Afternoon Must-Read: Dan Davies What’s Really Wrong With Bank Supervision
Afternoon Must-Read: Paul Krugman: The Pimco Perplex

Noted for Your Afternoon Procrastination for September 30, 2014

Over at Equitable Growth--The Equitablog


Must- and Shall-Reads:

And Over Here:

  1. Daniel Davies: What’s Really Wrong With Bank Supervision: "The banks treat supervisors like punks, and the supervisors let them.... The supervisor was, originally in the privacy of his office and talking to his own team, outraged. But then when he went to meet with the bank, all the vim and vinegar went out of him.... The problem, as everyone who is familiar with bank supervision knows, is that there is a cultural disinclination to challenge banks on their behaviour.... The biggest problem is that senior management of bank supervisors don’t have the supervisors’ backs.... Regulated institutions generally have better contacts and relationships with the top central bankers than their supervisors do. And for whatever reason, top central bankers never developed the necessary knee-jerk aggressive response to any attempts to make use of these relationships to affect the behaviour of supervisors. If you’re a bank CEO, then calling Tim Geithner for a chat--that ought to be OK. Calling Tim Geithner to complain about how your supervisor is treating you--that ought to be a third-rail, relationship-destroying, potential career ender of a call. And it isn’t..."

  2. Joe Stiglitz: Reconstructing Macroeconomic Theory to Manage Economic Policy: Any theory of deep downturns has to answer these questions: What is the source of the disturbances? Why do seemingly small shocks have such large effects? Why do deep downturns last so long? Why is there such persistence, when we have the same human, physical, and natural resources today as we had before the crisis?... The apparent liquidity trap today is markedly different from that envisioned by Keynes in the Great Depression, and why the Zero Lower Bound is not the central impediment to the effectiveness of monetary policy in restoring the economy to full employment."

  3. Daron Acemoglu et al.: Offshoring and Skill-Biased Technical Change: "When labour is sufficiently cheap abroad, firms have incentives to offshore low-skill tasks and invest in skill-biased technologies at home.... The production structure of Apple’s iPod illustrates some of the potential effects.... Though most production jobs are offshored, a significant number of high-skill engineering jobs and low-skill retail jobs are created in the US, and more than 50% of the value added of the iPod is captured by domestic companies. With more limited offshoring, some of the production jobs may have stayed within the US borders, increasing the demand for the services of low-skill production workers. But this would have also increased the cost and price of iPods, reducing employment not only in engineering and design occupations but also in retail and other related tasks.... The reason for this switch in the direction of technological progress is that more offshoring increases the demand for labour abroad and thus wages in the East. In turn, the closing of the wage gap between countries mutes the price effect that was fuelling skill-biased innovation.... Offshoring first increases wage inequality in the West. However, as offshoring continues, technical change eventually changes direction and may even lower the skill premium..."

  4. Martin Wolf: Why Inequality Is Such a Drag on Economies: "A report written by the chief US economist of Standard & Poor’s, and another from Morgan Stanley, agree that inequality is not only rising but having damaging effects on the US economy... two economic consequences... weak demand and lagging progress in raising educational levels.... The costs to society of rising inequality go further--the greatest costs are the erosion of the republican ideal of shared citizenship.... As the US Supreme Court seeks to bend the constitution to the will of plutocrats, the peril is to the politically egalitarian premises of the republic. Enormous divergences in wealth and power have hollowed out republics before now. They could well do so in our age. Yet even for those who do not share such concerns, the economic costs should matter..."

  5. Michael Bauer: Options-Based Expectations of Future Policy Rates: "Forecasts of short-term interest rates that are based on futures rates in financial markets can be very misleading when the policy rate is near the zero lower bound. By contrast, options on future short-term interest rates can provide more accurate projections. Currently these options suggest that the federal funds rate—the Federal Reserve’s key monetary policy interest rate—is most likely to lift off from zero around mid-2015 and rise only slowly afterwards at a pace of about 1 percentage point per year."

  6. Ryan Avent: Monetary Policy: Why Is the Fed Planning to Fail?: "THE members of the Federal Open Market Committee are not overly fond of being stuck at the zero lower bound (ZLB) [as they have been] since December of 2008.... Policy-making since then has been a monetary mess.... I'll put things more plainly. Central bankers should hate the ZLB. Whether or not policy at the ZLB tends to raise financial instability, the central bank simply can't do its job when its main interest rate is at zero. Since December of 2008 the Fed has failed miserably on both of its primary objectives: maximum employment and stable prices.... In a ZLB world the Fed does not do its job. That is a serious problem for the American economy and the Fed. It is quite possibly the most serious problem the Fed could conceivably have. So why is the Fed so determined to find itself right back at the ZLB in future, assuming it ever leaves it in the first place?... The fed funds rate rose to 5.25% prior to the Great Recession and nonetheless tumbled to the ZLB. The 2001 recession was far milder, yet in battling it the Fed reduced interest rates from a high of 6.5% down to 1%.... There is plenty of uncertainty regarding precisely how much cushion one needs between the federal funds rate and the ZLB, yet we can be pretty safe in concluding that roughly four percentage points counts as 'not nearly enough'.... Let's be clear about this. The central bank can choose the inflation rate it wants... so there is absolutely no reason why the Fed ought to find itself stuck with too low a full-employment interest rate.... One would think the Fed would want to be damn sure to get well away from the ZLB.... The Fed is going to intentionally undershoot its inflation target on average over the next three years, thereby ensuring that it returns to the ZLB during the next downturn, thereby ensuring that it continues to undershoot its inflation target while also missing its maximum employment target. And one can't be completely sure, but I think the reason they intend to do this is because they fear that setting and hitting a higher inflation target would call into question their credibility..."

