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| May 2009 »
At the NY Times Room for Debate, the question is
Does the U.S. Need an Auto Industry? My answer is
here, and there are
also responses from
Tyler Cowen and
Robert Lawrence. Update: Robert Reich and Deborah Swenson also respond.
Update: If comments are any indication, nobody much like what I wrote, and I don't blame them. I'll follow up soon and explain further.
Posted by Mark Thoma on Thursday, April 30, 2009 at 11:15 AM in Economics, International Trade |
Martin Feldstein has two worries. He's worried about deflation in the
short-run, and about inflation in the longer run:
Deflation raises questions about global recovery, by Martin Feldstein, Project
Syndicate: The rate of inflation is now close to zero in the US and several
other major countries. The Economist recently reported that economists it had
surveyed predict that consumer prices in the US and Japan will actually fall
this year as a whole, while inflation in the euro zone will be only 0.6 percent.
South Korea, Taiwan and Thailand will also see declines in consumer price
Deflation is potentially a very serious problem, because falling
prices — and the expectation that prices will continue to fall — would make the
current economic downturn worse in three distinct ways.
The most direct adverse impact of deflation is to increase the real value of
debt. ... [T]he price level could conceivably fall by a cumulative 10 percent
over the next few years. If that happens, a homeowner with a mortgage would see
the real value of his debt rise by 10 percent. Since price declines would bring
with them wage declines, the ratio of monthly mortgage payments to wage income
In addition..., deflation would mean higher loan-to-value ratios for homeowners,
leading to increased mortgage defaults... A lower price level would also
increase the real value of business debt, weakening balance sheets and thus
making it harder for companies to get additional credit.
The second adverse effect of deflation is to raise the real interest rate...
Because ... central banks have driven their short-term interest rates close to
zero, they cannot lower rates further in order to prevent deflation from raising
the real rate of interest. Higher real interest rates discourage credit-financed
purchases by households and businesses. This weakens overall demand, leading to
steeper declines in prices.
The resulting unusual economic environment of falling prices and wages can also
have a damaging psychological impact on households and businesses. ... If prices
fall at a rate of 1 percent, could they fall at a rate of 10 percent? ... Such
worries undermine confidence and make it harder to boost economic activity.
Some economists have said that the best way to deal with deflation is for the
central bank to flood the economy with money in order to persuade the public
that inflation will rise in the future... In fact, the Federal Reserve, the Bank
of England, and the Bank of Japan are doing just that under the name of
Not surprisingly, central bankers who are committed to a formal or informal
inflation target of about 2 percent per year are unwilling to abandon their
mandates openly and to assert that they are pursuing a high rate of inflation.
Nevertheless, their expansionary actions have helped to raise long-term
inflation expectations toward the target levels. ...
Ironically, although central banks are now focused on the problem of deflation,
the more serious risk for the longer term is that inflation will rise rapidly as
their economies recover and banks use the large volumes of recently accumulated
reserves to create loans that expand spending and demand.
Posted by Mark Thoma on Thursday, April 30, 2009 at 11:08 AM in Economics, Inflation, Monetary Policy |
There is no time to dither in a meltdown, by J. Bradford DeLong, Project
Syndicate: Are the world's governments capable of keeping the world economy
out of a deep and long depression? Three months ago, I would have said yes,
without question. Now, I am not so certain.
The problem is not that governments are unsure about what to do. The standard
checklist of what to do in a financial crisis ... has been gradually worked out
over two centuries...
The problem comes when expansionary monetary policy ... and central-bank
guarantees of orderly markets prove insufficient. Economists disagree about when
... governments should move beyond these first two items on the checklist.
Should governments try to increase monetary velocity by selling bonds, thereby
boosting short-term interest rates? Should they employ unemployed workers
directly, or indirectly, by bringing forward expenditures or expanding the scale
of government programs? Should they explicitly guarantee large financial
institutions' liabilities and/or classes of assets?
Should they buy up assets at what they believe is a discount from their long-run
values, or buy up assets that private investors are unwilling to trade, even at
a premium above their likely long-run values? Should governments recapitalize or
nationalize banks? Should they keep printing money even after exhausting their
ability to inject extra liquidity into the economy via conventional open-market
operations, which is now the case in the United States and elsewhere?
Three months ago, I said that ... trying a combination of these items - even a
confused and haphazard combination - was better than doing nothing. All five of
the world's major economies implemented their own confused and haphazard
combinations of monetary, fiscal, and banking stimulus policies during the Great
Depression, and the sooner they did - the sooner each began its own New Deal -
the better. ...
The conclusion that I draw from this is that we should try a combination of all
checklist measures - quantitative monetary easing; bank guarantees, purchases,
recapitalizations, and nationalizations; direct fiscal spending and debt issues
- while ensuring that we can do so fast enough and on a large enough scale to do
Yet I am told that the chances of getting more money in the US for an extra
round of fiscal stimulus this year is zero, as is the chance of getting more
money this year to intervene in the banking system on an even larger scale than
America's Troubled Asset Relief Program (TARP).
There is an 80 percent chance that waiting until 2010 and seeing what policies
look appropriate then would not be disastrous. But that means that there is a 20
percent chance that it would be.
Posted by Mark Thoma on Thursday, April 30, 2009 at 01:11 AM in Economics, Financial System, Policy |
Posted by Mark Thoma on Thursday, April 30, 2009 at 12:02 AM in Economics, Links |
Last session, described by the moderator as the first "definitive public account of how TARP
came into being":
TARP: A Look at What Happened From Inside the Treasury Department
- Kevin Fromer, Former Assistant Secretary for Legislative Affairs, U.S.
Department of the Treasury
- David Nason, Former Assistant Secretary for Financial Institutions, U.S.
Department of the Treasury
- Phillip Swagel, Former Assistant Secretary for Economic Policy, U.S.
Department of the Treasury
- Rick Newman, Chief Business Correspondent, U.S. News & World Report
The U.S. government has launched a number of bailout plans to fix the
financial system, but perhaps none has proven to be as controversial as the
Troubled Assets Relief Program, or TARP, which allows Treasury to purchase
banks' preferred shares and distressed assets. This panel, which includes former
officials from the U.S. Treasury Department, will reveal the inside story of how
this program was designed. What was debated most fiercely, and what factors
drove the decision-making process? What other options were considered? What is
their current reaction to the aftermath and its unintended consequences? This
panel will discuss the details, effectiveness, transparency and accountability
of one of the largest financial rescues in history. Bank nationalization,
regulatory reform and other possible solutions to restore public confidence and
market stability will also be highlighted.
