links for 2008-12-28

• The yield curve (wonkish) - Paul Krugman
• Stock-Market Strategy Halts Fishing Collapse - Scientific American
• 'The Ascent of Money,' by Niall Ferguson - Review - NYT
• 'The Story of Modern Financial Insanity,' Ed by Michael Lewis - Review - NYT
• Missing Minsky - City Economist
• Three Especially Vulnerable Groups - Robert Reich

Comments

[evagrius]

Ferguson's "Chimerica". Very appropriate. Probably the only real insight he's had in years.

[anne]

Ferguson's "Chimerica". Very, very, very ignorant.

[Meh]

It's probably not going to happen, but I'd love to see Bruce Wilder review Ferguson's book. Or Brad DeLong if Bruce isn't available.

My problem with Ferguson's previous work is that whenever he comes to some subject I know a fair bit about (the economics of the British Empire wrt India spring to mind) it's clear that Niall is all too happy to cherry-pick details to suit his overarching theme, rather than modify his preferred thesis to fit reality...

says...

CityEconomist..."Hy rejected all these ideas, preaching consistently about the need for regulation and the importance of leaning against the excesses of what Keynes called the animal spirits of investors."

Yes. Regulate to prevent excessive leverage, and loans that cannot be repaid. These are dangerous to the credit system.

"Fed Chairman Alan Greenspan and then-Governor Ben Bernanke were anxious not to “pop the bubble” because (citing the Milton Friedman-Anna Schwartz history) that’s the mistake the Fed made in 1928."

So policy decided to magnify the bubble greater than in 1929 instead. Stock margin in 1929 was 10%, but recent hedge funds et al had de facto 2% margin. Home margin was actually negative (banks loaned greater than the price of the home-no money down). Negative real interest rates added even more bubble mania. The problem with magnifying bubbles like this is that they eventually pop anyway on their own. The much larger bubbles are much harder to fix than smaller bubbles. This was the wrong approach.

says...

Robert Reich..."This will be a particular challenge for blue-collar workers whose earnings have depended largely on physical labor. Their bodies may not last.

3. Middle and lower-middle class retirees. Most are dependent on income from savings, which has declined sharply."

The pre 65 heavy lifting labor group is extremely vulnerable. They often cannot lift heavy objects until they are 65. Private health insurance is very expensive for this group. Their savings are gone. (The stock market crashed taking out the 401k plans. Their private pensions were inflated away, and their homes are virtually unmarketable.)

Constant inflation drove this group into inflation hedges, and that experiment has now failed. Constant inflation has prevented heavy lifters from safely saving for their future. Super expensive US health care has made things far worse. Anyone who can't work until 65 is in real trouble. Constant inflation has destroyed the income from meager savings that they depended on. Another group that constant inflation has greatly harmed.

[GAT Mac]

"Stock-Market Strategy Halts Fishing Collapse" is a possible mechanism by which markets (with government help) can over come the tragedy of the commons. Nevertheless, I am sure we can rely on anne to object to the government meddling into private affairs--let's rape the oceans of every last living thing.

[calmo]

Well I read all the links and then all the comments to Gat...and deserve one of those Phillip stars or mo. Most memorable was Gross's diss of Ferguson at the very end...insulting everyone including hisself for not stoppin hisself from further martketing ...so people, if time is running short for you today...pick the NYT review of 'The Ascent' last.
So I'm gonna stay with Gat's somewhat combative somewhat less constructive response like this]:"Stock-Market Strategy Halts Fishing Collapse" is a possible mechanism by which markets (with government help) can over come the tragedy of the commons. [such an apt encapsulation...promising expansion --at least allusions to some larger markets, maybe even some corner of the financial markets. A breath-taking start. ] Nevertheless, I am sure we can rely on anne to object to the government meddling into private affairs[ and then this exhale...from the worst possible orifice...dang.] --let's rape the oceans of every last living thing.[ "let's" --what do you mean "us", kemosabe? Only 1/2 of these "shares" worked...why? A total ban recommended in some cases, the universal decline in populations not given much space,...there is lots to feed on here if you were looking for work and not sparring with anne. A great start should not have this miserable endgame...this reader is trying to improve your game and not your distractions. Ok, I'm hoping for more work from you and less skirmishes.]

says...

PK writes...“niggling nabobs of negativism.”

There's a lot of that around here.

