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July 2012

Liveblogging World War II: July 31, 1942

Ironbottom Sound:

Aaron Ward (US Gleaves-class destroyer)
Akatsuki (Japanese Akatsuki-class destroyer)
Astoria (US New Orleans-class cruiser)
Atlanta (US Atlanta-class anti-aircraft cruiser)
Ayanami (Japanese Fubuki-class destroyer)
Barton (US Benson-class destroyer)
Blue (US Bagley-class destroyer)
Canberra (Australian Kent-class cruiser)
Colhoun (US Wickes-class destroyer)
Cushing (US Mahan-class destroyer)
De Haven (US Fletcher-class destroyer)
Duncan (US Gleaves-class destroyer)
Fubuki (Japanese Fubuki-class destroyer)
Furutaka (Japanese Furutaka-class cruiser)
George F. Elliot (US Heywood class transport)
Gregory (US Wickes-class destroyer)
Hiei (Japanese Kongō-class battleship)
Hirokawa Maru (Japanese military transport)
Jarvis (US Gridley-class destroyer)
John Penn (US miscellaneous class Attack Transport)
Kanawha (US Kanawha/Cuyama class fleet oiler)
Kasi Maru (Japanese freighter)
Kinugawa Maru (Japanese military transport)
Kirishima (Japanese Kongō-class battleship)
Laffey (US Benson-class destroyer)
Little (US Wickes-class destroyer)
Makigumo (Japanese Yugumo-class destroyer)
Moa (New Zealand Bird class corvette)
Monssen (US Gleaves-class destroyer)
Northampton (US Northampton-class heavy cruiser)
Preston (US Mahan-class destroyer)
PT-37 (US PT boat)
PT-44 (US PT boat)
PT-111 (US PT boat)
PT-112 (US PT boat)
PT-123 (US PT boat)
Quincy (US New Orleans-class cruiser)
Seminole (US Navajo-class oceangoing tug)
Serpens (United States Coast Guard-manned Liberty ship)
Takanami (Japanese Yugumo-class destroyer)
Teruzuki (Japanese Akizuki-class destroyer)
Toa Maru (Japanese military transport)
Vincennes (US New Orleans-class cruiser)
Walke (US Sims-class destroyer)
YP-284 (US Yard Patrol craft)
Yudachi (Japanese Shiratsuyu-class destroyer)

Stocks for the Medium Run

Microsoft Excel

Take the Campbell-Shiller smoothed earnings yield--the ratio of the current value of the S&P Composite to a ten-year trailing moving average of its earnings. Take the ten-year-ahead real return on the S&P Composite. Plot them together, and you have the graph above.

Real earnings on the S&P Composite grow by about 2%/year. That means that if the current ratio of permanent earnings to prices were a good forecast of future returns, you would expect future returns to be 11/10 of the Campbell-Shiller smoothed earnings yield--you would expect the red line to be perhaps a percentage point above the blue line. That aside, the net cumulative gap between the red line and the blue line is made up of (a) corporate opportunities to invest retained earnings in projects that yield more than the stock market return, (b) corporate dissipation of retained earnings in projects that yield less than the stock market return, and (c ) secular changes in the price-earnings ratio.

The current Campbell-Shiller smoothed earnings yield is 4.5%/year. The upward adjustment makes it 5.0%/year. Unless you think we are looking forward to (a) a substantial shortfall in future earnings growth relative to historical trends, or (b) a future collapse in the price-earnings ratio, it is hard to see how stocks can return less than 5%/year over the next decade. And in an environment in which you have to pay the Treasury 0.6%/year to watch your real value over the next decade, that is a very attractive expected return.

Equity Returns and the Size of the Economy: Bill Gross Makes a Distressingly Common Error...

Bill Gross:

PIMCO | Investment Outlook - Cult Figures: ​The cult of equity is dying…. [I]nvestors’ impressions of “stocks for the long run” or any run have mellowed as well…. Several generations were weaned and in fact grew wealthier believing that pieces of paper representing “shares” of future profits were something more than a conditional IOU that came with risk. Hadn’t history confirmed it? Jeremy Siegel’s rather ill-timed book affirming the equity cult… showered scorn on any heretic willing to question the inevitability of a decade-long period of upside stock market performance compared to the alternatives. Now in 2012, however, an investor can periodically compare the return of stocks for the past 10, 20 and 30 years, and find that long-term Treasury bonds have been the higher returning and obviously “safer” investment….

PIMCO | Investment Outlook  Cult Figures

[The] long-term history of inflation adjusted returns from stocks shows a persistent but recently fading 6.6% real return (known as the Siegel constant) since 1912…. No wonder today’s Boomers became Siegel disciples. Letting money do the hard work instead of working hard for the money was an historical inevitability it seemed.

Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes – a Ponzi scheme. If wealth or real GDP was only being created at an annual rate of 3.5% over the same period of time, then somehow stockholders must be skimming 3% off the top each and every year. If an economy’s GDP could only provide 3.5% more goods and services per year, then how could one segment (stockholders) so consistently profit at the expense of the others (lenders, laborers and government)? The commonsensical “illogic” of such an arrangement when carried forward another century to 2112 seems obvious as well. If stocks continue to appreciate at a 3% higher rate than the economy itself, then stockholders will command not only a disproportionate share of wealth but nearly all of the money in the world!…

Has the past 100-year experience shown in Chart 1 really been comparable to a chain letter which eventually exhausts its momentum due to a lack of willing players? In part, but not entirely. Common sense would argue that appropriately priced stocks should return more than bonds…. If GDP and wealth grew at 3.5% per year then it seems only reasonable that the bondholder should have gotten a little bit less and the stockholder something more than that….

Yet despite the past 30-year history of stock and bond returns that belie the really long term, it is not the future win/place perfecta order of finish that I quarrel with, but its 6.6% “constant” real return assumption and the huge historical advantage that stocks presumably command…. [R]eal wage gains for labor have been declining as a percentage of GDP since the early 1970s…. [G]overnment has conceded a piece of their GDP share via lower taxes…. [I]t is therefore not too surprising that those 6.6% historical real returns were 3% higher than actual wealth creation for such a long period. The legitimate question that market analysts, government forecasters and pension consultants should answer is how that 6.6% real return can possibly be duplicated in the future given today’s initial conditions…. [H]ow can stocks appreciate at 6.6% real? They cannot, absent a productivity miracle that resembles Apple’s wizardry….

Together then, a presumed 2% return for bonds and an historically low percentage nominal return for stocks – call it 4%, when combined in a diversified portfolio produce a nominal return of 3% and an expected inflation adjusted return near zero. The Siegel constant of 6.6% real appreciation, therefore, is an historical freak, a mutation likely never to be seen again as far as we mortals are concerned…

Bill Gross implicitly makes three assumptions: (i) that the total stock and bond valuations in the economy add up to the economy's private corporate capital stock, (ii) that the capital stock of the economy cannot grow much faster than real GDP (currently projected to grow at between 2.5%/year and 3.0%/year), and (iii) that all transfers from corporations to savers--dividends and share backs and bond interest and principal payments--are reinvested in the market. If those three assumptions are true, then indeed the weighted average of stock and bond returns must be in the 2.5-3.0%/year range.

But assumption (iii) is wrong. When a company pays me money by buying back a share, I do not have to reinvest that money in the market. When a company pays me money by issuing a dividend, it does not have to raise that money from the market by selling a new stock or bond--it can (and does) raise that money from its customers by selling them goods and services at more than their cost of production. And if (iii) fails, then there is no necessary direct arithmetic connection between the rate of return on stocks and bonds and the growth rate of the economy.

So what is the right forecast of long-run future stock returns? The S&P earnings yield is currently 7.7%. If the economy strengthens wages will rise and that would tend to push earnings yields down, but if the economy strengthens businesses will be able to take greater advantage of economies of scale and that would tend to push earnings yields up. I have seen no arguments that one factor is likely to be much stronger than the other.

That 7.7% earnings yield means that every year, after repairing worn-out capital, businesses have $7.70 for every $100 of stock market valuation adding to their physical capital stocks (which should boost fundamental value and so show up as a capital gain) or paying out via dividends and stock buy-backs. The right stock return to forecast is to mark that 7.7% earnings yield down to whatever you think the sustainable profits of American companies are, and to go with that.

Jonathan Portes Makes Me Blush...

Jonathan Portes:

Not the Treasury view...: Which (macro)-economists are worth listening to?: [W]hen economists argue about the correct stance of policy, who should we (policymakers, commentators, and the general public) listen to? This question was prompted by a recent exchange I had with Ed Vaizey and Simon Hughes on the BBC's Daily Politics: I pointed out that not only was the government's decision in 2010 to cut the deficit too quickly doing considerable economic damage, but that this was both predictable and predicted by economists such as Paul Krugman and Martin Wolf. Their response was essentially "how were we to know which economists to listen to? Others were saying the opposite"….

[P]olicymakers and the public should listen to economists who… have made empirically testable predictions (conditional or unconditional - see Krugman here) that have proved, by and large, to be broadly consistent with the data; and, second, they base those predictions on an analytic framework (not necessarily a formal model) that is persuasive…. My shortlist… is something like the following: Krugman, Delong and Wren-Lewis on fiscal policy… Adam Posen on monetary policy… Paul de Grauwe on sovereign and eurozone debt; Martin Wolf on private sector savings and public sector deficits (the financial balance approach); Richard Koo on the implications of a "balance sheet recession"

Not all of these economists agree with each other on everything, nor do I necessarily agree with them about everything…. But they each have clear analytic frameworks for thinking about the economy, and have used them to make empirically testable claims; and have largely been vindicated….