It's just starting, but this looks like one of the better sessions. I have to
leave as soon as it is done (and fight traffic on the 405...), but I'll post the
video as soon as I can. Update:
Notes: Lots of interesting detail, e.g. duties at the Treasury were divided among a capital team, a liquidity team, and a legislative team. The problems of getting the legislation passed are described in detail, and why they put forth a three page bill is explained (expediency). The communications problem of explaining why Main Street should care about Wall Street were very large (to both the public and congress), and having an election within a few weeks did not help at all. Treasury actions driven by the fear of a complete collapse of the global financial system. Congress did not understand how credit was provided in this country, and that led to resistance to the policies they wanted to put into place. What helped to get the legislation passed is the crash of the money market, which most people understood, and the message from big firms that layoffs were around the corner. Reason for TARP was to avoid a total breakdown, and they believe they did that. The second reason was to increase credit flows. Thus, the focus on whether banks are lending the TARP money, or not, is misdirected. Much of the money was intended to be a buffer against losses, not to provide new loans.
Was it a mistake to let Lehman fail? One problem is that no buyer materialized, but that may have been due to the terms. But without a buyer, saving them was not a choice they had. It had a 600 billion dollar balance sheet, and was enormously leveraged. The only way to stabilize an institution with liabilities that large stretched across the world is to stop a run on the institution. That was manageable in Bear Stearns' case since someone was willing to step forward and provide the guarantee. However, government support was not available for Lehman due to legal issues. They tried and tried to find a buyer to guarantee the balance sheet, couldn't, so Treasury/Fed had no choice but to let Lehman fail.They didn't think they could get the authority from congress to act in Lehman's case, so they didn't try. Did not expect the commercial paper market to shut-down, and that turned out to be a be a big problem.
[I had hoped to clean up and expand upon these notes, but need to hit the road...]
Posted by Mark Thoma on Wednesday, April 29, 2009 at 03:29 PM in Economics, Financial System |
The Fed released this statement after its meeting today. They note the economy has "improved modestly," and the plan is to continue the policies outlined after their last meeting:
Continue reading "FOMC Press Release" »
Posted by Mark Thoma on Wednesday, April 29, 2009 at 01:26 PM in Economics, Monetary Policy |
I'm in a session called What's the Grand Old Party to Do? (Andrew Breitbart, Jonah Goldberg, Amy Holmes, Kathryn Lopez, Byron York, William Bennett) (update: video). So far the themes have been how much more respect they have shown to Obama than Democrats showed Bush (they are the more "civilized party"), and how proud they are that they have rejected Identity politics.
They don't appear to believe they need to change, the key appears to be to hope and work for Obama's failure - they cannot believe that his policies will be successful (because they aren't their policies). So no need to change, just wait for the other side to fail and the country will come back to them. For example, Jonah Goldberg just said we should make a list of "I told you so's" and bring them out later after Democrats fail. It's a pretty clear denial that they need to change direction. It sounds a lot like a ditched spouse telling themselve all the things that are wrong with the new partnership, and hoping and believing the spouse who left will see all the things wrong with the new situation and come running back. Eventually, they believe, the country will realize their mistake, see the light, and come running back.
Just heard "conservatives are winning the arguments" so let's start pointing that out. Yes, please do. Now they are citing polls showing that the majority of the American people are conservative, so the key is to speak to their issues.
I expected to hear real proposals for change, and I'm very glad to be disappointed to hear nothing but a return to the same old failed strategies. (But we still have about an hour left...) (update: video)
Update: I don't recall Specter being mentioned, though I did drift in and out while they were talking so it may have come up briefly. Also, during the Q&A, the audience tried to ask about and push for change, but the panel was resistant. But I'll post the video soon so you can judge for yourself.
Currently in a session with Barry Eichengreen and others on The Rise and Fall of the U.S. Mortgage and Credit Markets Roundtable. (update: video)
Update: While I'm thinking about it, I didn't get to it, but several people have recommended this session: Credit
Markets (video) (David Malpass, Stephen Nesbitt, Steven Tananbaum, James Walker, moderator:
Posted by Mark Thoma on Wednesday, April 29, 2009 at 10:12 AM in Economics, Politics |
GDP down 6.1%. Green shoots are not, policymakers must plan for a prolonged downturn. If things turn out better than expected, great, but given that this downturn has been deeper and longer than anyone expected, even updated forecasts have consistently been too optimistic, we cannot let down our guard.
Posted by Mark Thoma on Wednesday, April 29, 2009 at 09:50 AM in Economics |
So says Barry Eichengreen:
Temptation of Risk, by Barry Eichengreen, National Interest: The Great
Credit Crisis has cast into doubt much of what we thought we knew about
economics. ... The question is how we could have been so misguided. One
interpretation, understandably popular given our current plight, is that the
basic economic theory informing the actions of central bankers and regulators
was fatally flawed. The only course left is to throw it out and start over. But
another view, considerably closer to the truth, is that the problem lay not so
much with the poverty of the underlying theory as with selective reading of
it... That ... encouraged financial decision makers to cherry-pick the theories
that supported excessive risk taking. It discouraged whistle-blowing, not just
by risk-management officers in large financial institutions, but also by the
economists whose scholarship provided intellectual justification for the
financial institutions’ decisions. The consequence was that scholarship that
warned of potential disaster was ignored. ...
[I]t was not that economic theory had nothing to say about the kinds of
structural weaknesses and conflicts of interest that paved the way to our
current catastrophe. In fact, large swaths of modern economic theory focus
squarely on the kind of generic problems that created our current mess. The
problem was not an inability to imagine that conflicts of interest, self-dealing
and herd behavior could arise, but a peculiar failure to apply those insights to
the real world. ...
What got us into this mess, in other words, were not the limits of scholarly
imagination. It was not the failure or inability of economists to model
conflicts of interest, incentives to take excessive risk and information
problems that can give rise to bubbles, panics and crises. It was not that
economists failed to recognize the role of social and psychological factors in
decision making or that they lacked the tools needed to draw out the
implications. In fact, these observations and others had been imaginatively
elaborated by contributors to the literatures on agency theory, information
economics and behavioral finance. Rather, the problem was a partial and
blinkered reading of that literature. The consumers of economic theory, not
surprisingly, tended to pick and choose those elements of that rich literature
that best supported their self-serving actions. ... It is in this light that we
must understand how it was that the vast majority of the economics profession
remained so blissfully silent and indeed unaware of the risk of financial
[A]mid the pervading sense of gloom and doom, there is at least one reason
for hope. The last ten years have seen a quiet revolution in the practice of
economics. For years theorists held the intellectual high ground. ... The
methods of empirical economists seeking to analyze real data were rudimentary by
But the IT revolution has altered the lay of the intellectual land. ... The
data sets used in empirical economics today are enormous, with observations
running into the millions. Some of this work is admittedly self-indulgent... But
now it is on the empirical side where the capacity to do high-quality research
is expanding most dramatically... And, revealingly, it is now empirically
oriented graduate students who are the hot property when top doctoral programs
seek to hire new faculty.