  7. Ryan Avent: Crises: They let it happen: "THE argument that American officials lacked the capability or authority to save Lehman Brothers—and, potentially, to spare the world the most wrenching financial crisis since the 1930s—never really withstood close scrutiny.... This morning the New York Times publishes a remarkable piece of reporting drawing on accounts from insiders at the Federal Reserve Bank of New York, who were there during the crisis of 2008. The Fed officials say that they were tasked to conduct analyses of Lehman's books in preparation for some sort of rescue, and came back with figures that could easily have justified a bail-out. But their results scarcely received a hearing..."

Should Be Aware of:


  1. Dan Drezner: The real reason pundits like to diss political science: "The debate over whether and how political science matters to policymakers has gone on long enough for me to realize what it reminds me of: the debate over whether women can be funny.... Tom Ricks, in a yeoman effort to troll the entire political science community, has decided he’s going to speak his truth to the academy.... Let’s tweak this debate by asking a slightly different question: Why are people like Tom Ricks continuing to insist that political science is irrelevant despite pervasive evidence to the contrary? My tentative answer is that more traditional foreign policy pundits like Ricks are sensing a relative decline in their own influence.... In a decade or so, the pundit and policymaking landscape will be changed in the same way that baseball commentary has been transformed over the last decade (it’s tough to find a good baseball commentator these days who doesn’t have a familiarity with sabermetrics).... The 'irrelevance' charge rings hollow, and tends to discredit those making the charge in the first place..."

  2. Jo Walton: After Paris: Meta, Irony, Narrative, Frames, and The Princess Bride: "I am not the intended audience for William Goldman’s The Princess Bride.... I think Goldman wanted to write something like a children’s book with the thrills of a children’s book, but for adults. Many writers have an imaginary reader, and I think Goldman’s imaginary reader for The Princess Bride was a cynic who normally reads John Updike, and a lot of what Goldman is doing in the way he wrote the book is trying to woo that reader. So, with that reader in mind, he wrote it with a very interesting frame. And when he came to make it into a movie, he wrote it with a different and also interesting frame. I might be a long way from Goldman’s imagined reader, but I am the real reader. I love it.... The book-frame... came as a surprise, and it took me a while to warm to it.... Goldman may have... wanted to make the child reader of fairytales re-examine the pleasure she got out of them. Goldman would like me to have a little distance in there. I might not want that, but he was going to give it to me nevertheless.... Thinking about the meta in The Princess Bride made me a better reader, a more thoughtful one with more interesting thoughts about narrative. What Goldman says he is doing... is giving us the essence of a children’s fairytale adventure, but in place of what he says he is cutting.... The frame gives the imagined reader what the imagined reader is imagined to be used to—a story about a middle-aged married man in contemporary America who is dealing with issues.... And it’s all sad and gives a sour note—and that sour note is in fact just what the story needs.... The frame of the movie... is less sour, but more meta.... I often don’t like things that are meta, because I feel there’s no point to them and because if I don’t care then why am I bothering?... Irony should be an ingredient, a necessary salt, without any element of irony a text can become earnest and weighed down. But irony isn’t enough on its own..."

  3. Ryan Lizza: The Revenge of Rand Paul: "In May, 2002, Paul returned to a long-held view... that government attempts to address discrimination are always wrong. His target was the Fair Housing Act.... Paul, then thirty-nine, found the F.H.A. to be a monstrous infringement on liberty: 'Decisions concerning private property and associations should in a free society be unhindered. As a consequence, some associations will discriminate.' He went on to note that although it is 'unenlightened and ill-informed to promote discrimination against individuals based on the color of their skin', a free society 'will abide unofficial, private discrimination—even when that means allowing hate-filled groups to exclude people based on the color of their skin'. Paul was beginning to think about running for political office.... In taking on the Republican establishment, Rand won over his father’s ardent supporters. 'That network was absolutely crucial'.... Rand conducted several interviews with the radio host Alex Jones, a conspiracy theorist who thinks that 9/11 was an inside job and shares Ron Paul’s view that America is perpetually on the verge of economic collapse. During an appearance in August, 2009, Rand said, 'We really don’t have a lot of time'. He worried that an economic collapse could lead to a situation similar to how 'we got Hitler in Germany', and added, 'If you get some kind of strong leader like that, then it’s all over for the Republic'..."