[There is] an obvious list of economists or those commenting on economic issues who got it completely wrong, usually because they were using analytic frameworks that were incoherent or lacked empirical evidence. I won't name individuals here, so I leave that to readers, but a short list of influential bodies that should have known better… those… writing editorials at the Financial Times, macroeconomic forecasters at the OECD, the European Department at the IMF… their recent stuff on both UK and eurozone has been pretty good… the senior leadership at the Bank of England and the Treasury, and probably worst of all senior economic policymakers at the ECB and European Commission.  Oh, and the credit ratings agencies….

It is worth mentioning two economists who I respect, admire and find interesting but do not in my view qualify for inclusion on my shortlist. They are Nouriel Roubini and Ken Rogoff. In both cases, I - and maybe this is partly my fault - don't understand what, if any, analytic framework they are using, so I find it difficult to impossible to evaluate their advice….

Finally, let me just point out that this is not hindsight on my part.  Most of those mentioned above were on the list of economists I read and, whenever possible, consulted when I was still a civil servant involved in policy advice on these issues (2008-11). And I put this specific list together more than a year ago now in preparation for a talk I gave to a group of government economists. And this matters. I don't think there's any doubt that if policymakers, both in the UK and elsewhere (especially in the eurozone) had, during the intervening period, listened to these people rather than their own economic advisers, the state of the UK and world economies would be significantly better than it is now.

Remind Me Again: Friedrich Paulus

The Nazis planned to push four armies forward and only four armies forward in the summer and fall of 1942--Sixth, Seventeenth, First Panzer, and Fourth Panzer. One can understand why an army personnel office would choose Hermann Hoth as commander of Fourth Panzer Army and von Kleist as commander of First Panzer Army. But Richard Ruoff as commander of the Seventeenth Army? And Friedrich Paulus as commander of the Sixth Army? What was there in their previous careers to mark them as the right people for army command in Southern Russia in the summer and fall of 1942?

Mitt Romney Calls for the U.S. to Copy israel's Big-Government Single-Payer Health System

Mitt Romney:

Do you realize what health care spending is as a percentage of the G.D.P. in Israel? Eight percent. You spend eight percent of G.D.P. on health care. You’re a pretty healthy nation. We spend 18 percent of our G.D.P. on health care, 10 percentage points more. That gap, that 10 percent cost, compare that with the size of our military — our military which is 4 percent, 4 percent. Our gap with Israel is 10 points of G.D.P. We have to find ways — not just to provide health care to more people, but to find ways to fund and manage our health care costs.

Sarah Kliff::

Israel… requir[es] all residents to carry insurance and capping revenue for various parts of the country’s health care system. Israel created a national health care system in 1995, largely funded through payroll and general tax revenue. The government provides all citizens with health insurance: They get to pick from one of four competing, nonprofit plans. Those insurance plans have to accept all customers—including people with pre-existing conditions—and provide residents with a broad set of government-mandated benefits…. Israel’s health care costs have hovered around 8 percent of its gross domestic product for over two decades…. Israel’s lower health care spending does not look to sacrifice the quality of care. It has made more improvements than the United States on numerous quality metrics, and the country continues to have a higher life expectancy….

The national government exerts direct operational control over a large proportion of total health care expenditures, through a range of mechanisms, including caps on hospital revenue and national contracts with salaried physicians. The Ministry of Finance has been able to persuade the national government to agree to relatively small increases in the health care budget because the system has performed well, with a very high level of public satisfaction.

The Israeli Ministry of Finance controls about 40 percent of Israel’s health care expenditures through those payments to the four insurance plans. The  ministry decides how much it will pay the health plans for each Israeli citizen they enroll, making adjustments for how old a person is and how high their health care costs are expected to be. It’s then up to the health insurance plan to figure out how to provide coverage within that set budget. If they spend too much—have a patient who is constantly in the hospital, for example—they will find themselves in the red. It’s that set budget—a capitated budget, in health policy terms—that seems to be crucial to the Israeli health care system’s success in cost control.

Noah Smith on the Inflation Debt

Noah Smith:

Noahpinion: Dinner at Zachary's: Inflation hawks have predicted 10 out of the last zero inflations. Japan printed Space Battleship Yamato-loads of money and inflation went from negative to just over zero. More recently, the Fed's massive asset purchases and ardent promises to keep interest rates at zero until the heat death of the Universe have not pushed core inflation higher than the 2% target. Furthermore, slack demand from Europe and China do not bode well for a robust global recovery in the next few years. Additionally, markets expect very low inflation for a long time to come (and second-guessing the market is always a gamble). Also, the Fed seems to have a good number of influential members who think 5% inflation would be a calamity far worse than 8% unemployment. And finally, liquidity-trap New Keynesian models of the macroeconomy, which recognize the importance of the Zero Lower Bound of nominal interest rates, seem to me far more credible to me than the flexible-price models that predict higher inflation.

To sum up: Inflation looks incredibly unlikely to me at this point. So why on Earth did I just bet Brad DeLong dinner that the U.S. economy will experience substantial inflation at some point during the next three years?

Short answer: Dinner with Brad DeLong at Zachary's will be fun even if I lose.

Longer answer: I got 50-to-1 odds on the bet (if I win, Brad buys me dinner and pays me 49x the cost of dinner). That means that I am essentially betting that there is a 2% chance that something really funky happens to the global economy over the next three years… [that] would cause inflation to go over 5% even as unemployment stayed over 6%…. Perhaps the Chinese state will collapse, disrupting supply chains and sending import costs soaring; or perhaps the Saudi state will collapse, sending oil prices soaring. And perhaps the Fed will be spooked so much by these events that it would allow 5% inflation as a hedge against global economic collapse.

Or, alternatively, perhaps the models (or mental model-sketches) used by John Cochrane, Steve Williamson, Jim Bullard, Charles Plosser, Narayana Kocherlakota, and other inflation hawks are much more right than I realize! I always talk about the basic ignorance of macroeconomists about how the economy works, so in a sense I'm putting my money where my mouth is.

Am I giving Brad a great deal by not demanding 100-to-1 or 200-to-1 odds? Probably, yes. In fact I was going to demand 100-to-1 but I felt it would be rude. But small probabilities are notoriously hard to estimate, or even guesstimate. So instead of expected utility maximization, I'm using a different decision theory rule, limiting my potential losses. The worst that can happen to me is that I will have to buy Brad dinner, during which he will probably laugh at me…

Ed Luce Praises Fleet Street and Disses Mitt Romney

Ed Luce:

Why the UK was right on Romney: The Washington commentariat is fond of disparaging Fleet Street…. But the UK media has a reasonable track record at detecting bluff….

Mr Romney’s awfulness as a candidate. It has nothing to do with insight: the UK media are only stating bluntly what is on everyone’s minds…. Six long years after he first emerged as presidential candidate, time is fast slipping away for Mr Romney to define himself favourably. At a moment when the US debate should be dominated by a weakening economy, Barack Obama’s campaign keeps shifting attention back to Mr Romney’s mangled biography. When the president needs a day off, Mr Romney is usually happy to step in his shoes.

Last Friday, US growth was reported at 1.5 per cent for the second quarter, well below the first quarter’s 2 per cent. Happily for the White House the latest bad numbers coincided with Mr Romney’s less than stellar London visit. It follows weeks of focus on Mr Romney’s reluctance to talk frankly about his past at Bain Capital (let alone turn that experience to his advantage), or to release more than two years of his tax returns.

Since he has not yet addressed either of those issues – and may never do so – they promise to drive many more news cycles yet….

The fact that Mr Obama is still favourite, if only by a whisker, offers an extraordinary rebuke to Mr Romney’s campaigning skills. Which brings us back to the Olympics. The first rule of foreign trips is that the candidate must avoid offending his hosts. Mr Romney did so before his aeroplane even left the tarmac. To become the butt of Mayor of London Boris Johnson’s humour only a few hours after having touched down takes some doing. And it contrasts strikingly with Mr Obama’s whirlwind Europe trip in 2008. The fact that within 24 hours Mr Romney went from describing himself as “disconcerted” with London’s preparations to being “very delighted” also drew attention to his best known flaw – a tendency to say one thing then contradict it soon afterwards with the same robotic certainty….

The next month will be make or break. First, Mr Romney will select a running-mate. It is possible he could make a bold choice, such as Condoleezza Rice, the former secretary of state, or Kelly Ayotte, the New Hampshire senator…. Then there is his convention in Tampa, Florida…. [After] Tampa… there is only the debates to go. And as his Olympic performances in London showed, Mr Romney is hardly quick on his feet.

Is the U.S. at Immediate Risk of Rapidly Becoming "Argentina" as a Result of Expansionary Counter-Cyclical Policies?: The Bet with Noah Smith: Noah Bravely Takes the Cochrane-Argentina Side…

FRED Graph  St Louis Fed 2

The bet:

If, at any time between 7/28/2012 and 7/28/2015, core consumer prices, as recorded in the FRED database series CPILFESL, are up more than 5% in the preceding 12 months, and if over the same 1-year period monthly U3 unemployment (as recorded in FRED database series UNRATE) has not averaged below 6%, then Brad DeLong agrees to buy Noah Smith one dinner at Zachary's Pizza at 1853 Solano Ave. in Berkeley CA, and to pay Noah 49 times the cost--including tax but excluding tip--of Noah's meal at Zachary's in Federal Reserve notes, or in alternative means of payment accepted by Zachary's should Zachary's Pizza no longer be accepting Federal Reserve notes at the date of the dinner. This cost will be assessed as the total cost of the dinner to all, divided by the number of people present, regardless of how much pizza is consumed by or how much alcohol is drunk by specific individuals.

