is enshrined in the First Amendment of the Constitution of the United States; Whereas, Section 9(a) of Article 9 of the California Constitution establishes that “the University of California constitutes a public trust”;

Whereas, Demonstrations consisting of both explicit and symbolic speech are a fundamental part of the public discourse in modern democracies and have been an important part of many social movements both nationally and internationally;

Whereas, Police violence against non-violent demonstrators on the Berkeley campus involving the use of batons, pepper spray, and direct physical force has caused personal injuries to students and faculty including broken bones; Whereas, Police violence against non-violent demonstrators has been consistently and repeatedly perpetrated over the last two years in at least five separate incidents on the Berkeley campus;

Whereas, The repeated incidents of police violence suggest that the Administration and the UCPD have adopted a policy of preemptive use of force against non-violent demonstrators who they anticipate may engage in acts of civil disobedience; and

Whereas, The Administration and UCPD appear to have not followed the recommendation of the June 14, 2010 Report of the Police Review Board (“Brazil report”) to clarify the proper lines of authority and their approach to non-violent civil disobedience on the Berkeley campus despite this confusion having been identified in the Report as a possible source of unnecessary violence;

Be it therefore RESOLVED, that:

  1. It is the sense of the faculty that the physical safety of campus community members (including police officers), and respect for their rights of political expression, dictate that police should not be deployed preemptively with riot weapons and tactics in response to non-violent demonstrations.
  2. The faculty calls upon the Administration to implement the recommendations of the June 14, 2010 Report of the Police Review Board (“Brazil report”).
  3. The faculty calls upon the Administration to immediately clarify the division of civilian and police authority over the response to campus demonstrations including requests for mutual aid to outside police forces.
  4. The faculty calls upon the Administration to make public the specific conditions under which it is prepared to authorize UCPD (as well as other forces operating under mutual aid) to use weapons and forceful tactics including, but not limited to, batons, pepper spray, tear gas, rubber bullets, tasers, flash-bang grenades, and pressure point grips, against demonstrators engaged in non-violent actions including linking arms and other forms of passive resistance to arrest.
  5. The faculty calls upon the Administration to announce that it will not authorize the use of such forceful tactics to prevent or preempt the formation of any assembly deemed unlawful that is composed in substantial part of students, faculty, or staff, and that remains non-violent.
  6. The faculty recommends that if a demonstration turns into an unlawful assembly (e.g., an occupation of a building) then the Administration should engage in dialogue, communication, and negotiation as the primary and preferred resolution approach.
  7. The faculty recommends that if and when arrests are deemed necessary to restore core university functions, the Administration not authorize the preemptive or disproportionate use of weapons and forceful tactics including, but not limited to, batons, pepper spray, tear gas, rubber bullets, tasers, flash-bang grenades, and pressure point grips.
  8. The faculty recommends that following any incident in which forcible methods were used, the Chancellor should convene a public meeting with a minimum of delay to explain the rationale of the decision to employ them.
  9. The Berkeley Division of the Academic Senate shall establish a Senate Committee on Demonstrations and Student Actions composed solely of faculty members to consult with the Administration, UCPD, and students.

Whereas, nonviolent political protest engages fundamental rights of free assembly and free speech, and

Whereas, the campus has established time, place, and manner guidelines by which it encourages such activities, and

Whereas, protesters may sometimes engage in political noncooperation which includes acts of civil disobedience – including the deliberate, open and peaceful violation of particular laws, decrees, regulations, and

Whereas, there is a clear chain of command ending with the Chancellor, which implements training and deployment of police to respond appropriately to protests, and

Whereas, campuses should exercise restraint in responding to peaceful protests and seek to resolve the situation through dialogue, and

Whereas, we are outraged by the brutal and dangerous police responses against members of the University community at UC Berkeley and other campuses,

Therefore be it Resolved that the Berkeley Division of the Academic Senate

  1. calls upon the Chancellor, EVCP, and Chief of Police to officially apologize to the campus community for the behavior of the UCPD on Nov. 9, 2011
  2. calls for immediate revision of policies and practices to minimize the danger of excessive use of force by the police, and to better train the police to employ nonviolent law enforcement that respects the rights of nonviolent protesters
  3. affirms its support for the right of free speech and peaceful protest by all members of the University community
  4. affirms its strong opposition to the State’s disinvestment in higher education, which is at the root of the student protests.

Whereas, Non-violent political protest engages fundamental rights of free assembly and free speech, and

Whereas, November 9th efforts by protestors to set up and remain in a temporary encampment near Sproul Hall constitutes non-violent political protest, and

Whereas, These non-violent actions were met with a brutal and dangerous police response (see, e.g., >>), a response authorized in advance as well as retroactively justified by Chancellor Birgeneau, Executive Vice Chancellor Breslauer and Vice Chancellor for Student Affairs LeGrande, and

Whereas, This is the third time in two years that such police violence has been unleashed upon protesters at Berkeley, with resulting bodily injuries to protestors, student and faculty outrage, a series of expensive lawsuits against the university, a tarnished university image, and a severely compromised climate for free expression on campus;

Therefore be it resolved that the Berkeley Division of the Academic Senate:

  1. Opposes all violent police responses to non-violent protest, whether that protest is lawful or not.
  2. Condemns the UC Berkeley administration’s authorization of violent responses to non- violent protests over the past two years.
  3. Demands that Chancellor Birgeneau, Executive Vice Chancellor Breslauer, and Vice Chancellor LeGrande take responsibility for and repudiate such policing as it occurred over the past two years.
  4. Demands that these administrators develop, follow and enforce university policy to respond non-violently to non-violent protests, to secure student welfare amidst these protests, and to minimize the deployment of force and foster free expression and assembly on campus.

Reinhardt Heydrich Liveblogs World War II: November 29, 1941

Invitation to Gruppenfuhrer Hoffman:

Head of the Security Police and SD
IV B 4 -3076/41g (1180)

Berlin SW 11, November 29, 1941
Prinz-Albrecht-Straße 8                                                         >Personal.


SS Gruppenführer Hoffmann, Race and Settlement Main Office


Dear Hoffman!

On July 31, 1941, the Reich Marshal of the Großdeutsches Reich commissioned me, together with other pertinent central agencies involved, to carry out all necessary preparations in regard to organizational, practical and material measures requisite for the total solution of the Jewish question in Europe, and to submit to him in the near future a general outline thereof. I am enclosing with my letter a photocopy of this order.

Considering the exceptional importance of these measures, and in order to reach a common greement on all aspects connected with this final solution among the central agencies concerned, I suggest that we make these problems a matter of joint discussion, especially because since October 15, 1941 Jews are already continuously being evacuated from the territory of the Reich, including the Protectorate of Bohemia and Moravia, to the East.

I therefore invite you to attend such a meeting, to be followed by breakfast, on December 9, 1941 at noon, at the office of the International Criminal Police Commission, Berlin, Am Kleinen Wannsee No. 16 Am Großen Wannsee Nr. 56/58. (Following to a tel. call of Sturmbannführer Günther on December 4, 1941 street changed.)

I have sent similar letters to Generalgouverneur Dr. Frank, Gauleiter Dr. Meyer, State Secretaries Stuckart, Dr. Schlegelberger, Gutterer and Neumann as well as Reichsamtsleiter Director Dr. Leibbrandt, Undersecretary Luther, SS-Obergruppenführer Krüger, SS-Gruppenführer Greifelt, SS-Oberführer Klopfer, and Permanent Secretary Kritzinger.

Heil Hitler!

Yours, Heydrich

Christina Romer on the One Thing That Disillusioned Her: The Fiscal Policy Debate

Christina Romer:

The one thing that has disillusioned me is the discussion of fiscal policy. Policymakers and far too many economists seem to be arguing from ideology rather than evidence…. [T]he evidence is stronger than it has ever been that fiscal policy matters—that fiscal stimulus helps the economy add jobs, and that reducing the budget deficit lowers growth at least in the near term. And yet, this evidence does not seem to be getting through to the legislative process.

That is unacceptable. We are never going to solve our problems if we can’t agree at least on the facts. Evidence-based policymaking is essential if we are ever going to triumph over this recession and deal with our long-run budget problems.

Charlie Stross on the Stupidity of the Publishing Companies

Charlie's Diary:

Cutting their own throats: Traditional publishing is dominated by the Big Six publishing groups…. The corporate drive for DRM is motivated by the fear of ebook piracy. But aside from piracy, the biggest ebook-related threat to the Big Six is called Until 2008, ebooks were a tiny market segment, under 1% and easily overlooked; but in 2009 ebook sales began to rise exponentially, and ebooks now account for over 20% of all fiction sales…. And Amazon have got 80% of the ebook retail market….

Amazon has ruthlessly used its near monopoly of online sales to exert monopsony buying pressure against suppliers, forcing the likes of Holtzbrinck or Penguin or Hachette to give them a deep discount on ebooks…. [T]he Big Six's pig-headed insistence on DRM on ebooks is handing Amazon a stick with which to beat them harder. DRM on ebooks gives Amazon a great tool for locking ebook customers into the Kindle platform. If you buy a book that you can only read on the Kindle, you're naturally going to be reluctant to move to other ebook platforms… and even more reluctant to buy ebooks from rival stores that use incompatible DRM….

As ebook sales mushroom, the Big Six's insistence on DRM has proven to be a hideous mistake. Rather than reducing piracy, it has locked customers in Amazon's walled garden, which in turn increases Amazon's leverage over publishers….

If the big six began selling ebooks without DRM, readers would at least be able to buy from other retailers and read their ebooks on whatever platform they wanted, thus eroding Amazon's monopoly position. But it's not clear that the folks in the boardrooms are agile enough to recognize the tar pit they've fallen into...

No, the Unemployed Are Not Happy

Karl Smith vivisects Casey Mulligan:

If the Safety Net is So Good Why Is the Economy So Bad?: Casey Mulligan says

One interpretation of these results is that the safety net did a great job: For every seven people who would have fallen into poverty, the social safety net caught six. Perhaps if the 2009 stimulus law had been a little bigger or a little more oriented to safety-net programs, all seven would have been caught. Another interpretation is that the safety net has taken away incentives and serves as a penalty for earning incomes above the poverty line. For every seven persons who let their market income fall below the poverty line, only one of them will have to bear the consequence of a poverty living standard. The other six will have a living standard above poverty… […] Of course, most people work hard despite a generous safety net, and 140 million people are still working today. But in a labor force as big as ours, it takes only a small fraction of people who react to a generous safety net by working less to create millions of unemployed. I suspect that employment cannot return to pre-recession levels until safety-net generosity does, too.