Not surprisingly, the best students have responded. The top young economists
are, increasingly, empirically oriented. ... To the extent that their work is
rooted concretely in observation of the real world, it is less likely to sway
with the latest fad and fashion. Or so one hopes.
The ... twenty-first century will be the age of inductive economics, when
empiricists hold sway and advice is grounded in concrete observation of markets
and their inhabitants. Work in economics, including the abstract model building
in which theorists engage, will be guided more powerfully by this real-world
observation. It is about time.
Should this reassure us that we can avoid another crisis? Alas, there is no
such certainty. ... [entire
Posted by Mark Thoma on Wednesday, April 29, 2009 at 12:58 AM in Economics, Methodology |
Posted by Mark Thoma on Wednesday, April 29, 2009 at 12:02 AM in Economics, Links |
I was glad we finished eating before Rush started talking:
Dinner Panel: A Political Discussion
- Willie Brown, Former Mayor of San Francisco; former Speaker, California
- Harold Ford Jr., Chairman, Democratic Leadership Council; Visiting Professor
of Public Policy, Vanderbilt University
- Ed Gillespie, Former Chairman, Republican National Committee (RNC); former
Counselor to President George W. Bush
- Rush Limbaugh, Host, "The Rush Limbaugh Show"
- Frank Luntz, President, The Word Doctors.com
If you have the stomach for it, the video is
The first distortion I caught was Gillespie's claim that the energy proposal
would, according to an MIT study, cost households $260 per month. Here's the
Financial Times energy blog on that estimate:
Earlier this year the Republican party, using a study by MIT, argued that the
cost would be $3,128 for every household [$3128/12=$261]. This was based on taking MIT’s
estimate that such a scheme would raise $366bn a year, and dividing that figure
for each household - something that one of the study’s authors said was ‘so
wrong it’s hard to know where to begin‘.
I wish one of the other panelists would have challenged this, or any of the
other distortions, e.g. Rush's claim that tax cuts pay for themselves - he used the Reagan tax cuts as an example - was not challenged at all. I didn't think the
Democrats on the panel did a very good job with the tax cut questions for the most part, and I can't say I was much impressed with Harold Ford. I was, however, very surprised with the grade the audience gave to Obama given my perception of the political makeup of the attendees (we had clickers at the tables). We were asked to give an A, B, C, D, or F:
[A=37%, B=32%, C=24%, D=5%, F=2%]
Posted by Mark Thoma on Tuesday, April 28, 2009 at 11:03 PM in Economics, Politics |
Here is the Nobel lunch panel video I said I'd post. Topics include the value
of economics, macroeconomics in particular, regulation, inequality, rationality, and efficient markets. Among other things, I was surprised to hear Becker support regulation, so long as it is automatic rather than discretionary (though Scholes disagrees):
A Discussion With Nobel Laureates in Economics: Whither Capitalism?:
- Gary Becker, Nobel Laureate, 1992; University Professor of Economics and
Sociology, University of Chicago
- Roger Myerson, Nobel Laureate, 2007; Glen A. Lloyd Distinguished Service
Professor in Economics, University of Chicago
- Myron Scholes, Nobel Laureate, 1997; Chairman, Platinum Grove Asset
- Michael Milken, Chairman, Milken Institute
It's become a Global Conference tradition for Michael Milken to moderate a
discussion with Nobel laureates in economics, and this year is no exception.
Topic A will be "whither capitalism" — that is, how the wrenching events of the
last year will affect the long-term prospects of the global economy. Expect
provocative commentary on subjects ranging from the logic of bank bailouts to
the relevance of Japan's lost decade to President Obama's determination to
tackle health-care reform. But if past performance is any indicator, don't be
surprised if the conversation veers into terra incognito — great economists have
a way of claiming the whole world of ideas as their own.
Update: Paul Kedrosky: "Did you enjoy the 'up with economists session?" That's a good summary of the session...
Posted by Mark Thoma on Tuesday, April 28, 2009 at 03:29 PM in Economics, Financial System, Macroeconomics, Regulation |
I'm hoping to post a video to the
Lunch Panel: A Discussion With Nobel Laureates in Economics: Whither Capitalism? soon. But for
the moment, an observation. One thing I was interested in is the change in the attitudes of participants between last year's meeting and this year's. It's hard to find such a difference
in the panelists, though I would say they are more defensive and ready to
deflect blame for what has happened for what happened (to government for the most part, you can judge one instance of this for yourself when the video is posted). But a big
difference is that last year I was given more business cards than I knew what to
do with, it was a huge stack. You could hardly turn around without someone introducing themselves, and offering their card. It probably made a
big impression on me because, as an academic, I have never bothered to get nor
had much use for a business card, and I found myself apologizing for that every
time somebody else would hawk their card.
So I made up my mind I'd have cards this year, but one day turned into
another, and on the way down I realized I'd never bothered to actually do that.
I figured I'd just apologize again for not having a card to exchange,
just like last year, but amazingly so far it hasn't been necessary. I haven't
been given a single card. Not one. Then I wondered, is it just me? So I've been paying
attention to what goes on at the tables as people sit down, and it's just not
like last year as far as I can observe.
Not sure what that means, exactly, and it's certainly not statistically
validated other than through my own limited observations and a few questions of
others about whether they've noticed the same thing, but it does seem like
people - as you would expect - have pulled back considerably in the search for
ways to expand their businesses, make new connections, etc. But it's not clear tome why the value of netwrking would have fallen so much due to the recession.
Posted by Mark Thoma on Tuesday, April 28, 2009 at 02:47 PM in Economics |
Steve Waldman says "we need a root-and-branch reorganization of the financial
Value for value, Steve Waldman: Would it have been better if Timothy
Geithner had had the power to guarantee all bank debt early on? As James
reminds us, that was part of the Swedish solution. Justin Fox
plausibly suggests that we might have avoided a lot of pain with a fast,
But that's not the point. The question isn't whether we could have avoided
this crisis, if only we had cut a big check. We could have, and that was not
lost to any of us debating these issues more than a year ago. (See e.g.
Mark Thoma.) Had we done so, the near-to-medium term fiscal costs might have
been less than they probably will be now. So, with 20/20 hindsight, would it
have been a good idea?
How you answer that question depends upon how you view the crisis. Is it an
aberration, a shock to a basically sound financial system, or is it a painful
symptom of an even more dangerous condition? ...