If however, the above condition is not satisfied, Noah agrees to buy Brad one dinner at Zachary's.

Miles Kimball will be the judge in charge of refereeing the bet. The decisions of the judge will be final and unappealable.

Furthermore, Noah's brave and gracious willingness to take the Cochrane-Argentina side of this bet at odds of only 50-1 will not be construed as a statement of his confidence in or of his support for any economist or position of economic analysis that judges expansionary fiscal policy at the zero lower nominal interest rate bound to be "insane" or that judges "1932" to currently be a less dire risk for the U.S. than "Argentina".

FRED Graph  St Louis Fed 3

The start was my noting that Sebastian Mallaby these days is sounding like a normal reality-based economist--and is far, far from the guy who back in March 2009 thought that what the audience at his CFR conference really needed to hear was the (unrebutted: the panel was stacked) opinions of John Cochrane:

What Do the 1930s Teach About Reforming Today's Financial Markets?: [T]he danger now is inflation.  And I would say it's a greater danger than most of the other people have said.  Our danger now is a run on Treasury debt.  It's not just can the Fed soak this stuff back up again, but can it soak this enormous amount of debt back up again when people don't want either money or Treasury bills or anything labeled "U.S. Government."  The danger is not 1932; the danger is Argentina, a massive run from Treasury debt.  And then monetary policy will not be able to do anything.  You can fool around with interest rates all you want.  When people don't want Treasury bills or money you're stuck….

The system is much more resilient than it was because of deregulation. Back in the Great Depression… if the Bailey Savings and Loan goes under, there is no way that JP Morgan, financed by an equity infusion from the sovereign wealth fund of Kuwait can come in and take over and start lending.  You're just stuck.  Well, we're not in that situation anymore….

Policy is chaotic. Who would invest in this climate?  It's not about toxic assets; it's about who wants to go in on a deal with Darth Vadar [sic], who can change his mind at any moment?  That's the uncertainty that's keeping things from getting going and that's what's slowing the rebuilding of financial markets.  We're facing growth-destroying marginal tax rates, an excuse for the government takeover of large and completely unrelated sectors, class warfare, vindictive ex post taxations….

My great hope is that the bounce-back will be quick before the quack medicine can be said to have worked.  (Chuckles.)  Just as we sort of -- as people think that this insane idea of fiscal stimulus -- which I'll go on with later if I get a chance -- came from Roosevelt's experience with no reason why it should work, there is a danger of thinking all of the crazy stuff they're doing now will have caused the bounce-back….

Cochrane than protested (sounding to my ear much like an old-line Marxist who claims that Marx never said real wages will fall but only that there was a tendency for the real wage to fall) that he had not said that unless the expansionary fiscal and monetary policies of 2009 were reversed the U.S. was about to experience an Argentina-like upward explosion of inflation, but only that there was a risk that, unless the expansionary fiscal and monetary policies of 2009 were reversed, the U.S. was about to experience an Argentina-like upward explosion of inflation.

And Noah Smith said that was a fair point.

I in turn counter-protested to Noah:

There was no reason to think that the expansion of the Fed balance sheet from $700B to $1.7T in mid-2009 would create too-much money chasing too-few goods--for as long as the economy was at the zero nominal interest rate lower bound expanding the Fed's balance sheet simply swapped one very low-yield nominal government liability for another with little effect on anybody's net liquidity or risk exposure. The marginal expansion of the projected national debt from the Recovery Act was absolutely trivial, and since the prospect of future health-care spending deficits had not provoked "Argentina" by 2008 there was no risk the additional marginal borrowing of the Recovery Act would provoke "Argentina" in the context of a depressed economy. Financial markets were not pricing in any chance of an upward explosion of inflation. Cochrane could neither (a) point at elements in the configuration of asset (and other) prices demonstrating that people besides him thought "Argentina" was a substantial risk, or (b) explain the market failure that kept people from hedging against the risk in such a way that we could see their hedges in market prices.

Thus Cochrane's point that he was just pointing out a "risk of Argentina" did not seem to me to be a fair point at all. If it really was a significant risk, than people ought--at the appropriate odds--to be willing to bet that that risk would actually come to pass. So I asked Noah if he was so willing...

Hence we decided on:

  • Zachary's pizza because we like pizza.
  • A three year term because we are hungry and would like to eat our pizza.
  • A twelve-month core CPI change of 5% as our definition of "Argentina"--yes, I realize that that is really absurd and is defining "Argentina" way, way down, but work with us on this…
  • An unemployment rate of 6% as marking exit from the depressed-economy régime--the transition from the "involuntary unemployment" to the "inflation" region on the Malinvaud diagram--and entry into a régime in which we would expect inflation to respond in the medium-term to expansionary policies
  • 50-1 as the appropriate odds: a 2% chance of the deficits and monetary base expansions of the past four and the next three years triggering the transformation of the U.S. into "Argentina".

I must say that Noah appears to me to not be an expected utility maximizer, or to have a substantially different assessment of the odds than I do: I would have demanded 200-1 to take the Cochrane side of this bet…

Mark your calendars now for August 2015…

Hoisted from the Comets: Ask the Internet Quest Edition

Tomas asks:

I so miss reading Daniel[ Davies's] blog [since he made it private subscription only]. Is there some manner of rite of passage or quest one might undertake to get invited?

It seems to me that proposing answers to this question is exactly what the internet is for. Suggestions?

The form of the suggestions should be something like:

"Daniel Davies will send you a password to his weblog if you first manage to X", where X is something like:

  • Acquire six microbrews that James Fallows has never drunk, convince him to drink them with you, and provide photographic evidence of your success…
  • Track Ogged to his lair, and provide photographic evidence of your success…
  • Bring him the heads of Nick Clegg and the Milibands…

Alternatively, we could simply assemble a consortium of 20 and set up a Fake Daniel Davies weblog to write and make public the sort of posts he really ought to write…

But Textualist Analysis Reveals That in 1790 "Bear Arms" Referred Only to Knives, Swords, and Muzzle-Loading Muskets!

Yes, Nino "It is a Mortal Sin to Disobey the Emperor Nero!" Scalia strikes again:

Scalia Suggests 'Hand-Held Rocket Launchers' Are Protected Under Second Amendment: WALLACE: What about… a weapon that can fire a hundred shots in a minute?

SCALIA: We’ll see. Obviously the Amendment does not apply to arms that cannot be hand-carried — it’s to keep and “bear,” so it doesn’t apply to cannons — but I suppose here are hand-held rocket launchers that can bring down airplanes, that will have to be decided.

Shuriken and numchuks are also clearly excluded…

Hoisted from the Archives DeLong Smackdown Watch: Daniel Davies Edition

Daniel Davies:

DeLong Smackdown Watch: From D-Squared Digest: They're always hacks, Brad. Always. Yes even Milton Friedman. The more independent-minded ones will occasionally come up with a liberalish or fair-minded idea or two, but this is purely for display, not for ever doing anything about if to do so would run the risk of a higher rate of capital gains tax. The ideological core of Chicago-style libertarianism has two planks.

  1. Vote Republican.
  2. That's it.

Why are American liberals so damnably obsessed with extending intellectual charity to right wing hacks which is never reciprocated? It reaches parodic form in the case of those tiresome "centrists" who left wing American bloggers are always playing the Lucy-holds-the-football game with. Oh, but their politics are sooo centrist! They're practically 50% of the way between Republicans and Democrats! Yeah, specifically they're right-wing Democrats in non-election years and party line Republicans any time it might conceivably matter (note that here, two years after the White House ceremony at which Friedman apparently "spent most of his 90th birthday lunch telling Bush that his fiscal policy was a disaster", here he is signing a letter in support of more of the same).

I wouldn't mind, but it's clearly not intellectual honesty that makes American liberals act pretend that Milton Friedman wasn't a party line Republican hack (which he was; he was also an excellent economist, which is why he won the Nobel Prize for Economics, not the Nobel Prize for Making A Sincere and Productive Contribution To The National Political Debate, which he would not have won if there was one). If it was just pure scholarly decency that made Yank liberals so keen on recognising the good qualities even in their political opponents, then you'd expect that they would also be quick to recognise the good qualities, analytical insights and so on in prominent Communist intellectuals. And do they? Do they f@#&. I won't link to the Paul Sweezy obituary, because I think everyone involved agrees that this wasn't Brad's finest hour, but it certainly wasn't atypical.

Of course the explanation's quite sensible. American liberals kiss up to Friedmanites and kick down on Reds because they're still, twenty years after the fall of the Berlin Wall, scared of being red-baited. One of the enduring reasons why I regard JK Galbraith as a hero is that practically alone among mainstream commentators of the era, he by and large refused to play this game.

Noah Smith: Weak Defenses of the Lucas/Prescott Program

Noah Smith:

Noahpinion: Weak defenses of the Lucas/Prescott Program: The first research program that came along and tried to answer the Lucas Critique was the "Real Business Cycle" program. This program, spearheaded by researchers such as Ed Prescott, made use of a new modeling approach called "DSGE". It also incorporated Robert Lucas' "Rational Expectations Hypothesis". Lucas didn't invent all of this stuff, but since A) it was invented in response to his Critique, B) he invented some of it, and C) he seemed to sign off on the parts he didn't invent, I feel justified in calling this new research program the "Lucas/Prescott Program"….