[anne]

So that we understand, Niall Ferguson was from the beginning a lover of imperialism, but not having British imperialism to applaud since the idea of British imperialism has become laughable, the applause has been for American imperialism. The only fear Ferguson has had is that America might not been quite as vicious and long lasting an imperialist as Britain. *

* http://select.nytimes.com/search/restricted/article?res=F0071FF6385E0C748EDDAD0894DB404482

April 27, 2003

The Empire Slinks Back
By NIALL FERGUSON

Wheresoever the Roman conquers, he inhabits. -- Seneca

[Barkley Rosser]

says,

As is often the case, you are off on your facts again. The Fed and other policymakers did not stimulate the stock market bubble in 1929. The lowering of margins had occurred prior to then. There certainly had been expansionary monetary policy and very loose to nonexistent regulations on lending and borrowing to buy stocks prior to then (and through 1929, although not for monetary policy).

But, on this matter Friedman and Schwartz are right. The Fed's response to the stock market crash in October 1929 was to tighten. They had been tightening precisely to pop the bubble. As documented by F and S, there was a split within the Fed, with New York wanting an easier policy, but Washington wishing to continue a tighter policy. They have claimed that this was due to anti-Semitism partly, a desire to do in certain Jewish-owned New York banks, although I do not know if that was true or not. Needless to say, Greenspan was well aware of this history and did not repeat it in October 1987.

[anne]

http://www.economagic.com/em-cgi/data.exe/fedstl/ambns+1

December 18, 2008

Monetary Base, 1927-1945

The monetary base shrunk in every month (year over year) from March 1928 through June 1929, then the monetary base shrunk in every month from December 1929 through December 1930. The base grew every month from January 1931 through January 1937, then the base shrunk again from February 1937 through March 1938, and grew from April 1938 through October 1941.

(Year - Month - Percent Change Year Over Year)

1928 03 (- 0.3)
1928 04 (- 0.0)
1928 05 (- 0.2)
1928 06 (- 0.6)
1928 07 (- 1.0)
1928 08 (- 1.7)
1928 09 (- 1.4)
1928 10 (- 1.3)
1928 11 (- 1.4)
1928 12 (- 1.0)

1929 01 (- 1.1)
1929 02 (- 0.5)
1929 03 (- 0.4) Hoover
1929 04 (- 2.0)
1929 05 (- 1.9)
1929 06 (- 1.3)
1929 07 ( 0.4)
1929 08 ( 1.2)
1929 09 ( 0.4)
1929 10 ( 0.4)
1929 11 ( 2.2)
1929 12 (- 0.5)

1930 01 (- 2.0)
1930 02 (- 2.7)
1930 03 (- 2.7)
1930 04 (- 1.8)
1930 05 (- 1.9)
1930 06 (- 1.8)
1930 07 (- 2.9)
1930 08 (- 3.4)
1930 09 (- 3.7)
1930 10 (- 4.2)
1930 11 (- 5.7)
1930 12 (- 1.4)

[anne]

http://krugman.blogs.nytimes.com/2008/11/28/was-the-great-depression-a-monetary-phenomenon/

November 28, 2008

Was the Great Depression a Monetary Phenomenon?
By Paul Krugman

[Depression chart] Sins of omission?

Has anyone else noticed that the current crisis sheds light on one of the great controversies of economic history?

A central theme of Keynes's "General Theory" was the impotence of monetary policy in depression-type conditions. But Milton Friedman and Anna Schwartz, in their magisterial monetary history of the United States, * claimed that the Fed could have prevented the Great Depression — a claim that in later, popular writings, including those of Friedman himself, was transmuted into the claim that the Fed caused the Depression.

Now, what the Fed really controlled was the monetary base — currency plus bank reserves. As the figure shows, the base actually rose during the great slump, which is why it's hard to make the case that the Fed caused the Depression. But arguably the Depression could have been prevented if the Fed had done more — if it had expanded the monetary base faster and done more to rescue banks in trouble.

So here we are, facing a new crisis reminiscent of the 1930s. And this time the Fed has been spectacularly aggressive about expanding the monetary base:

[Contemporary chart] Ben goes for broke.

And guess what — it doesn't seem to be working.

I think the thesis of the "Monetary History" has just taken a hit.