Continue reading ""Palliative Measures ... Have to be Attached to Curative Measures"" »
Posted by Mark Thoma on Tuesday, April 28, 2009 at 01:08 AM in Economics, Financial System, Regulation |
How libertarian dogma led the Fed astray, by Henry Kaufman, Commentary,
Financial Times: The Federal Reserve has been hobbled by ... major
shortcomings that were primarily responsible for the current and several
previous credit crises.
...My second major concern ... is the Fed’s prevailing economic
libertarianism. At the heart of this economic dogma is the belief that markets
know best and that those who compete well will prosper, while those who do not
How did this affect the Fed’s actions and behaviour? First, it explains to a
large extent why the Fed did not strongly oppose the removal of Glass-Steagall
restrictions. Second, it also helps explain why the Fed failed to recognise that
abandoning Glass-Steagall created more institutions that were “too big to fail”.
Third, it diminished the supervisory role of the Fed... [The] Fed’s ... tilt
toward an economic libertarian approach pushed supervision a notch down just at
a time when financial market complexity was on the rise.
Fourth, as hands-on supervision slackened, quantitative risk modelling became
increasingly acceptable. This approach ... was far from adequate. But it worked
hand in glove with a philosophy that markets knew best.
Fifth, adherence to economic libertarianism inhibited the Fed from using the
bully pulpit or moral suasion to constrain market excesses. It is difficult to
believe that recourse to moral suasion by a Fed chairman would be ineffective.
Sixth, the Fed’s increasingly libertarian philosophy underpinned its view
that it could not know how to recognise a credit bubble but knew what to do once
a bubble burst. This is a philosophy plagued with fallacies. ...
By guiding monetary policy in a libertarian direction, the Fed played a
central role in creating a financial environment defined by excessive credit
growth and unrestrained profit seeking. ... At a minimum, the Fed’s sensitivity
to financial excesses must be improved.
Posted by Mark Thoma on Tuesday, April 28, 2009 at 12:34 AM in Economics, Monetary Policy |
Posted by Mark Thoma on Tuesday, April 28, 2009 at 12:02 AM in Economics, Links |
At the Global Conference dinner tonight, part of which was a panel discussion on sports philanthropy by Andre Agassi, Mia Hamm, Tony Hawk, and Annika Sorenstam, I sat next to a conservative member of Parliament, David Davis. He told
me this story:
Tories in turmoil as David Davis resigns over 42-day vote, UK Guardian, June 12,
2008: The shadow home secretary, David Davis, threw the Conservative
leadership into turmoil today by unexpectedly announcing his resignation as an
MP, forcing a byelection in his constituency over the government's 42-day terror
Davis's move - to "take a stand" on what he said was the "relentless erosion"
of freedoms by the government - was taken against the wishes of David Cameron,
who beat him in a Tory leadership election in 2005.
Cameron made his disappointment clear by replacing Davis as shadow home
secretary with the shadow attorney general, Dominic Grieve, and saying Davis had
no guarantee of returning to the front bench if - as all parties expect - he
wins the byelection. ...
Davis seemed unaware he had consigned himself to the backbenches, telling the
BBC: "I may or may not be on the backbenches … This issue matters more to me
than my job."
Labour attempted to undercut Davis by announcing that they, like the Liberal
Democrats, would not contest the byelection... But
Davis's decision to resign and stand again - a move last seen on the British
mainland in 1982, and not since 1973 on a single issue of principle - injects
new unpredictability into British politics. ...
A Conservative source said Davis had had only three hours' sleep on Tuesday
night and was going through some kind of personal crisis. Davis brushed the
suggestion aside, saying: "Pop psychology in politics is very amusing but rarely
In his resignation statement, delivered outside the Commons at 1pm, Davis
said: "I will argue in this byelection against the slow strangulation of
fundamental British freedoms by this government." He said the undermining of civil liberties through moves such as detention
and the introduction of ID cards "cannot go on".
"It must be stopped, and for that reason today I feel it is incumbent on me
to take a stand," he told reporters...
He said his current issue is torture:
face torture pressure, BBC: UK ministers must answer allegations that
Britain was complicit in torture, a senior Conservative MP has said. David Davis
said a High Court ruling on Wednesday alleged that Binyam Mohamed, a UK resident
held in the Guantanamo Bay camp in Cuba, had been tortured. ...
The judges said the UK's attorney general has begun a criminal investigation
into possible torture against Mr Mohamed. Lord Justice Thomas and Mr Justice
Lloyd Jones said the attorney general would be investigating the issues of
"torture and cruel, inhuman or degrading treatment".
The judges said they wanted the full details of the alleged torture to be
published in the interests of safeguarding the rule of law, free speech and
But they had been persuaded that it was not in the public interest to publish
those details as the US government could then "inflict on the citizens of the
United Kingdom a very considerable increase in the dangers they face at a time
when a serious terrorist threat still pertains". ...
No 10 said it was not aware of any threat from the US government to withdraw
intelligence co-operation with Britain if details of the case were revealed. ...
Mr Davis said a High Court ruling, which pointed to complicity by the UK and
US authorities in his torture, was prevented from being published after the US
put pressure on the UK. ...
He said Mr Miliband should make a statement to MPs about the issue as soon as
possible to "explain what the devil is going on". He said the UK government
should make it "plain" that it did not support torture in any circumstances.
Mr Mohamed, 30, has been held in Guantanamo for four years... But war crimes
charges against him were dropped in October. ...
Last August, Lord Justice Thomas said evidence relating to the case should be
disclosed, saying it was "essential". However, the British government argued the
disclosure of certain material would cause "significant damage to national
Mr Davis said it appeared the Bush administration had "threatened" the UK
government about the repercussions should details of the case be made public.
"Frankly it is none of their business what our courts do," he said, adding
this was "plain fact" not merely an allegation.
"They should not seek in any circumstances to put pressure on British courts.
That's completely beyond the rule of law."
He said Mr Miliband must explain why this had happened and whether the new
Obama administration supported its predecessor's stance on the issue.
"While he is at it, he [the foreign secretary] should explain what degree of
complicity we have in this," he told the BBC.
Mr Davis said the government had taken a "highly principled public stand"
against torture but must "come clean" about whether there were cases where
British agencies ever knew about instances of torture by others. ...
Civil liberties campaigners described the judges' remarks on the case as
"astounding". Shami Chakrabarti, director of Liberty, said the Bush
administration had tried "to bully" the British courts and President Obama must
make it clear he would not do the same.
And Lib Dem leader Nick Clegg said all the documents in the case must be
published immediately. "There is no other terms for what the US intelligence
services are doing than blackmail," he said. "It is simply incredible that the
US government would have halted intelligence co-operation with the UK if this
information had been made public."