Continue reading "Noah Smith: Weak Defenses of the Lucas/Prescott Program" »

Things I Forgot to Note at the Time: Tyler Cowen Doubles Down on His Claim That America Today Has too Much Income Mobiliy

Tyler Cowen wrote:

Why economic mobility measures are overrated: For a given level of income, if some are moving up others are moving down. Do you take theories of wage rigidity seriously? If so, you might favor less relative mobility, other things remaining equal. More upward — and thus downward — relative mobility probably means less aggregate happiness, due to habit formation and frame of reference effects...

And then doubled down:

What does the inequality-immobility link mean?: [H]aving somewhat more [intergenerational] churn should not be viewed as a major social goal per se…. If you are looking for Turing test fail, mood affiliation, unwillingness to recognize comparisons on the margin (as if I am defending hereditary aristocracy), and us vs. them thinking, here are John Quiggin, Brad DeLong, and Paul Krugman, as if I had staged a satirical interchange to illustrate and make fun of their occasional proclivities…

The argument that America has too much intergenerational social mobility is not, to my mind, greatly strengthened by the plea that one is not "defending hereditary aristocracy"--that the optimal amount of intergenerational social mobility is not much less but just somewhat less than we have today.

Liveblogging World War II: July 29, 1942

Case Blue:

The Nazis cut the last direct railroad between central Russia and the Caucasus. Hereafter any oil flowing from the Caucasus to Russia must go by barge through the Caspian Sea and then up into Siberia.

World War II and Azerbaijan by Vagif Agayev Fuad Akhundov Fikrat T Aliyev and Mikhail Agarunov Vagif Agayev et al.:

World War II and Azerbaijan by Vagif Agayev, Fuad Akhundov, Fikrat T. Aliyev and Mikhail Agarunov: On the eve of what came to be known as "The Great Patriotic War," Baku was the cradle of the Soviet oil industry, and as such, the major supplier of oil and oil products. In 1940, for example, 22.2 million tons of oil were extracted from Baku which comprised nearly 72% of all the oil extracted in the entire USSR…. During the first year of the war, Azerbaijan produced 25.4 million tons of oil-a record for the entire history of its oil industry…. By the end of the year, so many engineers and oil workers had left for the war front that positions had to be filled by women. By the summer of 1942, more than 25,000 women or 33% of all the workers were working 18 hour shifts in the oil industries. At refineries and chemical plants, the percentage of women was even higher estimated 38%. By 1944, women's participation had grown to 60%. Veterans and retirees also returned to the oil fields to help as much as they could…. Baku sailors were desperate to find new ways to get the oil to the war front. Since there weren't enough tankers to do the job, they improvised ways to tow cisterns across the Caspian Sea to Krasnovodsk, Turkmenistan….

Hitler was determined to capture the oil fields of the Caucasus including those in Maikop (Russia) and Grozny (Chechnya). But most of all, he wanted Baku. Hitler was obsessed with oil….

[B]y late July 1942, Hitler's quest for Baku seemed well on its way to achieving his goal. The Germans had already captured the city of Rostov and severed the oil pipeline from the Caucasus. On August 9, they reached Maikop, the most westerly of the Caucasian oil centers-which turned out to be quite a small source for the Germans. Even under normal conditions, Maikop's production was only one tenth that of Baku's. However, before withdrawing from the city, the Russians had thoroughly destroyed the oil fields and supplies and equipment….

Hitler's generals presented him with a large decorated cake which depictedthe Caspian Sea and Baku. Documentary films show how amused Hitler was at the gesture and how he chose the most desirable piece-Baku-for himself. Fortunately, for Azerbaijan and the Allies, Hitler's attempt to devour Baku was confined to the icing on this cake….

In the summer of 1942, the threat of attack became so strong that the Soviet authorities decided to terminate drilling operations to evacuate the most valuable machinery and equipment further East. By autumn, 764 wells in Baku were sealed and 81 complete sets of drilling equipment together with the personnel were transported to Turkmenistan….

Another problem inseparably tied to fuel production was its transportation. By the summer of 1942, the enemy had blocked the main railways through which oil and its derivative products were transported. Thus, alternate means of transport had to be found via the Caspian and Volga water way. When the Germans also succeeding in blocking this route, transportation was routed through Central Asia. But the front couldn't wait. Aircraft, armored carriers, trucks, and tanks all needed fuel. Then the naval experts of the Baku oil-tanker fleet performed an incredible feat. For the first time in the world's history, they began towing a floating railway of oil tankers (wagons) from Baku to Krasnovodsk (Turkmenistan) as well as several thousands tons of oil reservoirs from Makhachkala (Dagestan) to Krasnovodsk.

The fleets were extremely overloaded. For example, the amount of oil transport in July 1941 exceeded 10 million barrels of crude oil and fuel. This amount was beyond the technical capabilities of the tanker fleet in Baku. But the demands from Moscow did not take into account the physical limitations. It was then that Baku naval experts hit upon the idea of attaching whole tanks and cisterns to each other by steel ropes and lowering them into the sea by cranes and towing them by steam tugs. This had never been done before in any place in the world and it enabled them to tow up to 35 cisterns together or 3 huge oil tanks (5 ton capacity) with a single tugboat.

Another Reason Google Is Likely to Win...

Gordon's Tech:

Technology defeats the do not call list: I've been getting repeated calls from 459-121-8344. There are web reports on this number, it's supposedly a telemarketer scam.

AT&T will block this number -- for about $6 a month. I tried reporting it as a violation of the do-not-call registry but of course 459 isn't a real area code (it's spoofed). So it can't be reported.

Google Voice will block these numbers.

I suppose if the problem continues I'll have to port my mobile number to GV.

Liveblogging World War II: July 28, 1942

Stephen Fritz:

H-Net Reviews: Five days after Hitler, Stalin issued an equally famous, and momentous, decision. Order No. 227, "Not a Step Back," indicated to Soviet officers and troops in plain and uncompromising language why the withdrawals had to cease, and what the consequences would be if they did not. Retreat, Stalin stressed, was no longer an option, since if it continued the Germans would seize the bulk of Soviet industrial and oil resources, which meant the end of the state. "Russia is large but there is nowhere to retreat," ran the slogan. It was, therefore, the duty of all to fight where they were. To stiffen his troops' resolve, Stalin also ordered the creation of a number of the infamous "blocking detachments," whose function was to shoot Soviet soldiers engaged in unauthorized withdrawals. At almost the same moment that Hitler had begun the fatal dissipation of German resources, then, Stalin had responded with ruthless measures to guarantee the complete mobilization of Soviet strength.


Paul Krugman: Schooling Inflationistas in Basic Principles of Logic

Types of Prediction:

What I think is going on is an attempt to blur the line between two kinds of prediction — unconditional and conditional. An unconditional prediction is something like this:

SCHIFF: You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.

For the most part, however, the economists who got it wrong didn’t make that kind of prediction; what they said was more along the lines of “if we have a massive increase in the monetary base and continue running trillion-dollar deficits, we’re going to see soaring inflation and interest rates”…. [H]ere’s the thing: the conditions for their prediction have been met. The monetary base has more than tripled; trillion-dollar deficits have gone on for years. I suppose you could offer some explanation in terms of other factors for the failure of these events to produce the predicted results — but I don’t see the Cochranes etc. doing that.

The point is that it’s not a very good excuse to say that you didn’t specifically predict runaway inflation if you gave an “if-then” story and your if came to pass without your then.

Weekend Musings Triggered by Observing That Noah Smith Is Working Hard to Make John Cochrane Appear Less Clueless About the World than He Is...

Noah Smith writes:

Noahpinion: Inflation predictions are hard, especially about inflation: John Cochrane responds here to a Brad DeLong jibe about inflation predictions. To make a long story short, back in 2009 Cochrane predicted inflation, it hasn't happened yet, and DeLong made fun of Cochrane for that fact. Cochrane essentially… [says:] The inflation prediction was (and is) a statement about risks, not a time-specific forecast….

Regarding Point 1, this is a very fair retort. Predictions are not necessarily forecasts. Saying "we are probably in a bubble that will burst sooner or later" is a different thing from saying "the bubble will burst at 10:36 A.M. next Thursday". I think people instinctively demand too many forecasts and not enough other kinds of predictions from macroeconomic models…

I disagree. I do not think that is a fair retort.

Two points:

First, and less important, a reader of Cochrane (and Smith) would believe that I had said something like "Cochrane confidently predicted in March 2009 that an explosion of inflation was imminent". I don't think I did. What I said was:

Back in the spring of 2009… Sebastian Mallaby['s]… idea of the kind of people whom he really needed to push up onto the stage were people like… John Cochrane, claiming that the "danger is not 1932; the danger is Argentina, a massive run from Treasury debt" and "this insane idea of fiscal stimulus".:

John Cochrane, March 30, 2009: The New Financial Deal: What Do the 1930s Teach About Reforming Today's Financial Markets?: [T]he danger now is inflation. And I would say it's a greater danger than most of the other people [who have mentioned it] have said. Our danger now is a run on Treasury debt. It's not just can the Fed soak this stuff back up again, but can it soak this enormous amount of debt back up again when people don't want either money or Treasury bills or anything labeled "U.S. Government." The danger is not 1932; the danger is Argentina, a massive run from Treasury debt. And then monetary policy will not be able to do anything. You can fool around with interest rates all you want. When people don't want Treasury bills or money you're stuck…

If someone says "you were wrong to fear risk X" it is not a retort to say "I never said X would happen, I only said it was a risk!" In general, I think, you do get further when you engage what your critics say rather than what they did not say…

Second, and more important, any economist's claim "I did not say it would happen, I only said that it was a substantial risk that might happen" does not thereby create an Invincible Fortress of Rightness from within which the economist can laugh all critics to scorn.