I assume – based on Casey’s general thesis – that his point here is that the expansion of the safety net is a major cause of the decline in employment. A core problem with this interpretation is that it models the decline as resulting from an expansion in individual budget constraints; now you can work less and avoid poverty were as before you couldn’t. Yet, an expansion of your budget constraint is an unambiguously good thing. If that’s the case the people are not not working because “the economy is bad”, they are not working because the economy is awesome.

Yet, they don’t talk and act like that. They talk and act as if something bad has happened; as if they are more afraid of their economic future than they were before; as if they are afraid to spend; as if they are afraid to quit their jobs.

Indeed, the quit data shows a sharp decline in quits associated with the recession. One would expect an expansion of the budget constraint to be associated with an increase in quits. It also knits in with an important point that can help economists stay grounded and not get lost on unproductive tangents: The economy is not bad because some statistics show anomalous patterns. The economy is bad because if you ask Joe on the street, how’s the economy, he will say, “it sucks.”…

If people are telling you that their current situation sucks that’s a strong clue that you should be looking for something reminiscent of a contraction of the choice space.

Why Oh Why Can't We Have a Better Press Corps?: Miguel Helft and Jessi Hempel of Fortune Edition

Daring Fireball:

‘A Tech Blog’: From a Fortune magazine cover story by Miguel Helft and Jessi Hempel:

Consider this: In October a tech blog reported that several top Google officials, including Eric Schmidt, the executive chairman, had not even set up their own accounts on Google+. A few days later Schmidt’s account quietly appeared on the site.

That would be Michael DeGusta, who reported this on his weblog The Understatement in early October. Fortune doesn’t credit DeGusta by name, refers to his website only as “a tech blog”, and doesn’t even have the courtesy to include a link. Shameless.

Henceforth, Fortune is “some business magazine”.

Twitterstorm delong: November 28, 2011

  • Felix Salmon on "Margin Call": Whom Are the Financial Oligarchs Exploiting? 11 hours ago Favorite Reply Delete

  • An xkcd Cartoon for Josh Barro Tonight 20 hours ago

  • EpicureanDeal Epicurean Dealmaker Um, I understand the outrage and all, but you realize that a Lender of Last Resort sometimes has to lend as a last resort, right? Also, 22 hours ago Retweeted by delong

  • davidcolburn David Colburn Gandhi, revised: First they ignore u, then they laugh at u, then they fight u, then u have internal feuds over tactics & process, then u win 24 Nov Retweeted by delong

  • MattZeitlin Matt Zeitlin People who whine about not teaching "Western Civilization" want it to be taught in a way, for any other culture, they would say was oh-so-PC 23 hours ago Retweeted by delong

  • digby56 digby RT @davidfrum: If Euro crashes, we spiral toward global depression.Not political story, and Americans must pay attention./#weluvblackfriday! 23 hours ago Retweeted by delong

  • tanehisi Ta-Nehisi Coates I moved out the hood and now have three farmer's markets nearby. Cats say the freshness of ingredients. The is beyond true. It's actually morally wrong how true this is. All carrots are not created equal. And for those who are tracking, Yes I have gone to full hipster snob mode. I put in my 35. I'm done with the hood. And black people. Except my son. And dude in the White House. Still waitin on that reparations... 27 Nov Retweeted by delong

  • phillipanderson phillip anderson Holy fuck. We suck. RT@thinkprogress: The average age of a homeless person in the United States is seven years old. 23 hours ago Retweeted by delong

  • FrankPasquale Frank Pasquale @ @ModeledBehavior @delong Gawker called it early: no chance of improvement here: time to ignore the Times 27 Nov Retweeted by delong

  • felixsalmon felix salmon Munchau: "the eurozone has 10 days at most": 27 Nov Retweeted by delong

  • Hilzoy on What Is Missing from Donald Kagan's Padded Cell 27 Nov

  • amy_vrwc Amy Miller @ When I start agreeing with @EricBoehlert on things...that's when you know things have really gone off the rails. #occupyButterball 27 Nov Retweeted by delong

  • Nouriel Nouriel Roubini It took 4 mths to convince core EZ parliaments to approve modified 440bn EFSF. How long - 1yr? - to have them vote a €1tr ESM, 2X original? 27 Nov Retweeted by delong

  • attackerman attackerman You can imagine the frustration that motivated Drezner to write this one. PS: I am an American liberal, and I... 27 Nov Retweeted by delong

TheStalwart Joseph Weisenthal RT @ReformedBroker: But let's not forget the classic version: 4 Simple Steps to Becoming a Billionaire 27 Nov

Wisdom and Liberty; or The Freedom of the Greeks

Matthew Yglesias:

Read my colleague Ian Milhiser for a rebuttal of Paul’s constitutional arguments. For my part, when I hear this stuff I think of my former professor, the late great libertarian political philosopher Robert Nozick who developed the notion (“demoktesis”) that democratic governance is a form of slavery. Nozick is a very smart guy and the position is rigorously argued. That said, regulated welfare state capitalism is clearly not actually the same as slavery. The fact that one can reach the conclusion that it is shows that there’s something deeply unsound with the Nozick-style view of property rights and highlights the extent to which libertarian ideology represents a departure from the values of classical liberals in whose work one finds no support for such a conclusion.

I do realize that philosophers gain street cred by erasing distinctions that exist and creating distinctions that don't, but it has never seemed to me that Nozick's game is one that wise people play.

We get our concepts of "freedom" and "slavery" from--surprise, surprise--the Classical Greeks. They saw full citizenship in a city-state--what we see as the powers, rights, and obligations of democratic governance--as the essence of freedom. It was the elimination of all of those pieces of citizenship that defined the state of slavery.

You can see this pretty much everywhere in the sources--my favorite place is in Herodotus's Histories, where Demaratus tells Xerxes that Persia will have a difficult time conquering Greece. Why? Because the Greeks are not slaves but free men, and will not easily submit and will fight hard. Why will they fight hard? Because they value being free and not being slaves very much. How will they be able to fight hard and so keep their freedom? Because free men are slaves to a particular master: the laws that the boulos and demos prescribe. Indeed, men who do not willingly become slaves to the law don't stay free men for long.

Instead, they become slaves to masters like Xerxes.

Men who are not slaves to the law prescribed by the processes of democratic governance as their master don't stay free men for very long. That is a paradoxical fact that is nevertheless woven into the original definition of "freedom"--and if you don't grasp that, you don't understand.

In the Histories, Xerxes does not understand what Demaratus is trying to tell him. That's one of Herodotus's big and ironic points.

Ironically, Nozick did not understand what Herodotus had to teach him either.

Quote of the Day: November 28, 2011

"No act of saving subtracts in the least from consumption, provided the thing saved be re-invested or restored to productive employment. On the contrary, it gives rise to a consumption perpetually renovated and recurring; whereas there is no repetition of an unproductive consumption."

--Jean-Baptiste Say, A Treatise on Political Economy

William Halsey Liveblogs World War II: November 28, 1941

William Halsey:

U.S.S. ENTERPRISE: Battle Order Number One: At Sea:

  1. The ENTERPRISE is now operating under war conditions.
  2. At any time, day or night, we must be ready for instant action.
  3. Hostile submarines may be encountered.
  4. The importance of every officer and man being specially alert and vigilant while on watch at his battle station must be fully realized by all hands.
  5. The failure of one man to carry out his assigned task promptly, particularly the lookouts, those manning the batteries, and all those on watch on the deck, might result in great loss of life and even loss of the ship.
  6. The Captain is confident all hands will prove equal to any emergency that may develop.
  7. It is part of the tradition of our Navy that, when put to the test, all hands keep cool, keep their heads, and FIGHT.
  8. Steady nerves and stout hearts are needed now.

Captain, U.S. Navy

Approved: November 28, 1941.
Vice Admiral, U.S. Navy,
Commander Aircraft, Battle Force

Furthermore, the briefing officers announced, the Marine pilots would not be returning to Hawaii that night, as many had expected. Instead, they were being transported to Wake Island, their new station.

The consternation of the men and officers was considerable. Commander William Buckner, Halsey's Operations Officer, confronted Halsey immediately after the briefing: "Goddammit, Admiral, you can't start a private war of your own!" "I'll take [responsibility]. If anything gets in the way, we'll shoot first and argue afterwards," replied Halsey.

Halsey's instructions were to get the Marine pilots and their planes to Wake Island in complete secrecy, and he was determined to take whatever steps were necessary to accomplish the mission. This included destroying any snoopers detected by the force, before they could raise alarm. Having verified that no Allied shipping was expected on his course, Halsey assumed that if any vessels were encountered, they'd probably be Japanese, and they'd probably have hostile intentions. (Though none of the American commanders were aware of this, by 28 November, a powerful Japanese striking force had been at sea for two days, steaming east towards a point well north of Pearl Harbor.) The only chance his small force would have of defending itself, or alerting Pacific Fleet headquarters, would be to seize the initiative and attack before being attacked.

Felix Salmon on "Margin Call": Whom Are the Financial Oligarchs Exploiting?

Felix Salmon wonders:

The lessons of “Margin Call”: I don’t believe that Wall Street is meaningfully improving the lives of the 1%, except insofar as Wall Streeters are the 1%. (Remember that financial professionals make up only 14% of the top 1%, and 18% of the top 0.1%. They’re a large chunk, but by no means the majority.)… I suspect that the top 1%, if anything, are responsible for a disproportionate share of Wall Street’s income. Wall Street isn’t picking the pockets of the 99% and giving the proceeds to the 1%: it’s picking the pockets of the 1% and giving the proceeds to itself. And Wall Street is taking a whole bunch of money from the 99%, too. But for the 86% of the top 1% who don’t work in finance, I really don’t believe for a minute that Wall Street is helping them out by giving them the hard-earned money of the 99%.