I encouraged him to pursue this, and the torture issue more generally,
Where are the US conservatives with this kind of courage? He said that when he first came out against the 42-day detention plan, the reaction on conservative blogs was very negative. However, the comments on those blogs disagreed overwhelmingly, and in no uncertain terms, and that grassroots support as he called it along with the support of a paper (the Daily something? - sorry - I don't recall) he compared to getting the support of Fox news caused the conservative blogs (and others in the media) to change their position. And once that happened, it was "checkmate" for those within the government who opposed him.
Posted by Mark Thoma on Monday, April 27, 2009 at 09:53 PM in Economics, Terrorism |
Since I was issued a press pass for the conference, on a tip, I went to
Governor Schwarzenegger's press conference on the swine flu outbreak. I was the
only one taking pictures with an iPhone. For the most part, it was as expected,
they are testing new flu cases, monitoring the borders in San Diego and Imperial
counties (though he made it clear there are no travel restrictions, at least not
yet - the Mexican border is a Federal issue in any case), and they gave
hygiene tips (wash your hands!). There are currently seven cases in California,
an eighth is suspected, and they are looking at a dozen additional cases. One of the doctors present noted that the CDC has created a seed virus and
is ready to move forward to create a vaccine if needed (there are currently 5
million does of anti-viral medication out there - a combination of Tami flu and
Relenza (sp?) - 25% will come to California, and they will be concentrated
in the counties where there are outbreaks.
But the news, I thought, was when he was asked to react to advice being given
in Europe not to travel to America, California in particular. Instead of saying that wasn't necessary,
that it was alarmist, he said that each country has to do what it thinks is
best. He did not say the advice was bad, and he made a statement about how we cannot worry about the economic effects right now. That made me think he believes the
problem is far bigger than what is reported above (otherwise, the probability of
infection is minuscule, and the European advice isn't really needed). Even so, I'd guess
he wishes he'd given a different answer.
Update: Bloomberg's version:
Avoid Travel to Mexico, U.S. Says as Outbreak of Flu Advances, by Tom Randall, April 27 (Bloomberg): Nonessential travel to Mexico should be avoided because of the outbreak of swine flu there that may be responsible for killing 100 people and sickening 1,000, U.S. health officials said.
A similar recommendation made by European officials against travel to the U.S., where 40 cases have been confirmed, is “premature,” said Richard Besser, acting head of the U.S. Centers for Disease Control and Prevention in Atlanta. None of the U.S. cases has been fatal, and the government is distributing swine flu information to people arriving in the U.S., he said.
Both the U.S. and European travel warnings may be influenced by politics more than science, said Margaret Chan, director-general of the World Health Organization in Geneva. WHO doesn’t recommend closing borders or restricting the movement of people or goods, Chan told leaders from United Nations agencies in a conference call today. The disease, also confirmed in Canada and Spain, has spread too far and would be impossible to contain by closing borders, she said.
“By definition, pandemic influenza will move around the world,” Chan said in the call today. “Does that mean we are going to close every country? Does that mean we are going to bring the world’s economy to a standstill?
“We know from past experience that transmission of influenza or the spread of new influenza disease would not be stopped by closing borders and would not be stopped by restricting movement of people or goods.” ...
Travel to Asia plunged during the 2002-2003 outbreak of severe acute respiratory disease, or SARS. ... “When we talk about travel advisories, we cannot think of the old days when we were dealing with SARS,” Chan said today. “It’s a totally different ballgame now.” ...
Health authorities in the U.S. recommended that nonessential travel to Mexico be avoided. The European Union also advised travelers to avoid areas affected by the outbreak. Australia, Japan, Singapore and South Korea are among countries screening travelers for fever, while Hong Kong raised its swine- flu response level to “serious” from “alert.”
When asked whether Europeans should avoid traveling to California, Arnold Schwarzenegger, the state’s governor, said: “That’s probably a wise decision.”
He said the risk of decreased tourism is outweighed by the importance of preventing the spread of the virus. ...
Posted by Mark Thoma on Monday, April 27, 2009 at 12:00 PM in Economics, Press |
The first session at the Milken Institute Global Conference [Update: Session video]:
Financial Recovery: When and How?
Mohamed El-Erian, CEO and Co-Chief Investment Officer, Pacific Investment
Management Co. (PIMCO)
Steve Forbes, Chairman and CEO, Forbes Inc.; Editor-in-Chief, Forbes
Kenneth Griffin, Founder, President and CEO, Citadel Investment Group LLC
John Micklethwait, Editor-in-Chief, The Economist
Michael Klowden, President and CEO, Milken Institute
The Global Conference kicks off by addressing the questions at the top of
everyone's mind this year. Just where are we in the financial crisis? Is it the
top of the eighth inning, or are we still stuck in the bottom of the third, with
many more twists and turns still in store? Our panelists will attempt to
quantify how much has been broken and how much has been repaired. What more
needs to be done to promote a recovery? Are government efforts to restore normal
lending and stabilize the banking system having any effect? What might be the
effects of stimulus spending? Have we allocated too much — or too little — to
address the problems? What indicators will signal that a recovery is under way?
I was curious to see how the attitudes had changed relative to last year, if
they had changed at all, e.g. whether there would be any self-reflection,
acceptance that the financial sector would have to change. But, nope, not from
this panel anyway. There was a lot of talk and worry about the growing role of
government in the economy, that was viewed as the main cause of all the problems
in the past, and of problems yet to come. There was very little about the
financial sector must change in order to stabilize the system going forward,
very little about what needs to be done to clean up their own houses.
So the game so far this year, if one session is any indication, is to blame
the government for the problems we have, and to point to the government as the
biggest potential impediment to the recovery. I don't know if this is a
conscious strategy or not, but it seems clear that blame the government is the
defense against more regulation.
Forbes is a good example. He said unionization, the government takeover of
banking and insurance, the stimulus program, regulation of the financial sector,
and other government intervention will potentially stall the recovery. It was
government that created this mess, he blames the Fed's low interest rates for
the bubble (though later he blamed mark to market, fear of regulators causing
assets to be undervalued, and the Fed allowing the dollar to fall too far, but
the theme was always that government is the problem), and he says that if the
government doesn't get out of the way, the recovery will be very slow. He had
one main recommendation for ending the crisis: The Fed should aggressively buy
MBS starting now. The fact that they haven't is the reason we are still having
problems (so, it's the government's fault).
Griffin also blames government, even brings up the "how many people did we
lift out of poverty defense" of financial innovation. But here's the argument
that caught my attention. He says the the typical household does not understand
all the ways it benefited from the financial sector over the last few decades.
Thus, when we socialize losses, as we must do, we are merely taking some of
those gains back - households are still better off overall. How is this the
government's fault? Instead of explaining this to households so they'd
understand, they have stoked populist anger, and that will lead to government
reactions that will make things worse.