* 1963

A Monetary History of the United States, 1867-1960
By Milton Friedman and Anna J. Schwartz

[anne]

http://www.economagic.com/em-cgi/data.exe/fedstl/ambns+1

December 18, 2008

Monetary Base, 1927-1945

1931 01 ( 1.9)
1931 02 ( 1.6)
1931 03 ( 1.7)
1931 04 ( 2.3)
1931 05 ( 3.2)
1931 06 ( 4.1)
1931 07 ( 5.2)
1931 08 ( 6.4)
1931 09 ( 8.7)
1931 10 (12.5)
1931 11 (10.1)
1931 12 ( 6.4)

1932 01 ( 7.2)
1932 02 ( 8.5)
1932 03 ( 6.8)
1932 04 ( 6.3)
1932 05 ( 7.8)
1932 06 ( 6.4)
1932 07 ( 7.3)
1932 08 ( 7.1)
1932 09 ( 5.6)
1932 10 ( 2.9)
1932 11 ( 5.2)
1932 12 ( 6.1)

1933 01 ( 7.1)
1933 02 ( 9.0)
1933 03 (20.7) Roosevelt
1933 04 (10.8)
1933 05 ( 5.6)
1933 06 ( 4.9)
1933 07 ( 2.5)
1933 08 ( 2.7)
1933 09 ( 3.4)
1933 10 ( 3.9)
1933 11 ( 3.7)
1933 12 ( 3.7)

1934 01 ( 3.6)
1934 02 ( 3.4)
1934 03 ( 1.2)
1934 04 (12.9)
1934 05 (17.3)
1934 06 (19.1)
1934 07 (21.2)
1934 08 (22.0)
1934 09 (19.7)
1934 10 (18.6)
1934 11 (19.6)
1934 12 (18.1)

1935 01 (19.9)
1935 02 (23.0)
1935 03 (13.7)
1935 04 (10.9)
1935 05 (13.7)
1935 06 (15.0)
1935 07 (13.5)
1935 08 (15.3)
1935 09 (16.6)
1935 10 (18.8)
1935 11 (20.5)
1935 12 (21.2)

1936 01 (18.5)
1936 02 (15.8)
1936 03 (13.9)
1936 04 (13.0)
1936 05 (12.7)
1936 06 (10.3)
1936 07 (15.0)
1936 08 ( 7.4)
1936 09 ( 1.9)
1936 10 ( 2.0)
1936 11 ( 1.2)
1936 12 ( 0.9)

1937 01 ( 0.3)
1937 02 (- 0.0)
1937 03 (- 4.2)
1937 04 (- 2.1)
1937 05 (-10.4)
1937 06 (-10.7)
1937 07 (-14.3)
1937 08 (-11.9)
1937 09 (- 6.0)
1937 10 (- 7.3)
1937 11 (- 9.4)
1937 12 (- 9.6)

1938 01 (- 7.9)
1938 02 (- 8.2)
1938 03 (- 0.4)

[calmo]

Happy holidays and mo to you Barkley. Just a question, and nothin serious...not part of that horde, "niggling nabobs of negativism" but trucking the usual "tremolos of tendentious tickling"...how do you know this (not-so-anonymous "says")says,

As is often the case, you are off on your facts again. Sherlock Holmes (and me too) ["Me me me" all the way home...] wants to borrow that instrument that sees right through "says" and his previous baaaaaaad scholarship ...and how often all of them are "off". "As is often the case", I could be misled, but...it ain't my fault.
You iz not helpin...in the cause of my rehabilitation...maybe mo.
Yo ain't.

[anne]

"Nevertheless, I am sure we can rely on ---- to object to the government meddling into private affairs--let's rape the oceans of every last living thing."

Notice the crazed lying, notice the crazed metaphor.

[anne]

http://www.nytimes.com/2008/12/28/business/28every.html?ref=business&pagewanted=print

December 28, 2008

They Told Me That Madoff Never Lost Money
By BEN STEIN

ABOUT two years ago, a little delegation from a major investment bank arrived at my home in Beverly Hills. These nice young people were from the bank's "wealth management division." I told them straight away that I didn't have anywhere near enough wealth to make their trip worth their time, but they smilingly insisted that we could help each other.

They told me that if I invested a certain sum with them, they would make sure that a large chunk of it was managed by a money manager of stupendous acumen. This genius, so they said, never lost money. He did better in up markets than in down markets, but even in down markets he did well. They said he used a strategy of buying stocks and hedging with options.