FRED Graph  St Louis Fed

If you say that something is a substantial risk and it does not come to pass, then--if you are an economist--you are committed to either (a) pointing at elements in the configuration of asset (and other) prices that demonstrated that people besides you thought it was a substantial risk at the time and took significant steps to insure themselves against it, or (b) explaining what was the market failure that kept people from hedging against the risk in such a way that we can see their hedges in market prices.

The inflation that Cochrane feared would follow the Federal Reserve's expansion of the high-powered money stock from $800B in 2008 to $1.7T in early 2009 has not come to pass. It has not come to pass even though the Federal Reserve has since not returned the high-powered money stock to normal but instead boosted it further to $2.7T and current market expectations are that it is more likely than not to be $3.3T by the end of the year. Yet there is no sign at all that anybody trading in asset markets is fearful enough of future inflation to price any probability of an acceleration of inflation into asset values.

FRED Graph  St Louis Fed 1

That is what the 10-year and 30-year break-even inflation rates from the Treasury nominal-TIPS spread tell us. If there is anybody ought there who believes in the risk of future inflation and is willing to put their money on it, the break-even inflation spread should be high. It isn't. It wasn't.

And the explanation of what the market failure here is, of why we should not take what asset prices are telling us seriously--why there were (and are) big risks of inflation even though market prices say there are not? Missing. Completely missing.

If you are an economist, you are supposed to put forward a coherent argument--expectations, risks, prices and quantities, market failures--that adds up to a consistent whole. If you are an economist, you are supposed to follow the rules--and there are rules, aren't there?

Thus, Noah, I really do not think it is "a fair retort" to say:

  • Risks of high inflation in 2009 were really really big!
  • TIPS in 2009 were really really undervalued!
  • Investors who were then holding TIPS had huge expected excess returns--and a return distribution with a large negative beta!
  • No, I have no explanation for why asset market prices then did not match fundamentals.

Of course, if you are not an economist but an ideologue, or are simply playing for a Team Republican which wants to pressure the Fed to keep nominal demand growth depressed, then the rules are different. Then you can simply blather in an evidence-free fashion without restraint, and nobody can complain…

Noahpinion: What If You Have Garbage Microfoundations?

Noah Smith:

Noahpinion: Why bother with microfoundations?: [W]hat we call “microfoundations” are not like physical laws. Heck, they’re not even true. Maximizing consumers are just a metaphor, possibly useful in making sense of behavior, but possibly not. The metaphors we use for microfoundations have no claim to be regarded as representing a higher order of truth than the ad hoc aggregate metaphors we use in IS-LM or whatever…. Using wrong descriptions of how people behave may or may not yield aggregate relationships that really do describe the economy. But the presence of the incorrect microfoundations will not give the aggregate results a leg up over models that simply started with the aggregates…. When I look at the macro models that have been constructed since Lucas first published his critique in the 1970s, I see a whole bunch of microfoundations that would be rejected by any sort of empirical or experimental evidence….

Macroeconomists seem to have basically nodded in the direction of the Lucas critique and in the direction of microeconomics as a whole, and then done one of two things: either A) gone right on using aggregate models, while writing down some "microfoundations" to please journal editors, or B) drawn policy recommendations directly from incorrect models of individual behavior.

Brad DeLong puts this rather more pithily:

I now have the most bizarre image in my mind: A seminar at the Library of Alexandria in 300 A.D., with an astronomer trying to provide micro foundations in the form of calculations of how large their wings must be and how fast their wings must beat for the angels to push the planets on their tracks through the quintessential spheres…

Yes, Republicans Lie All the Time. About Everything. Why Do You Ask?

Daily Kos: Netanyahu: Romney Lying About Their Friendship:

Bibi Netanyahu told Vanity Fair

I remember him [Romney] for sure, but I don’t think we had any particular connections, I knew him and he knew me, I suppose.

But… Mitt Romney… [says] the two were as thick as thieves (no pun intended) while they both worked at Bain Consulting Group in the 1970s….

ROMNEY: We [Mitt & Netanyahu] can almost speak in shorthand.  We share common experiences and have a perspective and underpinning which is similar."

In December GOP Debate regarding how America should handle Iran:

ROMNEY: I'd get on the phone to my friend Bibi Netanyahu and say, 'Would it help if I said this? What would you like me to do?'…

In April 2012, Romney said:

ROMNEY: Israel’s current prime minister is not just a friend, he’s an old friend…

Matthew O'Brien: Glenn Hubbard (Tacitly) Admits Romney's Economic Plan Won't Work

Matthew O'Brien:

Romney Economic Adviser Admits Romney's Economic Plan Won't Work: Romney seems to subscribe to the doctrine of "expansionary austerity"….It's an idea that has failed rather spectacularly…. Mitt Romney's top economic adviser… Glenn Hubbard… took to the pages of the Financial Times….

Gradual fiscal consolidation may also be stimulative… [if] reducing federal spending… lower[s] future tax rates and… lower[s] interest rates to [boost] investment and net exports.

Plenty of people considered this a loud (and perhaps wise) defense of austerity. It's not. How would less government spending translate into more spending overall? The question answers itself: If the other parts of the economy subsequently spend more…. And what would make them spend more? Answer: Lower interest rates….

That leaves one big question. Why would interest rates fall when the government spends less?… [T]here's a problem. Interest rates have never been lower. Cutting spending won't lower interest rates any further…. [T]here isn't any crowding out now….

Hubbard is smart. He knows that austerity won't work without lower interest rates. And he knows that interest rates couldn't be much lower than they already are. In other words, he knows that cutting the deficit too much too soon would be a very bad idea today.

Don't let the rhetoric confuse you. Romney might say he's an austerity candidate, but his top economic advisors quietly admit that this might not be wise.

It's almost like Romney might flip flop on this if he wins.

The biggest immediate problem is that Romney has no plausible plan to restore full employment. The second biggest problem is that Romney's economic plans--big tax cuts for the rich now, and implausible promises of cuts to Medicare and Social Security in the far future--do not create a stable environment for economic growth. The Medicare Part D and Iraq War policies Hubbard helped to implement during the Bush administration are ultimately going to have to be paid for somebody, and the fact that Hubbard's old boss George W. Bush had no plans for paying for them means that those anticipated debt burdens have been discouraging enterprise for a decade now. Running up the debt is excusable--nay, desirable--in big wars and depressions. Not otherwise.

The Extra-Large Omelet of Death...

Hat tip to Steven Lukes's The Curious Enlightenment of Professor Caritat:

Marquis de Condorcet: Marie-Jean-Antoine-Nicolas de Carita… 1743… 1794…. French mathematician, philosopher and Revolutionist….

Being of a very genial, susceptible and enthusiastic disposition, he was the friend of almost all the distinguished men of his time, and a zealous propagator of the religious and political views then current among the literati of France. D'Alembert, Turgot and Voltaire, for whom, he had great affection and veneration, and by whom he was highly respected and esteemed, contributed largely to the formation of his opinions. His "Lettre d'un laboreur de Picardie à M.N…" (Necker) was written under the inspiratiqn of Turgot, in defense of free internal trade in corn…. In 1785 he published his "Essai sur l'Application de l'Analyse aux Probabilités des Decisions prises à la Pluralité des Voix", a remarkable work which has a distinguished place in the history of the doctrine of probability…. In 1786 he married Sophie de Grouchy, a sister of Marshal Grouchy, said to have been one of the most beautiful women of her time….

He was the chief author of the address to the European powers when they threatened France with war. He was keenly interested in education, and, as a member of the committee of public instruction, presented to the Assembly (April 21 and 22, 1792) a bold and comprehensive scheme for the organization of a system of state education which, though more urgent questions compelled its postponement, became the basis of that adopted by the Convention, and thus laid the foundations on which the modern system of national education in France is built up. After the attempted flight of the King, in June 1791, Condorcet was one of the first to declare in favor of a republic….

At the elections for the Convention he was chosen for five departments, and took his seat for that of Aisne. He now became the most influential member of the committee on the constitution…. Condorcet objected to the assumption of judicial functions by the Convention, objected also on principle to the infliction of the death penalty; but he voted the King guilty of conspiring against liberty and worthy of any penalty short of death….

His severe and public criticism of the constitution adopted by the Convention, his denunciation of the arrest of the Girondists, and his opposition to the violent conduct of the Mountain, led to his being accused of conspiring against the Republic. He was condemned and declared to be hors la loi….

When the execution of the Girondists showed him that his presence exposed his protectress to a terrible danger, he resolved to seek a refuge elsewhere. "I am outlawed," he said, "and if I am discovered you will meet the same sad end as myself. I must not stay." Madame Vernet's reply deserves to be immortal, and should be given in her own words: "La Convention, Monsieur, a le droit de mettre hors la loi: elle n'a pas le pouvoir de mettre hors de l'humanité; vous resterez."…

[H]is wife and some of his friends, with the co-operation of Madame Vernet, prevailed on him to engage in the composition of the work by which he is best known -- the "Esquisse d'un Tableau Historique des Progrès de l'Esprit Humain"….