I shouldn't say that there was no attention at all to how the financial
sector must change. In fact, one of the last questions asked was exactly that,
"How must financial sector change?" Griffins answer was representative. He said
that existing regulations are fine, but they weren't enforced. Thus, we need
regulators to enforce what is there, not new regulation . In fact, he'd like
some of the existing regulation to go away, and he cited California state law as
an example. California has non-recourse laws, and he said this was a very large
part of why we had the bubble. Without those laws, things aren't nearly so bad.
He also blames Fannie and Freddie for the crisis, and says it proves regulation
The last question they were asked is "The one thing we should do to end the
crisis faster." My notes on their responses:
El-Erian: Innovation got ahead of infrastructure. Don't kill the innovation,
instead update the infrastructure. This was the closest anyone came to0
admitting that the financial sector must undergo change.
Forbes: The Fed should get more aggressive on MBS. Don't turn the US into
Griffin: Foster innovation by removing the government from picking winners
and losers. The sooner we do that, the faster we'll recover.
Micklethwait: Sort out the good/bad banks as fast as possible, the fight for
liberal, free market capitalism. Agrees with Griffin that government should
explain how common person benefited from financial innovation so they'll feel
better about helping to clean it up.
So there you have it, you don't know what's good for you. The financial
sector is fine, so get out of the way, leave them alone, and let them make your
lives better once again.
Needless to say, I see things a bit different. [I should edit this, but it will have to do as is ... off to the next session...]
Update: Here's the video:
Posted by Mark Thoma on Monday, April 27, 2009 at 09:49 AM in Economics, Financial System |
Will bankers escape new regulation and get off with "nothing more than a few
Nothing, by Paul Krugman, Commentary, NY Times: ...Sanford Weill, the former
chairman of Citigroup,... insisted that he and his peers in the financial sector
had earned their immense wealth through their contributions to society.
Soon after..., the financial edifice Mr. Weill took credit for helping to
build collapsed, inflicting immense collateral damage in the process. ... All of
which explains why we should be disturbed by an article ... reporting that pay
at investment banks ... is soaring again — right back up to 2007 levels.
Why is this disturbing?... First, there’s no longer any reason to believe
that the wizards of Wall Street actually contribute anything positive to
society, let alone enough to justify those humongous paychecks. ...
So why did some bankers suddenly begin making vast fortunes? It was, we were
told, a reward for their creativity — for financial innovation. At this point,
however, it’s hard to think of any major recent financial innovations that
actually aided society, as opposed to being new, improved ways to blow bubbles,
evade regulations and implement de facto Ponzi schemes.
Consider a recent speech by Ben Bernanke ... in which he tried to defend
financial innovation. His examples ... were (1) credit cards — not exactly a new
idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making
this up.) These were the things for which bankers got paid the big bucks?
Still, you might argue that ... it’s up to the private sector to decide how
much its employees are worth. But this brings me to my second point: Wall Street
is no longer, in any real sense, part of the private sector. It’s a ward of the
state, every bit as dependent on government aid as recipients of Temporary
Assistance for Needy Families, a k a “welfare.” ...[G]iven all that taxpayer
money on the line, financial firms should be acting like public utilities, not
returning to the practices and paychecks of 2007.
Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s
dangerous. Why, after all, did bankers take such huge risks? Because success —
or even the temporary appearance of success — offered such gigantic rewards:
even executives who blew up their companies could and did walk away with
hundreds of millions. Now we’re seeing similar rewards offered to people who can
play their risky games with federal backing. ...
Why are paychecks heading for the stratosphere again? Claims that firms have
to pay these salaries to retain their best people aren’t plausible: with
employment in the financial sector plunging, where are those people going to go?
No, the real reason financial firms are paying big again is simply because
they can. They’re making money again (although not as much as they claim), and
why not? After all, they can borrow cheaply, thanks to all those federal
guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for
tomorrow you may be regulated.
Or maybe not. There’s a palpable sense in the financial press that the storm
has passed: stocks are up, the economy’s nose-dive may be leveling off, and the
Obama administration will probably let the bankers off with nothing more than a
few stern speeches. Rightly or wrongly, the bankers seem to believe that a
return to business as usual is just around the corner.
We can only hope that our leaders prove them wrong, and carry through with
real reform. In 2008, overpaid bankers taking big risks with other people’s
money brought the world economy to its knees. The last thing we need is to give
them a chance to do it all over again.
Posted by Mark Thoma on Monday, April 27, 2009 at 12:43 AM in Economics, Financial System, Market Failure, Regulation |
Posted by Mark Thoma on Monday, April 27, 2009 at 12:01 AM in Economics, Links |
Here's one of the session's I plan to attend at this year's
Institute Global Conference:
What's the Grand Old Party to Do? The Future of the Conservative Movement
Andrew Breitbart, Publisher, Breitbart.com and Big Hollywood; Columnist,
Jonah Goldberg, Columnist, The Los Angeles Times
Amy Holmes, Political Analyst; former Senior Speechwriter for Senate
Majority Leader Bill Frist
Kathryn Lopez, Editor, National Review Online
Byron York, Chief Political Correspondent, Washington Examiner
William Bennett, Former U.S. Secretary of Education; Author, America:
The Last Best Hope
The Republican Party has suffered major losses in the last two elections.
Democrats are now in control of Congress and the presidency. Polls show the
GOP's popularity at near-record lows. And the recent spat over who is the leader
of the party — Rush Limbaugh? — showed that Republicans have some work to do in
order to restore the party's focus and popularity. In this panel, leading
conservatives will offer their views on how to rebuild the GOP.
The rest of the sessions I'll attend are mostly economics and finance related, but this one caught my eye. I'll let you know how it goes.
Posted by Mark Thoma on Sunday, April 26, 2009 at 09:07 PM in Economics, Politics |
Before Tea, Thank Your Lucky Stars, by Robert Frank, Commentary, NY Times:
The link between success and luck is stronger than many people think. Analysis
of this connection provides a useful framework for weighing ... recent “tea
parties,” where orators ... bemoaned their “crippling” tax burdens. ...
Contrary to what many parents tell their children, talent and hard work are
neither necessary nor sufficient for economic success..., some people enjoy
spectacular success despite having neither attribute. (Lip-synching members of
Far more numerous are talented people who work very hard, only to achieve
modest earnings. There are hundreds of them for every skilled, perseverant
person who strikes it rich — disparities that often stem from random events. ...
Malcolm Gladwell reports that a disproportionate number of pro hockey players
owe their success to the accident of having been born in January, which made
them the oldest, most experienced players in every youth league growing up. For
that reason alone, they were more likely to make all-star teams, receive special
coaching and eventually become professionals.
