links for 2008-12-02

• Treasury Finance Policy - knzn
• Investors Sue Countrywide Over Modified Loans - NYTimes.com
• Bailout Monitor Sees Lack of a Coherent Plan - NYTimes.com
• A Team of Whizzes - NYTimes.com
• Time for monetary authorities to jump into the liquidity trap - Willem Buiter
• Two perspectives on commercial and central bank solvency - Nick Rowe
• Where I Was Wrong About The Current Economic Crisis - Barkley Rosser
• The Great Crash of 2008 - Robert Reich
• Fiscal Policy Puzzles - Greg Mankiw
• Dow plunges again, Friedman fans despair - Andrew Leonard
• Paulson's Remarks on the U.S. Economy - Real Time Economics
• Summers, Geithner Have Baggage, Not Fatal Flaws - John M. Berry
• Obama's A-Team Economists Can Start With ABCs - Caroline Baum
• Cost and Benefits from a Fiscal Stimulus - pgl
• It's official - Econbrowser
• It's official: We're in a recession - How the World Works
• Infrastructure - The Bellows
• A note on Japan’s experiment with quantitative easing - Credit Writedowns
• Government spending is correct response to the economic crisis - Dean Baker
• The Great Slump of 1930 - John Maynard Keynes

Comments

[anne]

[Only for explanation; there continues to be a problem with Typepad, comments are not appearing on the thread or cannot be called up by clicking on the side index with Firefox or Explorer, even when refreshed. The problem continues even when different computers and networks are used.]

[anne]

http://www.nytimes.com/2008/12/02/world/europe/02germany.html?ref=world

December 2, 2008

Germany Aims to Guide the West's Ties to Russia
By NICHOLAS KULISH

Germany hopes to counter Russia's renewed militarism by promoting economic development and stability.

[Notice carefully the wording, in which we are supposed to immediately understand that Russia as opposed to America is newly militaristic. How though is Russia newly militaristic?]

[anne]

Russian peace-keeping soldiers and Russian citizens are attacked by another country along the Russian border and Russia responds in measured but decisive fashion to end the attack and insure there will be no repeat, and in turn Russia is repeatedly and continually called militarily aggressive and America proceeds with long held plans to ring Russia with missiles and expand NATO to Russian borders and even to threaten a renewal of a nuclear arms race (which is beyond insanity), but Russia can be termed newly militaristic with no consideration in the American media.

So propaganda becomes the driving force of foreign policy.

[Mirrors]

Robert Reich..."Why have they gone on strike? Not because of the difficulty of getting credit."

Enough with stimulating demand exclusively via more borrowing. Let the prices fall and consumers will have more purchasing power. The ever expanding debt theory of consumption has proven itself to be unsustainable and illusory.

[Barkley Rosser]

anne,

At it again, I see. What "Russian citizens"? Georgian citizens living in South Ossetia whom Russia has given passports to? And, "along the border," hack cough. Not really. And I love that "measured and decisive," phrases always used when one country invades another. Tell that to all the Georgians within Georgia proper killed by the invaders or displaced from their homes. And does that "measured and decisive" include the entry of troops into non-invaded Abkhazia and the pushing out of Georgian troops from there and the entry of Russian troops into Georgia proper from non-invaded Abkhazia?

BTW, still waiting to hear from anybody anywhere, besides yourself, who defends the Russian invasion of Georgia proper (not South Ossetia), however "measured and decisive" it was.

[Barkley Rosser]

Oh, and outside of Russia. Yes, Gorbachev defended the general operation (please do not repost for the umpteenth time his comments), but as I pointed out, carefully avoided any direct discussion of the part of the operation when the Russian troops went into Georgia proper other than to note that they got out pretty quickly, which is a tacit admission that this was an embarrassing and not-easily-defended part of the operation, one I suspect he did not approve of.

[GG]

JMK..."For since 1914 an immense burden of bonded debt, both national and international, has been contracted, which is fixed in terms of money."

Good gravy, after the trouble this excessive level of debt caused in the GD, why did policy allow debt to build up to such excessive levels again?

[anne]

http://www.nytimes.com/2008/12/02/world/europe/02germany.html?ref=world

December 2, 2008

Germany Aims to Guide the West's Ties to Russia
By NICHOLAS KULISH

Just as the United States is struggling to redefine its relationship with a resurgent and at times antagonistic government in Moscow, Germany is scrambling to protect the close commercial, cultural and diplomatic ties with Russia it has forged since the end of the cold war — and, in some areas, long before....

[Notice that the United States, all sweetness and warmth, "is struggling to redefine its relationship with a resurgent and at times antagonistic government in Moscow."]

[anne]

The United States, having taken the lead from the Mahatma (Gandhi that is), is all sweetness and warmth (flower children are us) all the time everywhere, while Russians are the growly bears they are named for. Grrrrr.

The problem is now getting Russia to stop the destruction of Iraq and Afghanistan and Somalia, to stop placing missiles in Canada (to protect against an attack by Iran), and to quit threatening to hold joint military exercises with China off the California coast. So much for Russian resurgent antagonism.

[anne]

What is interesting is that America having just finished a much beloved surge in Iraq and readying what promises to be a more beloved surge in Afghanistan is never ever going to be described as resurgent or antagonistic or resurgently antagonistic. We are all sweetness and flowers.

[GG]

Robert Reich..."So-called "margin requirements," first instituted in the wake of the Great Crash of 1929, were all but abandoned, as big banks and hedge funds found ways around them."

This is bad. This is very bad. Allowing institutions to leverage stocks/bonds/commodities 30 or 40 to one (with subsidized negative real interest rates loans no less) is a recipe for disaster. Margin calls can create a downward spiral. The synthetic market is even worse, with leverage beyond all reason. The leverage in the system is very much larger than in 30. A system based upon excessive debt is not sustainable. Will the world ever learn? Debt to GDP levels must be kept reasonable. Margin must be limited to 50%. Mortgages must have a reasonable down-payment (20% is the standard in other nations.) There is no other way to prevent eventual disaster.