I protested that a perfect hedge would not allow making any money, because money made on the one side would be lost on the other. They assured me that this genius had found a way to spot market inefficiencies and, indeed, to make money off a perfect hedge.

I thanked them for their time and promptly looked up Bernard Madoff online. Nothing I saw was even a bit convincing that he had made a breakthrough in financial theory. Besides, this large financial firm was going to charge me roughly 2 percent to put my money with Mr. Madoff's firm. I could invest my few shekels with Warren Buffett for no management fee at all....

[Perfect; Ben Stein understood an investment impossibility immediately and explains the problems of Bernard Madoff and the financial industry as a whole clearly both in terms of hedging that will not allow money to be made and excessive investment costs that will insure money must be lost.]

[calmo]

Notzo "crazed" really, as accomplished (QED) skirmisher...a real talent for using a few characters to elicit many ...from some...an I'm not sayin I'm jealous...or feelin temporarily neglected...and so savable...calmo sends out free harpoons...the loss leader.
Tis maybe innocent that "let's rape the oceans..." occurs in this context:Nevertheless, I am sure we can rely on anne to object to the government meddling into private affairs--let's rape the oceans of every last living thing. an unfortunate juxtaposition...rather than a metaphor --a common enough expression about the mismanagement of fisheries, yes?
I B stickin with Gat's start, knowing there's mo.

[anne]

"Nevertheless, I am sure we can rely on ---- to object to the government meddling into private affairs--let's rape the oceans of every last living thing."

There is a peculiar rottenness, a peculiar viciousness in repeating a vicious lie and vicious metaphor for the sake of the harm. Do continue, please.

[calmo]

Perfect...where to start peeling this orange?..LEMON.

From where Ben starts?

"About two years ago", well, you don't say Ben...how retrospectively of you....you knew all along...but were holding it back...for the barfbag --passitova!

Nope.

After decades of building a financial reputation, "empire" some said, we have little (possibly nice and young, too) Ben tell us: I thanked them (the nice young people --wannabe Beverly Hillers) for their time and promptly looked up Bernard Madoff online.this talent is still unknown...to Ben...well, well.

Nope, here is the lemon peeled:

"I protested that a perfect hedge would not allow making any money, because money made on the one side would be lost on the other." which accounts for the lackluster performance of HFs and their demise from the 80s...and the sun rising in the West for Ben Stein standin on his head.

[anne]

The problem with conservative hedging is that hedging is costly and hedging limits returns over a long term when a market can be expected to have positive returns over the long run. Perfect hedges actually make for zero returns minus the costs of hedging, thereby insuring losses. So, investing using hedges conservatively means expecting returns that are less than simple index funds can give. Further, paying several percentage points simply for the right to invest with a manager using conservative hedges adds to what are already high costs.

[anne]

Here we have the financial industry perfectly described. Paying at least 3 percentage points for investing conservatively, when investing completely in stocks since August 1976 would have meant a return of 10.02% after Vanguard index costs. Taking away about 3 percentage points of return would mean 30% or a return of a little more than 7.02%. But, here we have investment managers claiming to be conservative, charging highly and making returns above a portfolio invested 100% in stocks.

How could that possibly be?

[anne]

Notice how much the financial industry relies on fund raisers, the fund raisers simply turning over money to managers and doing no managing beyond and needing to know nothing about managing money only about fund raising. An investor is paying the fund raiser and the money manager and money managers have every reason to use expensive investments beyond.

Even if Madoff had been honest, there is a dishonesty in the process of money raising and managing and investing where 30% of conservative investment returns are consumed by costs. What is easily ignored is that Warren Buffett has impossibly low investment management costs at Berkshire Hathaway. The costs at Berkshire were not 3% but less than 0.3% when I checked a couple of years ago.

[anne]

Ben Stein, who seldom seems worth reading however popular the columns, happened to write importantly here. Interestingly, the professional financial analyst who makes a point of ridiculing Stein had not the slightest idea what Stein was showing in the column. Imagine my surprise.

[anne]

http://delong.typepad.com/sdj/2008/12/milton-friedman-did-a-bad-bad-thing-1.html

Milton Friedman Did a Bad, Bad Thing...
By Brad DeLong

He left no students at Chicago.

Uncle Milton said:

* Have the government buy and sell shirt-term assets in order to keep the stock of inside money balances growing smoothly.