I also don’t believe in some halcyon era when Wall Street was “an economic helpmate” to the 99%. It has always been very good at extracting rents, and very bad at creating wealth for its clients….

There are wealthy families who have managed to preserve and grow their wealth over many centuries — Italy and Germany both have quite a few of them, the ultimate Black Swan that was World War II notwithstanding. Those families tend to have a lot of real property: income-producing land, if you’re growing things like grapes or trees, is an amazing long-term asset, since the main rents you’re extracting come directly from the Sun. By contrast, the rich families who hire Goldman Sachs to look after their money and end up invested in Global Alpha or pre-IPO Facebook shares tend to be much newer money. They made it quickly, and they’ll probably lose it quite quickly too — it could quite easily all be gone within two or three generations.

This is one of the reasons why I’m less of a fan of Margin Call than Bernstein is. Where he sees “a running joke” that the big bosses don’t understand the nitty-gritty of finance and say things like “just speak to me in English”, I see a clumsy attempt at providing a bit of exegesis for the audience. Where he sees “ultimate irony” in Demi Moore’s defenestration, I see a risk manager who signed off on ever-riskier trades getting her just desserts. And where he sees the bank as an “economic predator”, I see it as a victim of its own greed. Yes, it causes considerable damage outside its own walls in its decision to conduct a fire sale of its toxic assets. But the alternative was for the bank to fail, and then, as we saw with Lehman Brothers, the damage caused would have been greater still….

[T]here was no bailout in this movie; indeed, there weren’t even any regulators. When the bank loses lots of money, it just keeps on going…. It’s a magical world where an insolvent bank can realize enormous losses and stay alive under exactly the same management and ownership. You have a mini-breakdown, you bury your dead dog, and you go back to your extremely well-paid job. In the real world, by contrast, Wall Street eats alive any bank which shows the slightest sign of weakness or potential insolvency…. When a bank makes an error of this magnitude, it dies — and the aftershocks, for the rest of us, are severe. Margin Call let the bank off easy — and America’s taxpayers, too.

The Wages of AFDC Repeal Is Children Living in Cars

CBS News:

Hard Times Generation: Families living in cars: More than 16 million children are now living in poverty and, for many of them, a proper home is elusive. Some cash-strapped families stay with relatives; others move into motels or homeless shelters. But, as Scott Pelley reports, sometimes those options run out, leaving an even more desperate choice: living in their cars. 60 Minutes returns to Florida, home to one third of America's homeless families, to find out what life is like for the epidemic's youngest survivors…

An epidemic of extreme poverty among American children was a predictable consequence of the AFDC repeal that Newt Gingrich designed and Bill Clinton signed in 1996.

One thing that makes me immensely proud to have worked for Alicia Munnell is that she held up Clinton's "ending of welfare as we know it" for months in 1995-6...

Hoisted from Comments: Hilzoy on What Is Missing from Donald Kagan's Padded Cell


And another thing...

[Donald Kagan wrote:]

The study of Western civilization, which dominated American education after World War II, has long been under attack, and is increasingly hard to find in our schools and colleges.

Really? "Hard to find"? In my philosophy department alone, we're teaching five courses in some aspect of the history of western civilization. I don't know for sure, but I'd bet that most history departments teach some European/N. American history, politics departments teach some European/N. American government, and I'm pretty sure departments like Romance Languages and German and English cover the odd snippet of Western culture. I even manage to teach courses like Enlightenment Moral and Political Theory without being hunted down by whoever it is that Prof. Kagan thinks is trying to force me to spend all my time denigrating it.

If Kagan can't manage to locate courses in Western civ at Yale -- a college where they have regularly scheduled courses in Old Church Slavonic, for heaven's sake -- the only possible explanation is that they don't teach them in his padded cell.

(On the other hand, back in 1977-81, when I was at Princeton, I remember looking for a decent introduction to Indian history and/or culture, and coming up empty. A whole subcontinent seemed to have gone missing from the curriculum.)

Twitterstorm delong: November 27, 2011

  • rote_fahne Mark RT @delong: Union Bosses Endorse Newt Gingrich! an amusing level of cluelessness in the twitterverse 3 hours ago

  • FrankPasquale Frank Pasquale @ @ModeledBehavior @delong Gawker called it early: no chance of improvement here: time to ignore the Times 4 hours ago

  • TheStalwart Joseph Weisenthal @ @felixsalmon @delong Yea, I've never understood the premise of journalists picking stocks. 5 hours ago

  • newspyre newspyre Thinking the unthinkable on a euro break-up rt @delong: #LOL @ Neil Sedaka quote. 6 hours ago

  • SMKPoliticus Sean M. Kelly @ @delong Astonished Merkel might allow #ECB to act aggressively, Sarkozy gestures to confirm he has not misheard. #euro 23 hours ago

  • hughsansom Hugh Sansom v @delong RT @zunguzungu: "A few violent shoppers are going to discredit the entire shopping movement." Wish I'd made that up. 26 Nov

  • yorksranter Alex Harrowell John Naughton is ignorant! Unaware that cars have had electronic engine management since 1980s or that petrolheads hack them ever since 39 minutes ago Retweeted by delong

  • Paul Krugman: Sweden Is Not in the Eurozone and Is Fine; Finland Is in the Eurozone and Is Not 3 hours ago

  • cstross Charles Stross Have just wasted two hours reading about super-heavy tank designs, like the 1000 ton Landkreuzer P.1000 Ratte 5 hours ago Retweeted by delong

  • Paul Starr: Remedy and Reaction: The Peculiar American Struggle over Health Care 5 hours ago

  • ModeledBehavior Modeled Behavior My mind angrily screams "WHAT IS THE POINT OF THIS?!?". Can u imagine forwarding a Bruni op-ed to a friend and saying "Wow, read this"? 5 hours ago Retweeted by delong

  • beat_the_press Dean Baker RT @jschmittwdc It takes a village to raise Casey Mulligan. Shawn Fremstad's turn to babysit. 6 hours ago Retweeted by delong

  • EricBoehlert Eric Boehlert interesting that in all the Newt media chatter v. little discussion if he's nominee, Obama wins 35-40 states; #wrongnarrative #tcot 7 hours ago Retweeted by delong

  • zunguzungu Aaron Bady @ @ggreenwald "Greenwald is correct, but why does he have to be so angry/abrasive/confrontational," etc @meemeemoomoo 7 hours ago Retweeted by delong

  • delong J. Bradford DeLong A Stray Thought or Two on Banking Recapitalization 10 hours ago

  • SuzyKhimm Suzy Khimm Also: my twitter app autocorrects "tweeps" to "twerps." #autosarcasm 19 hours ago Retweeted by delong

  • EconOfContempt EconOfContempt Bill Clinton says GOP primary environment "basically means you can't be authentic unless you've got a single-digit IQ" 20 hours ago Retweeted by delong

  • delong J. Bradford DeLong @ @ModeledBehavior Kind of a silly question. Tax deductibility (i) reduces cost (ii) if and only if you pool. Pooling is generally good. Price below marginal cost generally bad. Have to weigh one against the other. If no mandate, not an unreasonable policy. 21 hours ago

  • jbarro Josh Barro "I'm calling you a sinner, but not in a discriminating or harassing way." God, I'm glad I live near the coast. 26 Nov Retweeted by delong

  • RyanLizza Ryan Lizza RT @Channel11News: Tonight at 11: We'll talk 2 woman who was attacked w/waffle iron while trying 2 buy discount pepper spray on #blackfriday 26 Nov Retweeted by delong

  • zunguzungu Aaron Bady The trouble with conspiracies is that they create paper trails. Better to create a police culture where orders never need to be given. 26 Nov Favorite Undo Retweet Reply Retweeted by delong

Paul Krugman: Sweden Is Not in the Eurozone and Is Fine; Finland Is in the Eurozone and Is Not


The Euro Curse: Joe Weisenthal has a smart post comparing Sweden and Finland… solid… fiscally are in good shape. But where Swedish bond yields have been plummeting, Finnish yields have risen… the penalty Finland is paying for being part of the euro and lacking a lender of last resort….

I think it’s interesting that Finland and Sweden started to diverge back in April. What happened then? Ah, yes — the ECB started raising rates. And as Rebecca Wilder points out, that’s precisely when euro bond spreads began their upward march, culminating in the current crisis. By itself, that rate hike — although it was obviously, obviously a big mistake — should not have mattered that much. But maybe it acted as a signal of the ECB’s bloody-mindedness, and that’s what set off the panic.

If that’s what happened, then the ECB’s hard-money madness may have destroyed the euro.

Ten Days to Save the Eurozone?

Or so Wolfgang Münchau says:

The eurozone really has only days to avoid collapse: In virtually all the debates about the eurozone I have been engaged in, someone usually makes the point that it is only when things get bad enough, the politicians finally act – eurobond, debt monetisation, quantitative easing, whatever. I am not so sure. The argument ignores the problem of acute collective action. Last week, the crisis reached a new qualitative stage. With the spectacular flop of the German bond auction and the alarming rise in short-term rates in Spain and Italy, the government bond market across the eurozone has ceased to function.

The banking sector, too, is broken. Important parts of the eurozone economy are cut off from credit. The eurozone is now subject to a run by global investors, and a quiet bank run among its citizens. This massive erosion of trust has also destroyed the main plank of the rescue strategy. The European Financial Stability Facility derives its firepower from the guarantees of its shareholders. As the crisis has spread to France, Belgium, the Netherlands and Austria, the EFSF itself is affected by the contagious spread of the disease. Unless something very drastic happens, the eurozone could break up very soon.

Technically, one can solve the problem even now, but the options are becoming more limited. The eurozone needs to take three decisions very shortly, with very little potential for the usual fudges. First, the European Central Bank must agree a backstop of some kind…. The second measure is a firm timetable for a eurozone bond…. The third decision is a fiscal union. This would involve a partial loss of national sovereignty, and the creation of a credible institutional framework to deal with fiscal policy….

I am hearing that there are exploratory talks about a compromise package comprising those three elements. If the European summit could reach a deal on December 9, its next scheduled meeting, the eurozone will survive. If not, it risks a violent collapse. Even then, there is still a risk of a long recession, possibly a depression….

I cannot quite see how the German chancellor is going to extricate herself from these self-inflicted constraints….