Condorcet, by a fatally successful artifice, at last baffled the vigilance of his generous friend and escaped. Disappointed in finding even a night's shelter at the chateau of one whom he had befriended, he had to hide for three days and nights in the thickets and stone-quarries of Clamart. Oh the evening of the 7th of April 1794 -- not, as Carlyle says, on a "bleared May morning", -- with garments torn, with wounded leg, with famished looks, be entered a tavern in the village named, and called for an omelette. "How many eggs in your omelette?" "A dozen." "What is your trade?" "A carpenter." "Carpenters have not hands like these, and do not ask for a dozen eggs in an omelette." When his papers were demanded he had none to show; when his person was searched a Horace was found on him. The villagers seized him, bound him, haled him forthwith on bleeding feet towards Bourg-la-Reine; he fainted by the way, was set on a horse offered in pity by a passing peasant, and, at the journey's end, was cast into a cold damp cell. Next morning he was found dead on the floor. Whether he had died from suffering and exhaustion, from apoplexy or from poison, is an undetermined question.

Why Won’t Mitt Romney Root For His Own Horse?

Josh Fruhlinger:

Why Won’t Mitt Romney Root For His Wife’s Dumb Horse?: We’ve been a bit harsh on Ann Romney of late, what with her growing contempt for people who don’t have nine-figure net worth, but apparently she’s never really wanted Mitt to run for President, and now that he’s doing it he should probably be nicer to her? Like, you know, he’s in London for the Olympics where her horse is going to be dancing and all, the least he could do is show up and cheer or something! But instead, he said this:

It’s a big, exciting experience for my wife. I have to tell you, this is Ann’s sport. I’m not even sure which day the sport goes on. She will get the chance to see it, I will not be watching the event. I hope her horse does well.

Nice try distancing yourself from Rafalca, Mitt. Everyone knows that three months ago you were super-excited about the Dressage World Cup and personally picked out the music Rafalca danced to…

Indeed. Matthew Mosk:

The Romneys' Dancing Horse Competes Without Them: The World Cup finals for the elite sport of dancing horses, known as dressage, opened today in the Netherlands without the presence of two of its most prominent wealthy devotees, Mitt and Ann Romney. The Romneys' horse, Rafalca, will compete, however, performing to music personally selected by the Republican presidential candidate…. Until recently, her presence at such an elite event would have been automatic -- followers of the sport describe her as a fixture in the stands on the global dressage circuit, and in past years she brought her husband Mitt Romney along with her. While the rigors of the campaign trail are likely a major impediment this year, political analysts told ABC News another, more important factor may be behind the decision to downplay discussion of her pricey hobby: How it looks….

"It runs thousands of dollars a month to maintain," said Kenneth J. Braddick, a dressage enthusiast who publishes a website with news about the sport. "They have pretty much everything -- a farrier, a chiropractor, a vet, a masseuse for the horses. Just like any professional athlete at that level. That kind of infrastructure is massively expensive."

Mark Kleiman: Breach-of-Trust in Bain Capital

Mark Kleiman:

Bloomberg on Romney’s bust-out operation: Anthony Gardner, himself a private-equity operator, has crunched some numbers: > 10 of roughly 67 major deals by Bain Capital during Romney’s watch produced about 70 percent of the firm’s profits. Four of those 10 deals, as well as others, later wound up in bankruptcy.

Gardner then explains, using some of those big deals (including Ampad and GS Steel) as examples, how the asset-stripping operation worked… sticking creditors, workers, and sometimes the government with the tab…. [T]he notion that Romney is somehow not responsible because the actual bankruptcies only took place after he stopped active management of Bain whenever that turns out to be) is just absurd. What ought to count is when the fatal blow was struck, not when the medical examiner signed the death certificate.

Liveblogging World War II: July 26, 1942

Case Blue:

The Nazi XXIV Panzer Corps breaks through the Soviet lines and reaches the Don River in the Great Bend. The recently formed First and Fourth Tank Armies conducted several counterattacks against Sixth Army's advance, threatening XIV Panzer Corps, but neither attack by the inexperienced troops proved successful.

However, the Sixth Army is now nearly out of ammunition, and is short on motor fuel. Hitler demands that Sixth Army capture Stalingrad immediately, and also that the focus of the advance be shifted to Army Group A's drive toward the Caucasus oil fields. The OKH Quartermaster Department diverts half of Army Group B's motor transport to support Army Group A.

Casey B. Mulligan and the New York Times Mess It Up Again!

Casey Mulligan's article used to read:

The New York Times Publishes Casey Mulligan as a Joke, Doesn't It?: …the Fed lends money to banks on an overnight basis, at an interest rate called the federal funds rate…

As I said at the time:

The first joke [of three] comes in Casey Mulligan's first paragraph: the Fed does not lend money to banks on an overnight basis at the Federal Funds Rate. The Fed lends money to banks at an interest rate called the Discount Rate. The Federal Funds rate is the rate at which banks lend their Federal Funds--the deposits they have at the Federal Reserve--to each other. That's why it is called the Federal Funds rate…

They "corrected" it, to fix an "editing error".

His article now reads:

Casey B. Mulligan: Who Cares About Fed Funds?: …the Fed lends money to banks at the federal funds rate, the rate charged on overnight loans among banks…

For the second time:


This isn't rocket science, people.

People who can't get this right shouldn't be writing about finance or monetary policy.

People who cannot even get their corrections right shouldn't be writing at all.

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

In Which I Give Up Refereeing the War Over the Treasury: Matthew Yglesias on Neil Barofsky vs Tim Geithner


Neil Barofsky vs Tim Geithner: Who's right on the bailouts?: [B]eneath the obvious mutual loathing between Barofsky and Tim Geithner, and the dueling teams of journalists around each man, is a relatively narrow disagreement about public policy. Unfortunately the nature of the dispute between the two teams' media proxies—see, e.g., Jackie Calmes for Team Tim and Gretchen Morgenson for Team Neil, both in the New York Times—tends to obscure what the actual disagreement is about….

[T]he Treasury Department… they've been… trying to create the kind of healthy well-capitalized banking system that's crucial… [and] trying to create the kind of well-regulated banking system that's less likely to blow up in the future.

What does Barofsky think they're doing?… He agrees, for example, that Team Tim is in fact trying to better-regulate the banking system and that it's being fought in this effort by the Republican Party…. [D]oes Barofsky also agree that Team Tim is trying to create the healthy and well-capitalized banking system that's crucial for broader growth? Well only sort of:

In almost every critical juncture when it came to really meaningful choices in conducting the bailout, this administration and the prior administration—there's no meaningful difference  between the two—consistently chose the interests of Wall Street banks over that of homeowners, over that of the broader economy….

Team Tim would say that they're trying to create a well-capitalized banking system in order to bolster the broader economy. Team Neil counters that the broader economy would be better-served by a policy that imposed steep losses on banks and instead repaired household balance sheets…. [W]ho's right?…

Team Neil has never really presented a coherent alternative course of action…. From the original winter 2008-2009 argument over bank nationalization along Swedish lines, I've rarely heard it acknowledged that these courses of actions would likely have required hundreds of billions of dollars in additional "bailout" money. I think that still would have been the optimal policy, but it's not a no-brainer….

I can also say that I don't actually think this disagreement was nearly as consequential as either side seems to think. The administration made a catastrophic blunder in failing to appoint and confirm a team of Federal Reserve governors who were committed to reflating the economy to something approaching its pre-crisis trend level of aggregate spending. Had they done that, the banking policies they chose would have worked. Having failed to do that, even alternative superior banking policies would have failed.

Well, we do not know how well more aggressive and different housing policies in particular and financial market policies in general would have worked because they were not tried. Claims that they would not have worked because only monetary policy is important--or alternative claims that only fiscal policy is important or only banking policy is important or only new-Keynesian policies are important--seem to me to be strikingly unfounded: the victory of ideology and academic-intellectual factionalism over a frank admission of the limits of our ignorance. The stakes might have been low. They might not have been low. The example of Sweden in 1992 suggests that the stakes might have been high…

There is also the question of which side, in the really existing political-economic situation of 2009-2010, Team Neil was really playing for. Yes, they wanted to strip the bankers of their wealth, put bankers in jail, and pull homeowners above water. But their was no coalition for such a super-Swedish-model solution in Congress and no possibility of creating one. And Barofsky's allies in congress--the people who he was leaking games of "gotcha" to, the likes of Darrell Issa--wanted nothing done at all.

One perspective--I cannot evaluate it--is the view of the left-bureaucratic-career-civil-servant opposition within Treasury. Their view is that the net effect of Barofsky on the Treasury's willingness to do more to boost the recovery was negative:

  1. Tim Geithner's instinct is to think that the situation is never as bad as it looks right now, that everybody needs to be at the table and needs to get something in a compromise, and that when things are confused it is best to do less and avoid making mistakes.
  2. This makes him an absolute trainwreck as a #2 to somebody like Obama, whose instinct is also to think that the situation is never as bad as it looks right now, that everybody needs to be at the table and needs to get something in a compromise, and that when things are confused it is best to do less and avoid making mistakes.
  3. There were many proposals within Treasury to do bold and aggressive things that might or might not have worked to rebalance the financial sector and boost the economy.
  4. But somebody would always say: "this might not work at all".
  5. And somebody else would say: "and there is one chance in ten Wall Street would find a way to seriously game us on this, and then we would spend the rest of our lives defending ourselves against Barofsky in court."
  6. And somebody else would say: "And what kind of picture do you think Issa will paint when Barofsky leaks whatever looks worst? The White House will not like that at all."