* That is the "free market" policy.

* And it is good because "free market" policies are always good.

But he never explained to any students why government intervention to stabilize the output of the retail banking sector--checking account deposits--was a free market policy (why not some other sector?why not auto production? freight car loadings?).

And he never explained what to do if stabilizing checking account deposits wasn't enough.

And so now Chicago has nothing coherent or useful or constructive to say about our current situation.

[anne]

Actually, Chicago is precisely the reflection of Milton Friedman but we need protect saints, even the secular sort of saints, even the saints who were no such thing beyond our own imagining. Me, I imagine Friedman as Winnie-The-Pooh though I have moments of doubt.

http://www.machaon.ru/pooh/contents.html
http://www.machaon.ru/pooh/chap1.html

1926

Winnie-The-Pooh
By A. A. Milne

...In Which We Are Introduced to Winnie-The-Pooh and Some Bees, and the Stories Begin

HERE is Edward Bear, coming downstairs now, bump, bump, bump, on the back of his head, behind Christopher Robin. It is, as far as he knows, the only way of coming downstairs, but sometimes he feels that there really is another way, if only he could stop bumping for a moment and think of it.

And then he feels that perhaps there isn't. Anyhow, here he is at the bottom, and ready to be introduced to you. Winnie-the-Pooh.

When I first heard his name, I said, just as you are going to say, "But I thought he was a boy?"

"So did I," said Christopher Robin.

"Then you can't call him Winnie?"

"I don't."

"But you said--"

"He's Winnie-ther-Pooh. Don't you know what 'ther' means?"

"Ah, yes, now I do," I said quickly; and I hope you do too, because it is all the explanation you are going to get....

[calmo]

Menzie Chinn, our friend at Econbrowser (do read his current "Stuff happens" for an overview) links to Akerlof and Romer

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=227162

suggesting that Ben is 15years late...not merely 2...and not informed about the real character of HFs, the actual history of their performance rather than the theoretical vision of their operation.

[Bruce Wilder]

anne: "Perfect hedges actually make for zero returns minus the costs of hedging, thereby insuring losses. So, investing using hedges conservatively means expecting returns that are less than simple index funds can give."

A classic hedge is neutral with regard to broader market movements, which movements are the returns to simple index funds. Neutral, though, is not zero. Anne has made it sound like it is about eliminating the return from the secular trend of market, which would be silly and self-destructive. The hedge is a way of playing knowledge as arbitrage, and eliminating the risk of market movements from investments made on the basis of informed speculation. So, the return on a perfect hedge is riskless return, in addition to the return an index fund would earn from general market movements and dividends.

That's not to defend the hubris or confusion behind any non-passive investment strategy, but if you are going to try to earn a return on market research, a hedge framework can provide a way to apply that research knowledge, which isn't insane.

[Bruce Wilder]

I should also mention that there are problems of scale and term in hedge funds, that are seriously underplayed in the salesmanship. If you cannot commit $30 million forever, you shouldn't try to play. For us peons, Vanguard is still the only really honest, sensible option, as anne recommends.

[evagrius]

"Have the government buy and sell shirt-term assets in order to keep the stock of inside money balances growing smoothly."

Well, I, for one don't want the government in the tailoring business! Imagine buying shirts in order to keep money growing inside the pockets!

That is too much market interference!

[bob mcmanus]

The City Economist article about Minsky is good as far as it goes, but it doesn't go very far.

The Levy Economics Institute at Bard College is where to go for Minsky and his admirers. I love that place beyond reason.
Randall Wray, Jan Kregel, Jamie Galbraith, Thomas Palley, Jan Toporowski, names I don't know but trust simply by association and reading their work.

Minskyism, from my limited understanding, goes much deeper than the mere regulation of Finance. Finance is neither reflective or exogenous, but a direct product of Keynes marginal propensity to consume.

[Barkley Rosser]

calmo,

Not going to go on a long list of goofs by says recently, but there have been several.

Regarding Krugman's piece, he, along with everybody else, makes this assumption that zero is a floor on nominal interest rates. It is not. I think lots of people think it is, which may be why we rarely see negative interest rates. But we have seen them, several times recently.

Heck, if people are willing to buy bonds that offer zero interest, why should they not be willing to pay to hold some of those bonds, especially if they think that they are the super-safe haven?

Zero is not a bound.