I have yet to be convinced that the European Council is capable of reaching such a substantive agreement given its past record. Of course, it will agree on something and sell it as a comprehensive package. It always does. But the halt-life of these fake packages has been getting shorter. After the last summit, the financial markets’ enthusiasm over the ludicrous idea of a leveraged EFSF evaporated after less than 48 hours. Italy’s disastrous bond auction on Friday tells us time is running out. The eurozone has 10 days at most.

Liveblogging World War II: November 27, 1941

From U.S. Navy Headquarters:

FROM: Chief of Naval Operations


INFO: Cinclant, Spenavo


This dispatch is to be considered a war warning. Negotiations with Japan looking toward stabilization of conditions in the Pacific have ceased and an aggressive move by Japan is expected within the next few days. The number and equipment of Japanese troops and the organization of naval task forces indicates an amphibious expedition against either the Philippines, Thai or Kra Peninsula or possibly Borneo. Execute an appropriate defensive deployment preparatory to carrying out the tasks assigned in WPL 46. Inform district and Army authorities. A similar warning is being sent by War Department.

Spenavo inform British. Continental districts Guam, Samoa directed take appropriate measures against sabotage.

Copy to WPD, War Dept.

Quote of the Day: November 27, 2011

"The institutions of our social life underpin the trust we place in strangers. If sometimes that trust is misplaced it is because these institutions, most of the time, do a job so extraordinary that we have quite forgotten what a miracle it is that we ever trust strangers at all. Trusting strangers is, to put it simply, a most unnatural thing for us to do."

--Paul Seabright, The Company of Strangers: A Natural History of Economic Life

Tomorrow's UC Berkeley Faculty Meeting

Michael O'Hare:

Occupy UC « The Reality-Based Community: On Monday, the Berkeley faculty will have a special meeting to consider several resolutions condemning the police behavior at the Nov. 9 Occupy Cal demonstration, and another resolution that says in part:

Therefore be it Resolved that the Berkeley Division of the Academic Senate has lost confidence in the ability of Chancellor Birgeneau, EVC Breslauer and VC LeGrande to respond appropriately to non-violent campus protests, to secure student welfare amidst these protests, to minimize the deployment of force and to respect freedom of speech and assembly on the Berkeley campus.

This is going to be a complicated, awkward (not that that’s a fatal flaw) exercise that will probably not clarify much for anyone.  In the first place, the “Berkeley Division of the Academic Senate” is not a representative body but a committee of the whole 2000-odd of us, and its meetings are rarely attended by more than 100. Obviously it meets in a dense cloud of selection bias that obscures its legitimacy, so its resolutions and actions don’t seem to be taken very seriously by the campus authorities, who can easily say, “well, that’s what several dozen malcontents think, end of story”.  In the second place, the motion uses very strong language. Despite having signed the call for the meeting, mainly because I think this stuff desperately needs to be discussed, I’m not sure I’ve lost confidence precisely in the leadership’s ability to protect protesters from beating and chemical assault.

Admittedly, it’s hard to reconcile the chancellor’s public words from two years ago on the occasion of excessive police force at the Wheeler Hall occupation

Any tactics to exercise crowd control on campus must provide a safe platform for expression of free speech and freedom of assembly and we expect that, as a result of this review, modifications will be made. We must strive to ensure that there is no possibility in the future of the alleged actions of police brutality and that our actions are guided by non-violence.

with what happened three weeks ago, but probably the latest quite broad outrage and criticism have got their attention and they will not make that mistake (whether of omission or commission doesn’t matter too much) again.

But that’s not the big mistake, outrageous as it was. Another reason the meeting and the resolution are somewhat off-target is the blurring of different issues in the protests themselves. At Cal, public action has been pretty specifically directed at the chancellor, president, and regents, demanding increased state funding for higher education and reducing student fees (as though any of them had money to give out).  I regret this focus, because it looks self-serving and narrow; if tuition at Berkeley dropped to zero, (i) the students would still be facing terrible trouble because their state political machinery is broken, they will have trouble getting jobs and keeping them, and we have run out of tricks with which to pretend it isn’t necessary to pay for essential state services (like schools for their kids) (ii) the majority of the population not lucky enough to go to college at any price are already much worse off than they are.

In any case, the chancellor and president have been vocal (though ineffectual – probably inevitably) advocates for restoring state funding for higher education, and while I don’t have a good sense of the President Yudof’s personality either way, I believe Birgeneau to be a decent person who genuinely believes in educational access for everyone, in social and economic mobility generally, and also in not breaking his students’ and faculty’s ribs or dragging them on the ground by the hair.

The Occupy Cal protests, however, are part of a larger movement directed at the unconscionable increase in US economic inequality over the last thirty years and a widespread perception that the 1% who have been scooping up everything in sight have not contributed social value to society in any way proportional to the loot they have been collecting.  Income is supposed to reflect the value you create; Steve Jobs made a lot of people a lot better off in many ways, but what the financial sector’s big winners have done for us is, um, less clear. The big mistake is that campus (and university) leadership is a day late and a dollar short on the disintegration of the American economic and political systems.

Leadership is supposed to shape, direct, clarify, and empower a group’s values, and to represent those values to the larger environment (and to the group).  In the end, what I don’t have confidence in is our current leadership’s ability to do is any of that on the larger issues.  I brought this up with my public policy students in one course, mentioning that in 1986, Berkeley had divested itself of South African investments, manifesting and implementing (not just stating) an institutional position against apartheid.  I asked if they wanted the president or chancellor to represent, in their name,  that UC Berkeley is against endlessly increasing income inequality in America.  I was surprised to learn that their support for this idea was tepid at best, mainly (I think) because they sense a slippery slope of public university officials taking positions on all sorts of things without a real mandate.  And of course we have no machinery by which to unambiguously give such a mandate; it’s not even possible to email everyone on campus, the faculty senate is a noisy channel, and student government…well, the less said about its political efficacy the better.

As I rarely do, I think my students (at least this sample) are wrong.  I fault Birgeneau for being both invisible to the troops except as a source of inept spam emails, and the author of managerial choices that are incomprehensible to me, dithering around the edges of the crises rather than doing consequential things.  Why hasn’t he had a big meeting in the Greek Theatre of students and faculty to make some noise about the economic and political crisis in the state and nation, and put duties and tasks before us; if not us, who? Why hasn’t his discourse on police violence here been a real cry of rage that his instructions from 2009 were ignored, backed up with rolling heads and visits to the injured students?  Why isn’t he out walking around during demonstrations, getting between the cops and student bodies and putting good quotes on TV news?  There’s a lot of energy being released diffusely, and he should be the one directing it usefully. Afraid the regents will fire him? There are a lot worse things to lose than your job.

The crisis we’re enduring, like any crisis, is the occasion for a real leader to focus attention and break some habits and bonds of tradition, even at the cost of some collateral crockery. That’s not happening: instead (for example, my own hobbyhorse) of setting up a real quality assurance program that would reach every session of every course so we could show the public we’re going to overdeliver the learning the state has traditionally paid us to provide, he fired the Vice-Provost for Teaching and Learning, rolled her functions into another administrator’s very large portfolio, and hired a consulting firm to cut administrative costs. Instead of bringing the intercollegiate athletics program to heel as though it reported to him, and stanching $12m a year of bleeding, he’s allowing us to be saddled with a half-billion dollar debt for an over-the-top stadium upgrade and a conditioning center/coaching office palace/booster party venue that will crush us financially.

I will probably vote for the resolution, even though it’s not exactly what I want to say and despite my discomfort making such a strong statement against someone whose heart is in the right place. But Birgeneau is way over his head in his job, served by inadequate lieutenants, or both. Some kind of wakeup call is in order, and this is the motion on the table.

The 1994 New York Times Newt Gingrich Profile

NYT Magazine:

Gingrich's Life: The Complications and Ideals: His wife, who had started treatments for uterine cancer in 1978, underwent surgery in 1980. A day after the operation, Mr. Gingrich came to the hospital. Since they had already separated, he called her room to see if he could come up. Once there, according to friends who knew them both, he began talking about the terms of the divorce. She has said she threw him out of the room. In a few months they were divorced, and in 1981 he married his current wife, Marianne. Jackie Gingrich, who still teaches high school math, declined to be interviewed for this article.

A few weeks before Mr. Gingrich filed for divorce, he called his political aide and friend Mr. Carter to talk about his marriage. Mr. Carter said he and other friends had been worried that the marriage was falling apart. Mr. Gingrich told him why he wanted a divorce. "He said: 'She's not young enough or pretty enough to be the wife of a President. And besides, she has cancer.' It sounds harsh and hokey, but anyone who knows him knows it's perfectly consistent with the kinds of things he says."

Mr. Gingrich has adamantly denied saying any such thing. His supporters dismiss Mr. Carter as a disgruntled former aide who was miffed at not being asked to accompany Mr. Gingrich when he moved to Washington...

A Stray Thought or Two on Banking Recapitalization

Felix Salmon has fun with Mohamed El-Erian:

Europe’s insoluble problems: Mohamed El-Erian is calling for massive recapitalization of the banking system:

The global financial system is being refined “day in and day out,” El-Erian said, and as a result the balance between public and private is shifting and regulation is altering. “This is not being done according to some master plan,” but in reaction to a series of crisis management interventions. None of these piecemeal policy moves restored confidence in the markets, he said. What is needed is a coordinated and simultaneous set of policy actions globally in four areas: restoration of credit markets, elimination of deteriorating assets from balance sheets, injecting capital quickly into the banking system, and regulatory forbearance.

Oh, wait, that was El-Erian back in October 2008. But he’s saying something very similar now:

In addition to specifying higher prudential capital ratios, governments must now bully banks to act immediately. Where private funding is not forthcoming, which should now be the presumption for a growing number of banks, recapitalization must be imposed, in return for fundamental changes in the way financial institutions operate and burdens are shared.

The main difference, here, is the move from “regulatory forbearance” the first time around, to governments forcing “fundamental changes in the way financial institutions operate” today. But either way, this is basically, the bank-nationalization debate all over again. In the U.S., we didn’t nationalize in 2009. We ended up taking only modest stakes in banks, and getting through the crisis through the massive application of liquidity by the Fed. If the central bank, as lender of last resort, ensures that banks will always be funded, then you don’t need nationalization. It’s a bailout by monetary rather than fiscal means, and it’s a lot friendlier to bank shareholders than nationalization is.