Back in 2009 I thought I had a good understanding of Geithner and his team and what they thought and what they were trying to do and why. Now, however, I don't claim to. So I can't referee this any further.

Jason LInkins Doesn't Like the Fact That Jackie Calmes Doesn't Like Neil Barofsky's "Bailout"

Treasury's handling of home mortages--the HAMP program--was an utter, complete, total disaster. Its extreme disinterest in actually doing its job to rebalance mortgage financing is in my view the single most major count of any indictment of Tim Geithner, a principal cause of why the recovery has been so slow, and why I no longer say: "Geithner has a very hard job, and I'm sure is doing it better than I would in his place".

As Joe Gagnon says:

[O]ne of the biggest goals of QEI was to push down the mortgage rate to spark a refinancing boom to encourage households and enable households to reduce their expenditures and repair their balance sheets and be able to spend again. That worked not quite as well as we hoped because the administration’s program for getting underwater borrowers to borrow didn’t work and I think that’s a true disaster that has no excuse. I have nothing but incredible, there’s just, the blame the administration on not doing this is just incredible. This could have been a huge success. We got the lowest 30-year mortgage rates in history and we couldn’t take advantage of them to the extent that we could. We got about a trillion dollars in refinancing when we should have gotten two or three trillion dollars in refinancing.

The way I have heard the story, however, is that Neil Barofsky at SIGTARP was not part of the solution to HAMP but rather part of the problem: eager to play "gotcha" with any home refinancings that ended up costing the government money, and also eager to leak whatever "gotchas" he could to the highly partisan republican Darrell Issa, Barofsky's advice when taken made HAMP less effective and more bureaucratic.

Jason Linkins:

New York Times 'Bailout' Review Incomprehensible, Dismissive: Calmes' ersatz review in The New York Times… comes off as a lengthy valentine to the Treasury Department officials who are so soundly savaged in Barofsky's book…. Chances are, after all, that Republicans will widely embrace "Bailout" -- their base is so uniquely averse to TARP that Barofsky's critiques make him an ally of convenience. That said, it's not controversial at all to remind you that the GOP remains opposed to the sort of rigorous financial sector oversight that Barofsky champions….

[S]he argues that Barofsky's account contains a series of internal contradictions….

[L]et's take three TARP-related programs that Calmes never mentions by name (despite the fact that the staggering majority of Barofsky's account concerns these programs): the Home Affordable Modification Program, the Term Asset-Backed Securities Loan Facility, and the Public-Private Investment Program. In all three cases, Barofsky contends that the programs were hastily created for the purpose of scoring political points, invited fraud and abuse, and greatly favored Wall Street banks at the expense of taxpayers. Additionally, his concerns about these programs were routinely ignored….

It is honestly galling that Calmes simply dispenses with HAMP by saying, "Mr. Barofsky justifiably spends time on Treasury's failure to get banks to stem home foreclosures"….

But then Linkins doesn't talk at all about the Treasury's handling of the TALF, or about the PPIP at all. And I do not have the impression that the Treasury's neglect of Barofsky's advice (to the extent it was neglected) on TALF and PPIP led to the kinds of fraud that Barofsky was hired to prevent.

I gotta score this for Calmes on points.

The Need for a Higher Rate of Increase in Prices: Sebastian Mallaby Is Forty Months Late Department

Back in the spring of 2009, when Sebastian Mallaby of the Council on Foreign Relations put together a symposium on the then-gathering depression, his idea of the kind of people whom he really needed to push up onto the stage were people like… John Cochrane, claiming that the "danger is not 1932; the danger is Argentina, a massive run from Treasury debt" and "this insane idea of fiscal stimulus".:

John Cochrane, March 30, 2009: The New Financial Deal: What Do the 1930s Teach About Reforming Today's Financial Markets?: [T]he danger now is inflation. And I would say it's a greater danger than most of the other people [who have mentioned it] have said. Our danger now is a run on Treasury debt. It's not just can the Fed soak this stuff back up again, but can it soak this enormous amount of debt back up again when people don't want either money or Treasury bills or anything labeled "U.S. Government." The danger is not 1932; the danger is Argentina, a massive run from Treasury debt. And then monetary policy will not be able to do anything. You can fool around with interest rates all you want. When people don't want Treasury bills or money you're stuck.

Many things are depressingly the same [as in the Great Depression.] Policy is chaotic.  Who would invest in this climate?  [The problem is] not about toxic assets; [The problem is] about who wants to go in on a deal with Darth Vader [the government], who can change his mind at any moment?  That's the uncertainty that's keeping things from getting going and that's what's slowing the rebuilding of financial markets.  We're facing growth-destroying marginal tax rates, an excuse for the government takeover of large and completely unrelated sectors, class warfare, vindictive ex post taxations.  This is the chance for a credit crunch -- which normally resolves itself fairly quickly -- to turn into a Great Depression.  And perhaps most of all there is the danger of learning the wrong lessons; that our grandchildren will have to come back to the next meeting to say, what were the lessons -- the lessons mis-learned of the last time around?

My great hope is that the bounce-back will be quick before the quack medicine can be said to have worked.  (Chuckles.) Just as we sort of -- as people think that this insane idea of fiscal stimulus -- which I'll go on with later if I get a chance -- came from Roosevelt's experience with no reason why it should work, there is a danger of thinking all of the crazy stuff they're doing now will have caused the bounce-back, if that happens, in five years, but my only hope is that it happens quickly and doesn't leave us with another Great Depression…

I cannot think of a single sentence in that passage that makes John Cochrane look half-intelligent. Can you?

Today Sebastian Mallaby does not seem to be listening to the likes of John Cochrane any more:

Show some real audacity at the Fed: Mr Bernanke… last week… was rebuked by Republicans for his presumed recklessness, while Democrats appeared to feel he was pushing policy as far as he could. But there is nothing particularly wild about the Fed’s money printing. Its purpose is merely to effect a change in private balance sheets. Banks sell their Treasuries to the Fed in exchange for newly minted dollars (in the case of quantitative easing) or for shorter-term government securities (in the case of the current Operation Twist). Given that risk-free government securities are treated as cash equivalents by financial institutions, this is not radical.

Most assessments of quantitative easing find that it has worked…. But these positive verdicts conceal a less uplifting message. The first round of quantitative easing was most powerful – it was the largest, and its novelty inspired shock and awe. The second round, from November 2010 to June 2011, was less effective. The current Operation Twist is the limpest of all.

Unless the Fed can rekindle the shock value of the first round, more quantitative easing is unlikely to work. Success depends on a whole range of actors deciding that the Fed is determined to accelerate recovery rather than repeat a tired trick that they have seen before…. Quantitative easing that fails to spark risk-taking could actually make things worse….

With inflation below target and unemployment far above the neutral rate, there is a clear case for stimulus…. One possible measure is to cancel interest on excess reserves…. [T]he Fed could couple more quantitative easing with a formal announcement of a higher inflation target. Some Fed leaders are open to this. Charles Evans, the Chicago Fed president, has floated the idea of a 3 per cent target, effective until unemployment falls below 7 per cent…. Financiers would embrace risk assets rather than safe ones with real returns that would be clearly negative. Companies, expecting more growth, would step up investments…. The time has come for some fresh thinking. A Fed that can escape the myth of its audacity might be able to do more.

We really could have used this from him forty months ago, when it might have mattered.

Liveblogging World War II: July 25, 1942

Case Blue:

Nazi Army Group A crosses the Don River and advances rapidly into the steppe, fanning out along a 120 mile broad front from the Sea of Azov to Zymlianskaya.

Invasion of Papua:

After 2 ambushes in 2 days, Japanese overestimate the Australian forces defending the Kokoda track, over the Owen Stanley mountains to Port Moresby. They halt their advance and reorganize to face this unexpected resistance.

The New York Times Publishes Casey Mulligan as a Joke, Doesn't It?

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

This is really embarrassing, New York Times: really, really embarrassing.

The first joke comes in Casey Mulligan's first paragraph: the Fed does not lend money to banks on an overnight basis at the Federal Funds Rate. The Fed lends money to banks at an interest rate called the Discount Rate. The Federal Funds rate is the rate at which banks lend their Federal Funds--the deposits they have at the Federal Reserve--to each other. That's why it is called the Federal Funds rate.

The second joke comes in the second paragraph. Hansen and Singleton (1983) is "new research"?

The third joke is the entire third paragraph: since the long government bond rate is made up of the sum of (a) an average of present and future short-term rates and (b) term and risk premia, if Federal Reserve policy affects short rates then--unless you want to throw every single vestige of efficient markets overboard and argue that there are huge profit opportunities left on the table by financiers in the bond market--Federal Reserve policy affects long rates as well. Note the use of the weasel word "largely".

The New York Times badly needs to clean house here: there are lots of economists who would love to write for the New York Times for free and who know the difference between the Federal Funds Rate and the Discount Rate:

Casey B. Mulligan: Who Cares About Fed Funds?: New research confirms that the Federal Reserve’s monetary policy has little effect on a number of financial markets, let alone the wider economy…. The Federal Reserve and especially its regional bank in New York are actively engaged in buying and selling Treasury securities, and the Fed lends money to banks on an overnight basis, at an interest rate called the federal funds rate….