Although people are often quick to ascribe their own success to skill and
hard work, even those qualities entail heavy elements of luck. ... People born
with good genes and raised in nurturing families can claim little moral credit
for their talent and industriousness. They were just lucky. ...
Even in markets where luck plays no role, minuscule differences in
performance often translate into enormous differences in salaries. ... In law,
consulting, investment banking, corporate management and a host of other
occupations, the ablest performers are often paid hundreds or even thousands of
times as much as others who perform nearly as well.
Another important message of recent research is that a person’s salary
depends far more on where she is born than on her talent and effort.
For example, as a Peace Corps volunteer in Nepal long ago, I hired a cook who
had no formal education but was spectacularly intelligent and resourceful. ...
Yet his total lifetime earnings were less than even a very lazy, untalented
American might earn in a single year. Well-paid Americans owe an enormous, if
rarely acknowledged, debt to the social investments that supported their
The president’s proposal is modest: raising the top marginal tax rate from 35
percent to 39.5 percent, its level when Bill Clinton left office and well below
the corresponding level in most other industrial countries. There has never been
a shortage of talented people willing to work hard for success... And the
president’s proposal would not cause such a shortage...
It would, however, promote more efficient provision of public services... For
example,... when government levies higher tax rates on the wealthy, we can
provide public services that the wealthy and others greatly value but that would
otherwise be beyond reach. Under such a tax system, the heavier tax bill becomes
payable only if we’re lucky enough to end up among life’s biggest winners.
Financially successful tax protesters seem blissfully unaware of how
incredibly fortunate they are. To borrow from the late Ann Richards and her
description of the first President Bush, they were born on third base and
thought they’d hit a triple.
See also Hal Varian's
Luck, Skill, and Progressive Taxes:
In the debate over tax policy, the power of luck shouldn't be overlooked, by Hal
Varian, NY Times, 2001: President Bush's proposed tax cut has rekindled an
age-old debate: how progressive or regressive should the income tax be? ...
Continue reading "Luck and Taxes" »
Posted by Mark Thoma on Sunday, April 26, 2009 at 12:19 AM in Economics, Taxes |
Posted by Mark Thoma on Sunday, April 26, 2009 at 12:01 AM in Economics, Links |
Is the "Beijing Consensus" on the rise, even within the U.S.?:
‘Washington Consensus’ a thing of the past now, by Jonathan Holslag, Project
Syndicate: ...[T]he “Washington Consensus” about how the global economy
should be run is now a thing of the past. The question now is what is likely to
Although China is often said to lack “soft power”, many of its ideas on
economics and governance are coming into ascendance. Indeed, in pursuit of
national economic stability, the Obama administration is clearly moving towards
the kind of government intervention that China has been promoting over the past
In this model, the government, while continuing to benefit from the
international market, retains ... strict control over the financial sector,
restrictive government procurement policies, guidance for research and
development in the energy sector, and selective curbs on imports of goods and
services. All these factors are not only part of China’s economic rescue
package, but of Obama’s stimulus plan as well. ...
Rather than obsessing about elections, the US now seeks to build pragmatic
alliances to buttress its economic needs. This requires, first of all, cozying
up with China and the Gulf states – the main lenders to the US Treasury – as
well working with Iran and Russia to limit the costs of the wars in Afghanistan
As the US backtracks on its liberal standards, it is flirting with what can
be called the “Beijing Consensus”, which makes economic development a country’s
paramount goal and prescribes that states should actively steer growth in a way
that suits national stability. What matters in this worldview is not the nature
of any country’s political system, but the extent to which it improves its
people’s wellbeing. ...
This ... realism is ... a reversal of the neo-conservative muscle-flexing of
the George W Bush years. ... For example, in times of crisis it is no shame for
a government to be mercantilist, but by behaving in this way, the US has lost
the moral high ground as a champion of free trade. ...
As we move from a unipolar international order to one with multiple regional
powers,... [t]he result will be a new concert of powers... Instead of entrusting
America with the arduous task of safeguarding international stability on its
own, the BRICs (Brazil, Russia, India, and China) will assume a more prominent
role in policing their own backyards. Russia can have its Caucasus, and if the
generals in Myanmar should go mad, it would become China’s and India’s problem
to sort out. ...
Whether America is able to strengthen its global influence in the future will
depend not so much on its moral esteem, but on the extent to which it succeeds
in revamping its economy and forging new alliances. The same will apply for
But this rising Beijing Consensus offers no guarantee of stability. A concert
of powers is only as strong as its weakest pillar, and requires a great deal of
self-discipline and restraint. It remains to be seen how the American public
will respond to its national U-turn.
If one main player slides back into economic turmoil, nationalism will reduce
the scope for pragmatic bargaining. ... And, if China comes out of the crisis as
the big winner and continues to boost its power, zero-sum thinking will soon
replace win-win co-operation.
I don't agree with every word of this, but I have to hit the road in a few
minutes and will have to leave the response to all of you.
Posted by Mark Thoma on Saturday, April 25, 2009 at 01:06 PM in Development, Economics, Policy |
Akerlof and Shiller say it's up to government to set animal spirits free, only then will they be maximally creative":
Government and Animal Spirits, by George A, Akerlof and Robert J. Shiller,
Commentary, WSJ: The principal long-term result of the current financial
crisis should be improved financial regulation. ...
An understanding of animal spirits -- the human psychology and culture at the
heart of economic activity -- confirms the need for restoring the role of
regulators... History -- including recent history -- shows that without
regulation, animal spirits will drive economic activity to extremes. ...
At the end of the 1980s, our economic system was remarkably well-adapted to
weather any storm. For example, massive numbers of S&Ls failed during the
decade. But government protections isolated this collapse into a microeconomic
event that, while it cost taxpayers quite a bit of money, only rarely cost them
Then the economy changed -- as it always does -- challenging the regulations
that were in place. ... And regulation did not adapt to reflect this change in
the financial structure. The regulatory failure led to a profound systemic
instability in our economy...
Public antipathy toward regulation supplied the underlying reason for this
failure. The U.S. was deep into a new view of capitalism. Americans believed in
a no-holds-barred interpretation of the game. We had forgotten the hard-earned
lesson of the 1930s: Capitalism can give us real prosperity, but it does so only
on a playing field where the government sets the rules and acts as a referee.
Contrary to a widespread impression the current situation is not really a
crisis of capitalism. Rather we must recognize that capitalism must live within
certain rules. ... It may be true that in the classical economic paradigm there
is full employment. But with animal spirits, waves of optimism and pessimism
cause large-scale changes in aggregate demand... When demand goes down,
unemployment rises. It is the role of the government to mute those changes.