But the problem in Europe is that the ECB is displaying neither the willingness nor the ability to act as a lender of last resort — and in that situation, the only policy action left is for governments to step in and try to backstop the banking system directly. This is a very dangerous road to travel down…. So color me unconvinced that the solution to a liquidity crisis is an injection of capital. At best it’s insufficient; at worst it’s unnecessary, and only serves to exacerbate the painful process of deleveraging in a pretty drastic manner. After all, liquidity problems can hit anybody, no matter how solvent they are — just ask the German government. The Bund auction failed in large part because the European liquidity-go-round is utterly broken right now, and it’s hard to see how things would improve if Europe’s sovereigns, including Germany, started getting into the banking business.

The idea behind sovereign recapitalizations is our old friend Anstaltslast — the idea that if a bank is owned by the state, then there’s an implicit government guarantee on its liabilities. If Europe’s sovereigns started taking substantial equity stakes in their own banks, then there would be fewer worries over bank solvency: it’s almost impossible for a bank to go bust if the sovereign really doesn’t want it to. But in the context of serious worries over sovereign solvency, this tack doesn’t make a lot of sense. Once you’ve nationalized, there’s no real end to the degree to which you might end up being on the hook for the banks you now own: you can’t credibly claim that the banks you own are now so well capitalized that they’ll never need any more money. And in this case, of course, the worries over European bank solvency are worries over European sovereign solvency. You can’t tie these two rocks together, through nationalization, and expect them to float…

One thing that Felix misses, I think, is that liquidity crises and their cousins are always relative phenomena: people don't want to hold X in their portfolio because they want to hold the safer Y. But there is some financial asset Y that is the safest financial asset in the world--and whoever issues the Y can solve the liquidity crisis by flooding the zone, if they desire.

At the moment, it is pretty clear that the issuers of the ultimate Y is the U.S. Treasury and the U.S. Federal Reserves--with Japan and Germany close seconds and thirds. They can, collectively, solve our problems with very little substantive pain anywhere--if they wish.

The "you can't tie two rocks together and expect them to float" sounds good, but misses most of what is going on--for there is always something that is not a rock but rather helium.

Another thing that Felix misses is that gradual-bank-recapitalization-through-monetary-forebearance gives banks enormous incentives to rebalance themselves by shrinking their asset bases. And the rest of us would really rather that they rebalanced themselves without cutting back on the loans they make.

Noah Smith Takes Niall Ferguson to School: The Real Meaning of "Western Civilization" Department

This is a thing of beauty:

Noah Smith: Noahpinion: Niall Ferguson does not know what "Western Civilization" means:

"The blood of Numenor is all but spent, its pride and dignity forgotten." - Elrond

Ferguson warns darkly of a rapid collapse of American civilization… there is a deeply disturbing subtext that annoyed me so much that...well, here, I'll just let you see for yourself.

First, Ferguson's thesis:

I believe it’s time to ask how close the United States is to the “Oh sh*t!” moment—the moment we suddenly crash downward…. The West first surged ahead of the Rest after about 1500 thanks to a series of institutional innovations that I call the “killer applications”…. For hundreds of years, these killer apps were essentially monopolized by Europeans and their cousins who settled in North America and Australasia. They are the best explanation for what economic historians call “the great divergence”: the astonishing gap that arose between Western standards of living and those in the rest of the world…. Beginning with Japan, however, one non-Western society after another has worked out that these apps can be downloaded and installed in non-Western operating systems...

Now, before I move on to the really annoying part of Ferguson's article, this talk of "non-Western operating systems" has already rankled. What the heck is the "operating system" of a society? What inherent quality of "Western-ness" does Ferguson imagine Japan fundamentally lacks, such that even though Japan has representative democracy, property rights, competitive capitalism, work ethic, science, and medicine, the Land of the Rising Sun is still running on a "non-Western operating system"? Is it Christianity? But then South Korea would be "Western," since it is majority Christian (and far more religious than, say, France). And Ferguson cites Korea as a "non-Western" civilization in his very next paragraph (which I'll get to in a moment)…. I think you see what I'm getting at, and just to drive it home, here's Ferguson's next paragraph:

Ask yourself: who’s got the work ethic now? The average South Korean works about 39 percent more hours per week than the average American. The school year in South Korea is 220 days long, compared with 180 days here. And you don’t have to spend too long at any major U.S. university to know which students really drive themselves: the Asians and Asian-Americans.

So a sign that American civilization is in decline is that... Asian-Americans study hard?

Labeling Asian Americans as "non-Western" gives away the game completely. By "Western," Niall Ferguson… is referring to a set of people… "white people." Asian Americans may have American passports, Ferguson thinks, but civilizationally speaking they are permanent foreigners. This interpretation is pretty much confirmed a couple paragraphs later: Social scientist Charles Murray calls for a “civic great awakening”—a return to the original values of the American republic. He’s got a point.

When you admit to taking your cues from America's most prominent academic racist, you've pretty much laid your cards on the table.

This makes me sick, and not just because of the racism. It's because Ferguson's offhand exclusion of non-whites from the "Western" world is, in fact, what I believe to be the biggest threat to our civilization.

You see, I believe that the United States of America has another "killer app"… meritocratic diversity. Where other countries cling to blood-and-soil tribalism, America absorbs and employs the energy and talent of a vast array of peoples…..

Imagine if this were 1911, and Ferguson had instead lamented: "And you don’t have to spend too long at any major U.S. university to know which students really drive themselves: the Jewish-Americans." He might have held this up as a harbinger of Western decline…. Niall Ferguson pines for the days of Anglo-Saxon empire, but in fact, many historians believe that race-blind meritocracy is the key to all successful hegemons…. The biggest threat facing American civilization now is not loss of work ethic…. Nor is it insufficient consumerism (believe you me), the abandonment of modern medicine, the end of rule of law, creeping monopolies, or the abandonment of science. It is political dysfunction and distrust of our national institutions, brought on by the refusal of a large bloc of white Americans (the "Tea Party" etc.) to accept nonwhite Americans. The very denial of "Western-ness" to nonwhite Americans is what is threatening the West. Articles like Ferguson's, in other words, are part of the problem….

Basically, this is one of the laziest, sloppiest, most pernicious columns that I have ever read. I am simply physically, biologically incapable of sticking to my self-enforced blogging hiatus when something this awful crosses my screen.

Twitterstorm delong: November 26, 2011

  • jbarro Josh Barro "I'm calling you a sinner, but not in a discriminating or harassing way." God, I'm glad I live near the coast. 25 minutes ago Retweeted by delong

  • RyanLizza Ryan Lizza RT @Channel11News: Tonight at 11: We'll talk 2 woman who was attacked w/waffle iron while trying 2 buy discount pepper spray on #blackfriday 16 minutes ago Retweeted by delong

  • zunguzungu Aaron Bady The trouble with conspiracies is that they create paper trails. Better to create a police culture where orders never need to be given. 14 minutes ago Retweeted by delong

  • zunguzungu Aaron Bady By the way, this barrage of tweeting comes to you courtesy of my new macbook, which has two things my old computer lacked: 13 minutes ago Retweeted by delong

  • zunguzungu Aaron Bady a battery that could go for more than ten minutes and a functional wireless card. Also Thile/Ma/Duncan/Mayer's "Goat Rodeo Sessions." 12 minutes ago Retweeted by delong

  • delong J. Bradford DeLong Where Does Richard Tol's Claim That Tokyo Today Is 16 Feet Lower Relative To Sea Level Than It Was in 1900 Comes From? 1 hour ago

  • delong J. Bradford DeLong Over on the Crooked Timber Comments, Richard Tol Nominates Himself for This Year's Stupidest Known Animal Award 1 hour ago

  • TPC: Income Tax Paid at Each Tax Rate, 1958-2009 hour ago

  • emptywheel emptywheel RT @jaketapper: Helluva day the president picked to buy Ahmed Rashid's Descent into Chaos... 2 hours ago Retweeted by delong

  • delong J. Bradford DeLong #occupyzunguzungu 1 hour ago

  • delong J. Bradford DeLong @ @DougHenwood @moetkacik Say, rather, that Bernanke steps that would compensate for SFT are the fiscal policy that dare not speak its name 2 hours ago

  • delong J. Bradford DeLong @ @DougHenwood @moetkacik Not $2T! $3T! But Jan Hatzius wants them to take it to $5T and change the target. Bernanke not going to do that 2 hours ago

  • JustinWolfers Justin Wolfers I'm certain I am. Well, not certain, but pretty sure. RT @bakadesuyo: Are you dangerously overconfident? 4 hours ago Retweeted by delong

  • digby56 digby MT @tbogg: @meYou know, Newt didn't have to use a teleprompter to tell his wife he was leaving her when she was in the hospital with cancer. 3 hours ago Retweeted by delong

  • The legend of Joe's Taco Lounge 4 hours ago

  • David Frum: When Did the GOP Lose Touch With Reality? 5 hours ago

  • delong J. Bradford DeLong Leon Trotsky (1931): Against National Communism! 5 hours ago

  • thegarance Garance Franke-Ruta The only part of this 1979 living room of the future missing today is the domestic robot w drinks: 6 hours ago Retweeted by delong

  • U.C. Davis Lt. Pike Pepperspray Blogging 7 hours ago

  • Macy's Thanksgiving Day Parade, 1932

  • tomtomorrow Tom Tomorrow If you are just getting in from an evening of drinking, please be sure to unburden your soul on twitter before bed. What could go wrong? 13 hours ago Retweeted by delong

  • hblodget Henry Blodget RT @JBennet: Yes, I did just persuade our son to come to dinner by saying, 'Your book can charge while we're eating.' 23 hours ago Retweeted by delong

  • sidewalkperspec Chris MT @delong: You Could Write an Entire Washington Post Article Quoting People Who Are Lying without Telling Your Readers

Department of "Huh?!": "Benevolent" Colonial Officials Department

I must say it is unclear where Donald Kagan spends his time. It certainly isn't on the Yale campus, talking to students and faculty.