A 1983 study by Lars Peter Hansen of the University of Chicago and Kenneth Singleton of Stanford showed that short-term rates on Treasury bills and short-term returns on stocks traded on the New York Stock Exchange had very little correlation with consumer spending….

Eugene Fama of the University of Chicago recently studied the relationship between the markets for overnight loans and the markets for long-term bonds…. Professor Fama found the yields on long-term government bonds to be largely immune from Fed policy changes…

Gretchen Morgenson Likes Neil Barofsky's Book

Gretchen Morgenson on Neil Barofsky:

One battle involved the Public-Private Investment Program, designed to get troubled mortgages off banks’ balance sheets by encouraging private investors to buy them using mostly taxpayer dollars. When the inspector general’s office recommended ways to protect against fraud and to fix other flaws in the program, Mr. Barofsky writes, the Treasury rejected the suggestions, maintaining that they would gut the programs and reduce participation.

Another skirmish involved the department’s ill-conceived loan modification plan, known as the Home Affordable Modification Program. When the Treasury began discussing the program’s outlines, Mr. Barofsky said he became concerned that it would open the door to fraudulent foreclosure rescue schemes, in which large upfront fees could be extracted from desperate borrowers eager to participate in what was supposed to be a free government program. When his office recommended fraud-prevention measures, several were ignored, he writes. A few months after the modification plan was announced, his office began a preliminary audit of its rollout. “We soon verified what we had suspected,” Mr. Barofsky writes. “Treasury had failed to ensure that the servicers had the necessary infrastructure to support a massive mortgage modification program.” It barely got off the ground, and few homeowners have received the help they hoped for....

Despite all of this, Mr. Barofsky ends on something of a positive note. Meaningful changes to our broken system may finally come about, he writes, if enough people get angry. His conclusion is this: “Only with this appropriate and justified rage can we sow the seeds for the types of reform that will one day break our system free from the corrupting grasp of the megabanks".

Only a Government Would Have Created the Internet

Duncan Black:

Eschaton: I think the aspect of the "government invented the internet" which isn't emphasized enough is that it isn't just some random fluke that it was born out of various public and publicly financed entities. A private company would not have created it. Before the internet (or www, depending on precisely what we're talking about) we had various pre-internets, which were all cool enough in their own way and offered various applications, information, and services to people. In some ways the were superior to the internet of old, but they weren't the "informtaion superhighway" which we could all just hook into any way we wanted. It wasn't so much the technology, though it was that too, it was the idea, and it isn't an idea a for-profit company would have pursued in nearly the same way.

In some ways we're seeing the return to the pre-internet version, though the actual internet still exists. Facebook polices content, and people expect them to for reasons I can't fathom…

Jackie Calmes Says that SIGTARP IG Neil Barofsky Is Incoherent…

Jackie Calmes:

‘Bailout,’ by Neil Barofsky: Barofsky refers throughout to the $700 billion bailout, never clarifying that less than $300 billion of that amount went out the door by the time TARP expired; that not a penny went to banks during the Obama administration; and that the big banks repaid taxpayers with interest.

As ugly and flawed as the rescue process was… an economic collapse was averted, and that Main Street is recovering: slowly, but typically so for recessions brought on by credit crises….

To the extent that Mr. Barofsky acknowledges that neither big losses nor big fraud cases occurred, he credits the anti-fraud measures he pressed Treasury to include in programs and contracts. Yet his book is a chronicle of complaints that Treasury undercut, blindsided and ignored him. Perhaps the biggest criticism of Treasury Secretary Timothy F. Geithner suggested by Mr. Barofsky’s account is that Mr. Geithner should have been a lot more conciliatory toward this zealous inspector general, if only to avoid becoming the biggest villain in Mr. Barofsky’s morality tale….

While Mr. Barofsky pointedly describes the Wall Street background of every Washington player who has one, he never notes that Mr. Geithner does not fit the theme, having served in the public sector, starting at Treasury a quarter-century ago, despite lucrative offers during the Street’s boom years.

Mr. Barofsky’s book adds little of substance to the mini-library on the worst financial crisis since the Depression….

Mr. Barofsky, now a senior fellow at New York University School of Law, does a good job of describing the complex financial products at the core of the crisis. And he does open windows into how Washington works, though not always those he intended…. [He]develops backdoor relationships with the offices of friendly [and highly, highly partisan] Republican lawmakers like Senator Charles E. Grassley of Iowa and Representative Darrell Issa of California, leaking information back and forth to shape news coverage. Then he wonders why Treasury keeps him in the dark?

Mr. Barofsky justifiably spends time on Treasury’s failure to get banks to stem home foreclosures. But he charges that Treasury helped give birth to the Tea Party “by rolling out a hurried and poorly thought-out mortgage modification program,” when what actually spawned that movement was conservatives’ opposition to the very idea of bailing out troubled homeowners, which Mr. Barofsky so favors....

If Treasury has been making policies exclusively “by Wall Street for Wall Street,” as Mr. Barofsky says, why then has a once friendly Wall Street turned so hostile to President Obama’s re-election?

Sandy Weill Calls for a Return to Glass-Steagall

Now he tells us department:

Wall Street Legend Sandy Weill: Break Up the Big Banks: Former Citigroup Chairman & CEO Sanford I. Weill, the man who invented the financial supermarket, called for the breakup of big banks in an interview on CNBC Wednesday.

What we should probably do is go and split up investment banking from banking, have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not too big to fail

Weill told CNBC’s “Squawk Box.”

He added:

If they want to hedge what they’re doing with their investments, let them do it in a way that’s going to be mark-to-market so they’re never going to be hit.”

He essentially called for the return of the Glass–Steagall Act, which imposed banking reforms that split banks from other financial institutions such as insurance companies…

Sliding Into The Great Depression

Sliding Into The Great Depression: At its nadir, the Depression was collective insanity. Workers were idle because firms would not hire them to work their machines; firms would not hire workers to work machines because they saw no market for goods; and there was no market for goods because workers had no incomes to spend.

Long-term unemployment means that the burden of economic dislocation is unequally borne. Since the prices workers must pay often fall faster than wages, the welfare of those who remain employed frequently rises in a depression. Those who become and stay unemployed bear far more than their share of the burden of a depression. Moreover the reintegration of the unemployed into even a smoothly-functioning market economy may prove difficult, for what employer would not prefer a fresh entrant into the labor force to someone out of work for years? The simple fact that an economy has recently undergone a period of mass unemployment may make it difficult to attain levels of employment and boom that a luckier economy attains as a matter of course.Once an economy had fallen deeply into the Great Depression, devalued exchange rates, prudent and moderate government budget deficits (as opposed to the deficits involved in fighting major wars), and the passage of time all appeared equally ineffective ways of dealing with long-term unemployment. Highly centralized and unionized labor markets like Australia's and decentralized and laissez-faire labor markets like that of the United States did equally poorly in dealing with long-term unemployment. Fascist "solutions" were equally unsuccessful, as the case of Italy shows, unless accompanied by rapid rearmament as in Germany.

Even today, economists have no clean answers to the question of why the private sector could not find ways to employ its long-term unemployed. The very extent of persistent unemployment in spite of different labor market structures and national institutions suggests that theories that find one key failure responsible should be taken with a grain of salt.

But should we be surprised that the long-term unemployed do not register their labor supply proportionately strongly? They might accurately suspect that they will be at the end of every selection queue. In the end it was the coming of World War II and its associated demand for military goods that made private sector employers wish to hire the long-term unemployed at wages they would accept.

At first the unemployed searched eagerly and diligently for alternative sources of work. But if four months or so passed without successful reemployment, the unemployed tended to become discouraged and distraught. After eight months of continuous unemployment, the typical unemployed worker still searches for a job, but in a desultory fashion and without much hope. And within a year of becoming unemployed the worker is out of the labor market for all practical purposes: a job must arrive at his or her door, grab him or her by the scruff of the neck, and through him or her back into the nine-to-five routine if he or she is to be employed again.

This is the pattern of the long-term unemployed in the Great Depression; this is the pattern of the long-term unemployed in Western Europe in the 1990s. It appears to take an extraordinarily high-pressure labor market, like that of World War II, to successfully reemploy the long-term unemployed.

The Long, Slow Boring of Hard Boards...

Ken MacLeod:

Red Plenty or socialism without doctrines: In the 1970s I thought that central planning combined with democratic control along the lines argued for by (e.g.) Ernest Mandel was possible and desirable. Towards the end of the decade I stumbled upon the economic calculation argument, as briefly stated by David Ramsay Steele in a readable pamphlet. I didn’t understand it fully but I kept worrying at the problem it posed. In the 1980s I read Geoffrey Hodgson’s The Democratic Economy, and Nove’s The Economics of Feasible Socialism, which made some socialist sense of the same argument. More recently I’ve been interested in the more radical market socialism proposed by David Schweickart. The only serious socialist arguments against market socialism are those of Paul Cockshott et al for a democratic, centrally planned economy – which I don’t have the mathematics to follow in detail, but which I keep dragging to the attention of anyone who does.

Meanwhile, in my own neck of the woods, the Scottish Socialist Party offers a 12-point plan for a ‘Scottish socialist republic’, one of whose 12 points is:

Supermarket prices will be frozen.

Sometimes I wonder why I bother.