links for 2008-03-21

• Frank calls for financial risk regulator, FT
• Cartoon - Tom Toles
• Will hedge funds go down next? - The Economist
• Inflation Hits the Poor Hardest - washingtonpost.com

Comments

[Inflation Hits the Poor Hardest]

Yes, finally people are becoming aware of the highly regressive nature of the inflation "tax". Inflation, as a method of subsidizing low short term interest rates, transfers purchasing power from the less well to do over to borrowers. Surely a better method of subsidizing loans can be found than reducing the already abysmal standard of living of the nation's most vulnerable. Elderly grandparents living on a fixed pension, and minimum wage workers, need the purchasing power more than hedge funds do.

[anne]

http://www.cfr.org/publication/11943/

November 8, 2006

The Cost of the Iraq War
By Lionel Beehner - Council of Foreign Relations

Are the costs of the war in Iraq expected to increase?

Given the ongoing transformation of the armed forces and the stresses on the military, experts expect the overall annual defense budget—currently $440 billion—to increase slightly over the coming years. But most predict the costs of the war in Iraq (as well as the larger war on terror), as approximated by the supplemental requests to Congress, to increase slightly, as they have since 2003, but may begin to decrease if U.S. forces redeploy in the years ahead. All told, economists Linda Bilmes of Harvard University and Joseph E. Stiglitz of Columbia University estimate the final war cost could top $2 trillion (PDF), based on U.S. withdrawals from Iraq by 2010 to 2015 and accounting for the "value of statistical life" for troops killed. But CFR's Holtz-Eakin remains dubious of their math. "Try not to be seduced by an economist," he says. "The question will always be: How much lower [would the costs] have been in an alternate universe without the wars in Afghanistan and Iraq? That's the difficulty with this game. Who knows how it would have played out?" ...

[anne]

http://www.cfr.org/publication/15781/
http://www.chicagotribune.com/news/chi-oped0320amitymar20,0,3113494.story

March 20, 2008

Trying to Make Sense of the Cost of War
By Amity Shlaes

Three trillion dollars is the amount that Nobel Prize winner Joseph Stiglitz and Linda Bilmes put as the cost of the Iraq war in their new book "The Three Trillion Dollar War." The book makes some good points, including that Washington has underestimated war costs from the beginning. But Stiglitz and Bilmes are off the mark in arguing that the current conflict darkens the nation's financial future....

[anne]

http://www.cfr.org/publication/6096/washington_needs_a_colonial_office.html

July 3, 2003

Washington Needs a Colonial Office
By Max Boot

[So that we understand the grounds on which the Council on Foreign Relations has stood.]

[ndd]

Prof. Thoma:
Great bunch of articles you've posted today! Many thanks.

[anne]

http://www.cfr.org/publication/11943/

November 8, 2006

Experts agree that compared to U.S. gross domestic product (GDP), the annual cost of the war in Iraq remains small. “Defense spending as a percentage of GDP is at historical lows,” Gen. Peter J. Schoomaker, the U.S. Army chief of staff, recently told reporters....

http://query.nytimes.com/gst/fullpage.html?res=9F06E2DA133CF93BA15751C0A9659C8B63

February 28, 2003

Pentagon Contradicts General On Iraq Occupation Force's Size
By ERIC SCHMITT

In a contentious exchange over the costs of war with Iraq, the Pentagon's second-ranking official today disparaged a top Army general's assessment of the number of troops needed to secure postwar Iraq....

Mr. Wolfowitz spent much of the hearing knocking down published estimates of the costs of war and rebuilding, saying the upper range of $95 billion was too high, and that the estimates were almost meaningless because of the variables....

[anne]

Question:

http://krugman.blogs.nytimes.com/2008/03/20/fed-funds-question-seriously-wonkish-and-possibly-dumb-too/

March 20, 2008

Fed Funds Question (Seriously Wonkish, and Possibly Dumb Too)
By Paul Krugman

The target Fed funds rate is now 2.25%. Everyone expects it to be reduced further; Citi economists predict * that it will be down to 1% by mid-year.

But I have a possibly naive question: can the Fed really cut the Fed funds rate that far? I don't mean "can" in the sense that other concerns will give them pause; I mean literally — does the Fed really have that ability?

Bear with me while I talk this through. The Fed actually conducts monetary policy through open-market operations in Treasuries: the FOMC tells the open-market desk to buy or sell Treasuries from banks until the Fed funds rate is close to the target. Normally this puts Treasury interest rates close to the Fed funds rate, since one short-term loan to a very safe customer is a lot like another.

But right now Treasury interest rates are much, much lower than the Fed funds rate — around half a percent on both 1-month and 3-month bills. Weirdness like negative rates on repos ** aside (I'm still trying to wrap my mind around that one), basically the Fed can only drive Treasury rates down by about another half-point — which would still seem to leave Fed funds well above 1%.

How is it possible for the Fed funds rate to be higher than the Treasury rates? Well, one interpretation is that banks don't trust each other — not even for overnight loans. Fed fund loans, after all, are unsecured.

In other words, the Fed funds rate may be more like LIBOR than the Treasury rate — and it may be being held up by a premium similar to the TED spread. ***

Am I being really stupid here? Or is it possible that the fear factor will soon make it impossible for the Fed even to achieve its target on the interest rate it supposedly controls?

* http://blogs.wsj.com/economics/2008/03/20/citi-economists-interest-rate-cuts-ahead-lots-of-them/

** http://www.aleablog.com/negative-repo-rates-today/

*** http://www.bloomberg.com/apps/quote?ticker=.TEDSP%3AIND

[anne]

Answer:

http://delong.typepad.com/sdj/2008/03/paul-krugman-wo.html

March 20, 2008

Paul Krugman Wonders Whether He Is Dumb. I Say: "NO!!"
Eited by Brad DeLong

No, this is not stupid. As Clouse and Elmendorf (1997) write: *

"Because funds-market trading is typically not collateralized, the funds rate can also differ across borrowers according to their perceived riskiness." This has in fact been happening since last August--what the (average) fed funds rate is on any given day depends on who is doing the borrowing.

* http://www.federalreserve.gov/pubs/feds/1997/199730/199730pap.pdf