Donald Kagan:

Civilization - The West and the Rest - By Niall Ferguson - Book Review: This is a difficult time in which to present an account — and what amounts to a defense — of the West’s rise to pre-eminence and its unequaled influence in shaping the world today. The West is on the defensive, challenged economically by the ascent of China and politically and militarily by a wave of Islamist hatred. Perhaps as great a challenge is internal. The study of Western civilization, which dominated American education after World War II, has long been under attack, and is increasingly hard to find in our schools and colleges. When it is treated at all, the West is maligned because of its history of slavery and imperialism, an alleged addiction to war and its exclusion of women and nonwhites from its rights and privileges….

Kagan goes on:

Niall Ferguson thinks otherwise. A professor at both Harvard University and the Harvard Business School…. [He] decides that in comparison with other civilizations, the better side “came out on top.” Many of the observations in “Civilization: The West and the Rest” will not win Ferguson friends among the fashionable in today’s academy…. Ferguson is so unfashionable as to speak in defense of imperialism: “It is a truth almost universally acknowledged in the schools and colleges of the Western world that imperialism is the root cause of nearly every modern problem… a convenient alibi for rapacious dictators like Zimbabwe’s Robert Mugabe.” Contradicting historians who “represent colonial officials as morally equivalent to Nazis or Stalinists,” he points out that in most Asian and African countries “life expectancy began to improve before the end of European colonial rule”…

Ever since at least the time of Bartolomé de las Casas and of Hernan Cortes, it has been very clear to anyone who cares that the slavers and the conquerors who spread misery were, as they have always been, very different people from the traders and the teachers and the doctors--and, yes, the missionaries--who brought science, industry, technology, and public health. Life expectancy in India was not "improved" by the Amritsar massacre, after all, or by Winston S. Churchill's querulous telegram to his Viceroy Archibald Wavell asking:

if food [in India] was so scarce, why Gandhi hadn’t died yet.

Who the FUCK are Donald Kagan and Niall Ferguson to dare to claim that I share an essential "Western" identity with somebody like Brigadier General Reginald E.H. Dyer? Or with somebody like Marcus Tullius Cicero, who joked that Julius Caesar was an idiot for invading Britain for the island had no silver to plunder and its inhabitants were too stupid and uneducated to make good slaves?

They can all go off in their corner together.

I am not one of them, and my civilization is not theirs.

Over on the Crooked Timber Comments, Richard Tol Nominates Himself for This Year's Stupidest Known Animal Award

Stupid revealed preference arguments … — Crooked Timber:

Richard Tol 11.26.11 at 9:11 pm: My original post was serious and not. I did not seriously think that a few descriptive statistics about migrants in Europe could tell us anything about the impacts of climate change. I do think that there is serious problem with the “2K warming is dangerous” theme. Otto Pohl demonstrates that humans can experience drastic climate change and live to blog the tale. It is odd that a species that lives on the equator and on the pole, in the desert and in the rainforest, is worried about climate change.

ddave heasman 11.26.11 at 9:14 pm: “It is odd that a species that lives on the equator and on the pole, in the desert and in the rainforest, is worried about climate change.” Species don’t worry; people do. All of us living in temperate climes that might be overrun by hundreds of millions of desperate refugees worry at least a little.

Richard Tol 11.26.11 at 9:18 pm: @dave: Why do you worry about that prospect? At the moment, there are hundreds of millions of desperate people would love to overrun Europe and North America. They do not. Immigration barriers are pretty effective. Why would that be any different in the future?

Barry Freed 11.26.11 at 9:24 pm: “It is odd that a species that lives on the equator and on the pole, in the desert and in the rainforest, is worried about climate change.” It’s odd that a professor of the economics of climate change could make such a statement seriously. What about all the other species that inhabit the planet that do not have the same adaptability as human beings? Many of which we depend on economically, I might add.

William Timberman 11.26.11 at 9:26 pm: Omigod.

Gareth Rees 11.26.11 at 9:42 pm: In a way this kind of thing is encouraging: it’s a sign that the “warming isn’t happening” line of denial is no longer convincing to anyone, so people are forced back to the next line of defence, which is “the effects of warming will not be all that bad [at least for people who don’t live near the coast, or depend on glacier-fed water supplies, or rely on crops grown in marginal areas, etc]”. (After that line is no longer convincing either, the line after that will be, “tough luck, there’s nothing we can do about it anyway.” Coming to a blog near you in a few years’ time.)


cian 11.26.11 at 9:56 pm: “It is odd that a species that lives on the equator and on the pole, in the desert and in the rainforest, is worried about climate change.” Yes why would anyone worry about rising sea levels, desertification, more extreme weather and the as yet known affects on the ecology of massive changes in the temperature. Not to mention the possibility at some point the methane stored in Siberia will be released causing even worse problems. Obviously this is exactly the same as a professor choosing to take a position at a university with a warmer climate. Or is that the joke?

Alan in SF 11.26.11 at 9:57 pm: Wouldn’t the additional body heat in the warmer economist-vectors accelerate climate change even more? This is worrisome! Although no doubt good news for Dublin.

Richard Tol 11.26.11 at 10:03 pm: @Cian: No joke. An invitation to think. Tokyo subsided by 5 metres in the 20th century. Projected sea level rise for the 21st century is in the order of 0.5 metre. Why would Tokyo worry about a problem one-tenth of the size it has successfully mastered? And if the Japanese could do it in the 20th century, could the Americans do the same in the 21st?

Omega Centauri 11.26.11 at 10:23 pm: This sort of stuff unfortunately has political relevance. Among the intended audience of mid and high latitude dwellers, warmer (weather) is usually thought of as better. So the argument -even if not intended to stand up to scientific relevance has a lot of political salience. A lot of people are closet fans of a warmer planet. Well, Richard it is very unlikely to be .5M, more likely 1-2M per century. And this rate of change will continue for several hundred years. Dealing with inconstant, and rising sealevels will be a serious tax/expense on coastal communities for hundreds of years to come. The benefits of a minor extension in the age of cheap energy will be dissipated within a couple of decades. Not to mention all sorts of other changes away from the conditions upon which the design of our infrastructure -especially stuff like farming practices was predicated upon. And the natural world which humans are as reliant upon as any other creatures, that doesn’t figure in economic analysis -so it doesn’t matter.


Sam Clark 11.26.11 at 10:36 pm: Richard Tol at 43, to dave heasman: ‘Why do you worry about that prospect [of desperate refugees fleeing the effects of climate change]? At the moment, there are hundreds of millions of desperate people would love to overrun Europe and North America. They do not. Immigration barriers are pretty effective. Why would that be any different in the future?’ I don’t want to speak for dave heasman, but I worry about this because I care about other human beings. I therefore think that your comment reveals a pretty repulsive unconcern: ‘why worry? It’ll only be some distant poor people who are hurt by all this climate-change stuff’.

Where does the claim that Tokyo today is 16 feet lower relative to sea level than it was in 1900 comes from?

Floyd Norris on the Arcana Imperii of Central Banking: Central Banks Have the Power to Do Things They Have No Power to Do Department

Floyd Norris:

It Shouldn’t Take a Panic to Spur Responsibility:

If it is known that the Bank of England is freely advancing on what in ordinary times is reckoned a good security — on what is then commonly pledged and easily convertible — the alarm of the solvent merchants and bankers will be stayed. But if securities, really good and usually convertible, are refused by the Bank, the alarm will not abate, the other loans made will fail in obtaining their end, and the panic will become worse and worse.

— Walter Bagehot, “Lombard Street,” 1873

For well over a century it was taken for granted that the first job of central banks was to stem panics. It was, as the phrase went, to be a lender of last resort.

Until now.

As Europe’s financial situation has gotten worse and worse, the European Central Bank has moved grudgingly….

Implicit in the German prescription is the message that the sinners who spent and borrowed too much deserve to be punished. They can regain competitiveness with structural reforms — which Germany will happily help to devise — over a sustained period…. Implicitly, Germany is threatening that countries which do not do as they should will be forced out of the euro zone and left to fend for themselves. It is a threat that led Greek and Italian politicians to cede power, but will it persuade most of the people to go along with unpopular changes? If they rebel, and in the end Germany does pull the plug, Germany will be among the big losers….

There is a real risk of moral hazard in central bank bailouts. The theory offered by Bagehot in the 19th century called for banks to make loans on securities that are of high quality and will be liquid when the panic passes, but not on low-quality securities. Telling the good from the bad during a panic is not always easy. But we have until now assumed that a central bank would find bonds issued by its own government to be good paper, and investors could act accordingly. It may be true that the European Central Bank lacks specific legal authority to perform as a central bank should in a crisis. But there is nothing new to that. Brad DeLong, an economist at the University of California, Berkeley, points to comments made in 1844 by Sir Robert Peel, then Britain’s prime minister, explaining why he had not sought specific legislation to authorize the bank to step in during a panic:

“My confidence is unshaken that we have taken all the precautions which legislation can prudently take against a recurrence of a pecuniary crisis,” he wrote in a letter. “It may occur in spite of our precautions; and if it does and if it be necessary to assume a grave responsibility, I dare say men will be found willing to assume such a responsibility.”

In Europe, it is high time for such men, or women, to be found.

What Could Bernanke Do? Monetary Policy Reponse to Tweeting Doug Henwood Deapartment

Over on the >Twitter Machine, Doug Henwood asks why us wild-eyed shrill types think Bernanke and his Fed should be doing more:

@delong @moetkacik I don't get the line that Bernanke isn't doing enough. Taking the Fed's bal sht up to $2t ain't nuthin'.

@delong @moetkacik Helicopter Ben can't compensate for stupid fiscal thinking.

@delong @moetkacik Has the phrase "pushing on a string" lost all its meaning?

@delong @moetkacik But fiscal gets the money moving. QE and such just festers on balance sheets.

First of all, Bernanke hasn't just taken the Fed balance sheet up to $2T. He has taken it up to $3T. That ain't chopped liver--that ain't even terrine de foie gras, truite fumée, champignons et poire.

Second, I agree that normal Federal Reserve policy--declaring that long-run price stability is job #1 while buying and selling short-term Treasury bills for cash--does absolutely nothing right now: it is indeed pushing on a string.