[anne]

http://www.princeton.edu/~pkrugman/nominal_wage.pdf

December 2, 2008

Notes on Nominal Wages and Employment
By Paul Krugman

Keynes's chapter on money-wages and employment is hard for modern economists to read. So I thought it might be helpful to restate it in terms of the standard textbook aggregate-demand-aggregate-supply framework.

We start with a production function, determining output as a function of employment:

Y = F(N)

With competitive markets, workers will be hired up to the point at which the real wage equals the marginal product of labor. (In the real world things are more complicated, but never mind.) If workers' contracts directly determined real wages, that would be the end of the story. But if workers negotiate a nominal wage instead, what we get is an aggregate supply curve that depends on the ratio of the aggregate price level to the wage rate:

Y = S(P/W)

Our standard model then says that macroeconomic equilibrium is determined by the intersection of this AS curve with an AD curve, representing the demand side of the economy. So we get a diagram like this:

AS
AD
P
Y

Now suppose that the evil New Deal pushes up nominal wages. This shifts the AS curve up, which leads to a higher price level and lower output:

AS1
AD
P
Y
AS2

And that's the story as people like Amity Shlaes tell it, although probably without really understanding the logic.

But what is the crucial feature of this story? It requires that the aggregate demand curve be downward sloping. And why should that be true?

Well, in normal times the AD curve slopes down, we think, because other things equal a higher price level increases the demand for money, which drives up interest rates, which reduces desired spending. (In terms of IS-LM analysis, higher P leads to lower M/P which shifts LM left.)

But in liquidity trap conditions, the interest rate isn't affected at the margin by either the supply or the demand for money – it's hard up against the zero bound. And as a result the usual explanation for the downward slope of the AD curve doesn't work. You can appeal to the Pigou effect, I guess – but against that you have to put Fisherian debt deflation. In a liquidity trap, the AD curve is at least as likely to be upward-sloping as it is to be downward-sloping. And in the mid-1930s America was very much in a liquidity trap, with the interest rate on 3-month T-bills only 0.14 percent.

Suppose that the AD curve is vertical. Then the picture looks like this:

AS1
AD
P
Y
AS2

And there's no adverse effect at all of the wage increase on output.

The key point, then, is that the reality of a liquidity trap in the 1930s has crucial implications for what we think about the effects of policies like the NIRA. People who assert that New Deal support for wages made the Depression much worse aren't thinking it through. They're implicitly assuming – not demonstrating – that the AD curve had a "normal" slope, even in the depths of the Depression. But it didn't.

[anne]

http://www.economagic.com/em-cgi/data.exe/fedbog/tbaa3m
http://www.economagic.com/em-cgi/data.exe/fedbog/tbsm3m

2008

Interest Rates on 3-month Treasury Bills, 1931-1950

January - July

1931 ( 0.95%)
1931 ( 0.48) July, Low
1931 ( 3.25) December, High

1932 ( 2.68) January, High
1932 ( 0.42)
1932 ( 0.08) December, Low

1933 ( 0.21)
1933 ( 2.29) March, High
1933 ( 0.37)
1933 ( 0.10) September, Low

1934 ( 0.72)
1934 ( 0.15)

1935 ( 0.20)
1935 ( 0.15)

1936 ( 0.20)
1936 ( 0.15)

1937 ( 0.17)
1937 ( 0.56) April, High
1937 ( 0.28)

1938 ( 0.10)
1938 ( 0.07)

1939 ( 0.03)
1939 ( 0.04)

1940 ( 0.01) January, Low
1940 ( 0.05)

1941 ( 0.02)
1941 ( 0.12)

[Barkley Rosser]

anne,

Although their current president is, most Russians are not "named for bears." Their ancient pagan ancestors did worship them, though, and the bear is often used as an international symbol for Russia, just as the eagle is for the US and John Bull is for the UK.

How often do I need to remind you that I did not support the US invasion of Iraq, do not support the effort to get either Ukraine or Georgia into NATO, do not support the anti-missile shield the US is trying to impose on Poland and the Czech Republic, along with a number of other things you whine about regarding US policy? Yes, I agree the US has been and continues to be overly militaristic. So, the question is how to get it to be less so.

This is where I get very annoyed with these stupid actions by Putin, such as invading Georgia proper. They simply make it easier for those who want to put Georgia into NATO and a missile shield into Poland and the Czech Republic get their way. That has been just screamingly obvious, and if you have not notice it yet, you need to look a bit more closely.

In the meantime, I shall be dropping out of the discussion for about a week. Leaving early tomorrow morning to give a plenary lecture in Taiwan, assuming the airports do not close again, where I am also planning to plot with the Russians and the Somali pirates to help plan an invasion of the Chinese mainland from Taiwan... :-).

[anne]

Have a fine trip and lecture; Taiwan is interesting.

[anne]

[Continuing from this morning, Typepad is still not recognizing or allowing click on reading of comments after a refresh on Explorer or Firefox or on separate computers and networks.]

[Prefer]

JMK..."...upon what do the profits of the producers of capital-goods depend? They depend on whether the public prefer to keep their savings liquid in the shape of money or its equivalent or to use them to buy capital-goods or the equivalent. If the public are reluctant to buy the latter, then the producers of capital-goods will make a loss; consequently less capital-goods will be produced; with the result that, for the reasons given above, producers of consumption-goods will also make a loss."

Here is the origin of the current problem. The public does not collectively prefer to buy capital goods with their savings. Instead, the public collectively prefers to buy unproductive inflation hedges with their savings.