That said, the Federal Reserve might be able to spark a real economic recovery by…

  1. Announcing that it is going to keep short-term Treasury interest rates low not just as long as the economy is depressed but even afterwards when the economy has recovered and when it would normally be raising interest rates: that it is going to keep short-term Treasury interest rates low until it generates an inflationary boom, and that you had better start building capacity now to serve your customers during that inflationary boom or your competitors will do so and take your profits.

  2. Not just announcing but actually bailing-in the taxpayers of the United States of America as the risk-bearing partners of American financial institutions: with the taxpayers as their risk-bearings partners, financial institutions that were previously tapped-out on their risk-bearing capacity will now have the ability and the incentive to make more loans at more attractive terms to more potentially-expanding businesses.

Now it is certainly true that (2) is not monetary but rather fiscal policy: commitments by the U.S. government to spend the taxpayers' money in certain states of the world. But I don't see why the Fed should not do it. And (1) is definitely within the Fed's purview.

How well would (1) and (2) work? We don't know. Are they worth trying? I certainly think so, and I believe that any of the alternative candidates for Fed Chair I heard back in 2009--Blinder, Dudley, Summers, Yellen--would at the least be thinking much harder than Bernanke appears to be about whether (1) or (2) or ideally both at once are worth trying on a large scale.

Me? If I were in the hot seat, I would follow the Jan Hatzius plan: (a) take the Fed's balance sheet up to $5T over the next two months, and (b) say that if that turned out not to be enough to get nominal GDP growth to a path that will return it to its pre-2007 trend within three years, that I would then keep interest rates low and take the Fed's balance sheet even higher until it did.

We are not going to get meaningful economic recovery until something boosts demand enough to get the monthly hiring rate up to something close to 4% of the labor force than 3%, and if not expansionary monetary policy, then what?



What Tax Rates Do the Rich Deserve?

Paul Krugman:

Taxing Job Creators: Mark Thoma sends us to the new Journal of Economic Perspectives paper (pdf) on optimal taxes by Peter Diamond and Emmanuel Saez. It’s a tough read (I’m still working on it myself), but there’s one discussion that I think helps make a useful point about current political debate…. D&S analyze the optimal tax rate on top earners. And they argue that this should be the rate that maximizes the revenue collected from these top earners — full stop. Why? Because… a marginal dollar of income makes very little difference to the welfare of the wealthy…. So to a first approximation policy should soak the rich for the maximum amount — not out of envy or a desire to punish, but simply to raise as much money as possible for other purposes…. Using parameters based on the literature, D&S suggest that the optimal tax rate on the highest earners is in the vicinity of 70%….

Right now the official rhetoric of the right, and a fair number of people who consider themselves centrist, is that high-income individuals are “job creators” who must be cherished for the good they do. Yet textbook economics says that in a competitive economy, the contribution any individual (or for that matter any factor of production) makes to the economy at the margin is what that individual earns — period…. [A]re conservatives comfortable with this analysis? I would guess not, that they have a deep-seated belief that the 1%, by working harder, are doing the 99% a big favor, creating jobs and raising incomes — and that this gain isn’t fully (or even largely) captured by the money they’re paid.

My point, then, is that this claim — and the lionization of high earners as people who make a vast contribution to society — is not, in fact, something that comes out of the free-market economic principles these people claim to believe in. Even if you believe that the top 1% or better yet the top 0.1% are actually earning the money they make, what they contribute is what they get, and they deserve no special solicitude.

The idea that the rich and powerful deserve our deference and--I guess "worship" is the right word--not just because they are powerful enough to injure us if we do not but because they deserve our deference and worship is an old idea powerfully wired into human consciousness. Sometimes it is that they deserve our deference because they are our benefactors: the "captains of industry have enriched us all, especially the poor" argument. Sometimes they just deserve our deference because they are superior beings.

Adam Smith had two things to say about this:

The poor man's son, whom heaven in its anger has visited with ambition, when he begins to look around him, admires the condition of the rich. He finds the cottage of his father too small for his accommodation, and fancies he should be lodged more at his ease in a palace. He is displeased with being obliged to walk a-foot, or to endure the fatigue of riding on horseback. He sees his superiors carried about in machines, and imagines that in one of these he could travel with less inconveniency. He feels himself naturally indolent, and willing to serve himself with his own hands as little as possible; and judges, that a numerous retinue of servants would save him from a great deal of trouble. He thinks if he had attained all these, he would sit still contentedly, and be quiet, enjoying himself in the thought of the happiness and tranquillity of his situation.

He is enchanted with the distant idea of this felicity. It appears in his fancy like the life of some superior rank of beings, and, in order to arrive at it, he devotes himself for ever to the pursuit of wealth and greatness. To obtain the conveniencies which these afford, he submits in the first year, nay in the first month of his application, to more fatigue of body and more uneasiness of mind than he could have suffered through the whole of his life from the want of them. He studies to distinguish himself in some laborious profession. With the most unrelenting industry he labours night and day to acquire talents superior to all his competitors. He endeavours next to bring those talents into public view, and with equal assiduity solicits every opportunity of employment. For this purpose he makes his court to all mankind; he serves those whom he hates, and is obsequious to those whom he despises. Through the whole of his life he pursues the idea of a certain artificial and elegant repose which he may never arrive at, for which he sacrifices a real tranquillity that is at all times in his power, and which, if in the extremity of old age he should at last attain to it, he will find to be in no respect preferable to that humble security and contentment which he had abandoned for it.

It is then, in the last dregs of life, his body wasted with toil and diseases, his mind galled and ruffled by the memory of a thousand injuries and disappointments which he imagines he has met with from the injustice of his enemies, or from the perfidy and ingratitude of his friends, that he begins at last to find that wealth and greatness are mere trinkets of frivolous utility, no more adapted for procuring ease of body or tranquillity of mind than the tweezer-cases of the lover of toys; and like them too, more troublesome to the person who carries them about with him than all the advantages they can afford him are commodious.

There is no other real difference between them, except that the conveniencies of the one are somewhat more observable than those of the other. The palaces, the gardens, the equipage, the retinue of the great, are objects of which the obvious conveniency strikes every body. They do not require that their masters should point out to us wherein consists their utility. Of our own accord we readily enter into it, and by sympathy enjoy and thereby applaud the satisfaction which they are fitted to afford him. But the curiosity of a tooth-pick, of an ear-picker, of a machine for cutting the nails, or of any other trinket of the same kind, is not so obvious. Their conveniency may perhaps be equally great, but it is not so striking, and we do not so readily enter into the satisfaction of the man who possesses them. They are therefore less reasonable subjects of vanity than the magnificence of wealth and greatness; and in this consists the sole advantage of these last. They more effectually gratify that love of distinction so natural to man. To one who was to live alone in a desolate island it might be a matter of doubt, perhaps, whether a palace, or a collection of such small conveniencies as are commonly contained in a tweezer-case, would contribute most to his happiness and enjoyment. If he is to live in society, indeed, there can be no comparison, because in this, as in all other cases, we constantly pay more regard to the sentiments of the spectator, than to those of the person principally concerned, and consider rather how his situation will appear to other people, than how it will appear to himself.

If we examine, however, why the spectator distinguishes with such admiration the condition of the rich and the great, we shall find that it is not so much upon account of the superior ease or pleasure which they are supposed to enjoy, as of the numberless artificial and elegant contrivances for promoting this ease or pleasure. He does not even imagine that they are really happier than other people: but he imagines that they possess more means of happiness. And it is the ingenious and artful adjustment of those means to the end for which they were intended, that is the principal source of his admiration. But in the languor of disease and the weariness of old age, the pleasures of the vain and empty distinctions of greatness disappear.

To one, in this situation, they are no longer capable of recommeding those toilsome pursuits in which they had formerly engaged him. In his heart he curses ambition, and vainly regrets the ease and the indolence of youth, pleasures which are fled for ever, and which he has foolishly sacrificed for what, when he has got it, can afford him no real satisfaction. In this miserable aspect does greatness appear to every man when reduced either by spleen or disease to observe with attention his own situation, and to consider what it is that is really wanting to his happiness. Power and riches appear then to be, what they are, enormous and operose machines contrived to produce a few trifling conveniencies to the body, consisting of springs the most nice and delicate, which must be kept in order with the most anxious attention, and which in spite of all our care are ready every moment to burst into pieces, and to crush in their ruins their unfortunate possessor. They are immense fabrics, which it requires the labour of a life to raise, which threaten every moment to overwhelm the person that dwells in them, and which while they stand, though they may save him from some smaller inconveniencies, can protect him from none of the severer inclemencies of the season. They keep off the summer shower, not the winter storm, but leave him always as much, and sometimes more exposed than before, to anxiety, to fear, and to sorrow; to diseases, to danger, and to death.

But though this splenetic philosophy, which in time of sickness or low spirits is familiar to every man, thus entirely depreciates those great objects of human desire, when in better health and in better humour, we never fail to regard them under a more agreeable aspect. Our imagination, which in pain and sorrow seems to be confined and cooped up within our own persons, in times of ease and prosperity expands itself to every thing around us. We are then charmed with the beauty of that accommodation which reigns in the palaces and oeconomy of the great; and admire how every thing is adapted to promote their ease, to prevent their wants, to gratify their wishes, and to amuse and entertain their most frivolous desires.

If we consider the real satisfaction which all these things are capable of affording, by itself and separated from the beauty of that arrangement which is fitted to promote it, it will always appear in the highest degree contemptible and trifling. But we rarely view it in this abstract and philosophical light. We naturally confound it in our imagination with the order, the regular and harmonious movement of the system, the machine or oeconomy by means of which it is produced. The pleasures of wealth and greatness, when considered in this complex view, strike the imagination as something grand and beautiful and noble, of which the attainment is well worth all the toil and anxiety which we are so apt to bestow upon it.

And it is well that nature imposes upon us in this manner. It is this deception which rouses and keeps in continual motion the industry of mankind. It is this which first prompted them to cultivate the ground, to build houses, to found cities and commonwealths, and to invent and improve all the sciences and arts, which ennoble and embellish human life; which have entirely changed the whole face of the globe, have turned the rude forests of nature into agreeable and fertile plains, and made the trackless and barren ocean a new fund of subsistence, and the great high road of communication to the different nations of the earth. The earth by these labours of mankind has been obliged to redouble her natural fertility, and to maintain a greater multitude of inhabitants. It is to no purpose, that the proud and unfeeling landlord views his extensive fields, and without a thought for the wants of his brethren, in imagination consumes himself the whole harvest that grows upon them. The homely and vulgar proverb, that the eye is larger than the belly, never was more fully verified than with regard to him. The capacity of his stomach bears no proportion to the immensity of his desires, and will receive no more than that of the meanest peasant. The rest he is obliged to distribute among those, who prepare, in the nicest manner, that little which he himself makes use of, among those who fit up the palace in which this little is to be consumed, among those who provide and keep in order all the different baubles and trinkets, which are employed in the oeconomy of greatness; all of whom thus derive from his luxury and caprice, that share of the necessaries of life, which they would in vain have expected from his humanity or his justice.

The produce of the soil maintains at all times nearly that number of inhabitants which it is capable of maintaining. The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants, and thus without intending it, without knowing it, advance the interest of the society, and afford means to the multiplication of the species. When Providence divided the earth among a few lordly masters, it neither forgot nor abandoned those who seemed to have been left out in the partition. These last too enjoy their share of all that it produces. In what constitutes the real happiness of human life, they are in no respect inferior to those who would seem so much above them. In ease of body and peace of mind, all the different ranks of life are nearly upon a level, and the beggar, who suns himself by the side of the highway, possesses that security which kings are fighting for…


When we consider the condition of the great, in those delusive colours in which the imagination is apt to paint it. it seems to be almost the abstract idea of a perfect and happy state. It is the very state which, in all our waking dreams and idle reveries, we had sketched out to ourselves as the final object of all our desires. We feel, therefore, a peculiar sympathy with the satisfaction of those who are in it. We favour all their inclinations, and forward all their wishes. What pity, we think, that any thing should spoil and corrupt so agreeable a situation! We could even wish them immortal; and it seems hard to us, that death should at last put an end to such perfect enjoyment. It is cruel, we think, in Nature to compel them from their exalted stations to that humble, but hospitable home, which she has provided for all her children. Great King, live for ever! is the compliment, which, after the manner of eastern adulation, we should readily make them, if experience did not teach us its absurdity. Every calamity that befals them, every injury that is done them, excites in the breast of the spectator ten times more compassion and resentment than he would have felt, had the same things happened to other men.

It is the misfortunes of Kings only which afford the proper subjects for tragedy. They resemble, in this respect, the misfortunes of lovers. Those two situations are the chief which interest us upon the theatre; because, in spite of all that reason and experience can tell us to the contrary, the prejudices of the imagination attach to these two states a happiness superior to any other. To disturb, or to put an end to such perfect enjoyment, seems to be the most atrocious of all injuries. The traitor who conspires against the life of his monarch, is thought a greater monster than any other murderer. All the innocent blood that was shed in the civil wars, provoked less indignation than the death of Charles I. A stranger to human nature, who saw the indifference of men about the misery of their inferiors, and the regret and indignation which they feel for the misfortunes and sufferings of those above them, would be apt to imagine, that pain must be more agonizing, and the convulsions of death more terrible to persons of higher rank, than to those of meaner stations.

Upon this disposition of mankind, to go along with all the passions of the rich and the powerful, is founded the distinction of ranks, and the order of society. Our obsequiousness to our superiors more frequently arises from our admiration for the advantages of their situation, than from any private expectations of benefit from their good-will. Their benefits can extend but to a few. but their fortunes interest almost every body. We are eager to assist them in completing a system of happiness that approaches so near to perfection; and we desire to serve them for their own sake, without any other recompense but the vanity or the honour of obliging them. Neither is our deference to their inclinations founded chiefly, or altogether, upon a regard to the utility of such submission, and to the order of society, which is best supported by it. Even when the order of society seems to require that we should oppose them, we can hardly bring ourselves to do it.

That kings are the servants of the people, to be obeyed, resisted, deposed, or punished, as the public conveniency may require, is the doctrine of reason and philosophy; but it is not the doctrine of Nature. Nature would teach us to submit to them for their own sake, to tremble and bow down before their exalted station, to regard their smile as a reward sufficient to compensate any services, and to dread their displeasure, though no other evil were to follow from it, as the severest of all mortifications. To treat them in any respect as men, to reason and dispute with them upon ordinary occasions, requires such resolution, that there are few men whose magnanimity can support them in it, unless they are likewise assisted by familiarity and acquaintance. The strongest motives, the most furious passions, fear, hatred, and resentment, are scarce sufficient to balance this natural disposition to respect them: and their conduct must, either justly or unjustly, have excited the highest degree of all those passions, before the bulk of the people can be brought to oppose them with violence, or to desire to see them either punished or deposed.

Even when the people have been brought this length, they are apt to relent every moment, and easily relapse into their habitual state of deference to those whom they have been accustomed to look upon as their natural superiors. They cannot stand the mortification of their monarch. Compassion soon takes the place of resentment, they forget all past provocations, their old principles of loyalty revive, and they run to re-establish the ruined authority of their old masters, with the same violence with which they had opposed it. The death of Charles I. brought about the Restoration of the royal family. Compassion for James II. when he was seized by the populace in making his escape on ship-board, had almost prevented the Revolution, and made it go on more heavily than before...

Yet Another Note on Gold Mining and Cyclical Unemployment in Austrian Economics

Everytime I try to get out they drag me back in...

The extremely thoughtful Daniel Kuehn comments:

OK, gold represented a "relatively" fixed standard of value (basically what Bill Woolsey says).

That still seems considerably more plausible than your idea that the guy who drones on and on for hundreds of pages about subjective value theory (Mises) actually has a cost of production theory of value. There's a lot to criticize in Austrian economics - a cost of production theory of value is not on that list.

and follows it up with, in email:

I'm guessing if paper money increased at the rate that the gold supply increases [von Mises] would be a happy camper

And Robert Murphy inquires where Ludwig von Mises wrote my paraphrase:

  • an increase in the real money stock that comes about from people spending time energy and resources digging gold from the ground and refining it is equally efficacious in curing a depression.

So I went back to my notes and found it:

If gold production had been considerably greater than it actually was in recent years, then the drop in prices [in the early 1930s] would have been moderated or perhaps even prevented from appearing…

If the increase in the money stock in the 1920s had taken the form of an increase in gold rather than of paper money, there would have been no big deflation in the early 1930s. No big deflation in the early 1930s, no Great Depression.

That's the source of my belief that, in von Mises-world, that if nominal wages are constant--if nominal wages are sticky--then expanded gold mining is an efficacious way of curing and avoiding depressions without major adverse consequences.

And if nominal wages are not sticky and move freely to clear the labor market? Then, in von Mises-world at least, we don't have a Great Depression to cure at all.

I think the analytical point is clear.

Now you do need to know that von Mises recognizes that he has created a problem for himself. He shifts his ground--but in so doing so he, I think, breaks all hope of analytic consistency. His escape hatch appears to me to demolish his own argument for the superiority of the gold standard. Von Mises writes:

attempts of labor unions to drive wages up higher than they would have been on the unhampered market… have nothing to do… actual money prices are higher or lower. Labor unions no longer contend over the height of money wages, but over the height of real wages…. Thus no reason remains for assuming that an increase in the gold supply must, in a particular case, improve the situation…

If that is correct, then there is also no reason for assuming that any monetary change can help or hurt. Most particularly, if real wages are that sticky, then von Mises's claim that you cure depressions by creating huge amounts of excess unemployment and so putting downward pressure on wages and so increasing the real money stock through that channel fails as well.

The U.S. Department of State Liveblogs World War II: November 26, 1941

The Avalon Project : United States Note to Japan November 26, 1941:

The representatives of the Government of the United States and of the Government of Japan have been carrying on during the past several months informal and exploratory conversations for the purpose of arriving at a settlement if possible of questions relating to the entire Pacific area based upon the principles of peace, law and order and fair dealing among nations. These principles include the principle of inviolability of territorial integrity and sovereignty of each and all nations; the principle of non-interference in the internal affairs of other countries; the principle of equality, including equality of commercial opportunity and treatment; and the principle of reliance upon international cooperation and conciliation for the prevention and pacific settlement of controversies and for improvement of international conditions by peaceful methods and processes.

It is believed that in our discussions some progress has been made in reference to the general principles which constitute the basis of a peaceful settlement covering the entire Pacific area. Recently the Japanese Ambassador has stated that the Japanese Government is desirous of continuing the conversations directed toward a comprehensive and peaceful settlement of the Pacific area; that it would be helpful toward creating an atmosphere favorable to the successful outcome of the conversations if a temporary modus vivendi could be agreed upon to be in effect while the conversations looking to peaceful settlement in the Pacific were continuing. On November 20 the Japanese Ambassador communicated to the Secretary of State proposals in regard to temporary measure to be taken respectively by the Government of Japan and by the Government of the United States, which measures are understood to have been designed to accomplish the purposes above indicated.

The Government of the United States most earnestly desires to contribute to the promotion and maintenance of peace and stability in the Pacific area, and to afford every opportunity for the continuance of discussion with the Japanese Government directed toward working out a broad-gauge program of peace throughout the Pacific area. The proposals which were presented by the Japanese Ambassador on November 20 contain some features which, in the opinion of this Government, conflict with the fundamental principles which form a part of the general settlement under consideration and to which each Government has declared that it is committed. The Government of the United States believes that the adoption of such proposals would not be likely to contribute to the ultimate objectives of ensuring peace under law, order and justice in the Pacific area, and it suggests that further effort be made to resolve our divergences of view in regard to the practical application of the fundamental principles already mentioned.

With this object in view the Government of the United States offers for the consideration of the Japanese Government a plan of a broad but simple settlement covering the entire Pacific area as one practical exemplification of a program which this Government envisages as something to be worked out during our further conversations.

The plan therein suggested represents an effort to bridge the gap between our draft of June 21, 1941 and the Japanese draft of September 25 by making a new approach to the essential problems underlying a comprehensive Pacific settlement. This plan contains provisions dealing with the practical application of the fundamental principles which we have agreed in our conversations constitute the only sound basis for worthwhile international relations. We hope that in this way progress toward reaching a meeting of minds between our two Governments may be expedited.