Moreover, entrepreneurs and companies do not just sell people what they
really want. They also sell people what they think they want, and not
infrequently what they think they want turns out to be snake oil. Especially in
financial markets... All of these processes are driven by stories. The stories
that people tell to themselves -- about themselves, about how others behave, and
even about how the economy as a whole behaves -- all influence what they do.
These stories vary over time.
Such a world of animal spirits justifies the economic intervention of
government. Its role is not to harness animal spirits but really to set them
free, to allow them to be maximally creative. A brilliant player wants a
referee, for only when the game has appropriate rules can he really show his
talents. ...American financial regulation hasn't had an overhaul in 70 years.
The challenge for the Obama administration, along with the U.S. Congress and our
SROs, is to invent a new and better American version of the capitalist game.
Posted by Mark Thoma on Saturday, April 25, 2009 at 01:05 PM in Economics, Market Failure |
Posted by Mark Thoma on Saturday, April 25, 2009 at 12:01 AM in Economics, Links |
Tim Duy says the Fed is likely to step up its purchases of long-term
TALF Disappointment and the Fed's Balance Sheet, by Tim Duy: Mark Thoma directs us to a Washington Post article detailing the slow start-up of the Federal Reserve's much discussed but little used TALF program. At this juncture, a critical constraint appears to be counterparty risk - no one trusts the US government to hold parties to their contractual obligations:
Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. ... There are restrictions on the business activities of participants in the program. ... But perhaps more significant ... is a fear that the government could retroactively change the terms, exacting new limits on what investors can pay their executives, for example, or trying to claw back profits that firms make in the program. ...
Perhaps TALF will gain traction in the months ahead. For now, however, I imagine that no amount of lipstick is able to conceal what must be official disappointment with the program. The question on my mind is will slow take up on TALF induce the Federal Reserve to step up its purchases of mortgage assets and longer term Treasuries. From the last Fed minutes:
Continue reading "Fed Watch: TALF Disappointment and the Fed's Balance Sheet" »
Posted by Mark Thoma on Friday, April 24, 2009 at 12:24 PM in Economics, Fed Watch, Monetary Policy |
We need to "regain our moral compass":
Reclaiming America’s Soul, by Paul Krugman, Commentary, NY Times: “Nothing
will be gained by spending our time and energy laying blame for the past.” So
declared President Obama, after his commendable decision to release the legal
memos that his predecessor used to justify torture. Some people in the political
and media establishments have echoed his position. We need to look forward, not
backward, they say. No prosecutions, please; no investigations; we’re just too
And there are indeed immense challenges out there: an economic crisis, a
health care crisis, an environmental crisis. Isn’t revisiting the abuses of the
last eight years, no matter how bad they were, a luxury we can’t afford?
No, it isn’t, because ... never before have our leaders so utterly betrayed
everything our nation stands for. “This government does not torture people,”
declared former President Bush, but it did, and all the world knows it.
And the only way we can regain our moral compass ... is to investigate how
that happened, and, if necessary, to prosecute those responsible.
What about the argument that investigating the Bush administration’s abuses
will impede efforts to deal with the crises of today? Even if that were true —
even if truth and justice came at a high price — ...laws aren’t supposed to be
enforced only when convenient. But is there any real reason to believe that the
nation would pay a high price for accountability? ...
Tim Geithner ... wouldn’t be called away... Peter Orszag, the budget
director, wouldn’t be called away... Even the president needn’t, and indeed
shouldn’t, be involved. All he would have to do is let the Justice Department do
its job... America is capable of uncovering the truth and enforcing the law even
while it goes about its other business.
Still, you might argue — and many do — that revisiting the abuses of the Bush
years would undermine the political consensus the president needs to pursue his
But the answer to that is, what political consensus? There are still, alas, a
significant number of people in our political life who stand on the side of the
torturers. But these are the same people who have been relentless in their
efforts to block President Obama... The president cannot lose their good will,
because they never offered any.
That said, there are a lot of people in Washington who ... probably just
don’t want an ugly scene... But the ugliness is already there, and pretending it
isn’t won’t make it go away.
Others, I suspect, would rather not revisit those years because they don’t
want to be reminded of their own sins of omission.
For the fact is that officials in the Bush administration instituted torture
as a policy, misled the nation into a war they wanted to fight and, probably,
tortured people in the attempt to extract “confessions” that would justify that
war. And during the march to war, most of the political and media establishment
looked the other way.
It’s hard, then, not to be cynical when some of the people who should have
spoken out against what was happening, but didn’t, now declare that we should
forget the whole era — for the sake of the country, of course.
Sorry, but what we really should do for the sake of the country is have
investigations both of torture and of the march to war. These investigations
should, where appropriate, be followed by prosecutions — not out of
vindictiveness, but because this is a nation of laws.
We need to do this for the sake of our future. For this isn’t about looking
backward, it’s about looking forward — because it’s about reclaiming America’s
I wrote this several days ago, but never posted it. It echoes much of the
When asked whether people will be held accountable for their actions during
the time the last administration was in power, this administration says that
it's time to move on, to put the past behind us, to let bygones be bygones. But
that is not a reason to prevent people from having to take responsibility for
Continue reading "Paul Krugman: Reclaiming America’s Soul" »
Posted by Mark Thoma on Friday, April 24, 2009 at 12:33 AM in Economics, Iraq and Afghanistan, Politics, Terrorism |
Jamie Galbraith explains why he believes the recovery will be slow, and what we might do to speed it up:
The Recovery to Come, Remarks to the 18th Annual Conference Honoring Hyman Minsky, by James K. Galbraith:
...The question before us is:... Will what went down, come back up? ... It seems to me that there are four essential points to make about the
expansion to come.
- It will surely be very slow to restore employment. At present writing jobs
are being lost at the rate of over 600,000 per month. To reverse this in six
months would require a swing to job creation of the same amount, or a net swing
of 1.2 million jobs a month for half a year. This is not going to happen - not
even close. ... As a result, we can expect the human wreckage of this slump to
persist... Without direct
employment measures, many of the people most hurt will not again find decent
- As a result of the administration's determination to save the big banks, we
will emerge from this slump with an unreformed financial sector in the hands of
the same people who produced the disaster in the first place. ...
Continue reading ""The Recovery to Come"" »
Posted by Mark Thoma on Friday, April 24, 2009 at 12:17 AM in Economics |
Posted by Mark Thoma on Friday, April 24, 2009 at 12:06 AM in Economics, Links |
According to this research, inequality raises residential segregation. This is worrisome in part because the increase in segregation can cause problems that feedback to both amplify and perpetuate the
Inequality and the Measurement of
Residential Segregation by Income In American Neighborhoods, by Tara Watson,
NBER Working Paper No. 14908, April 2009: Abstract American
metropolitan areas have experienced rising residential segregation by income
since 1970. One potential explanation for this change is growing income
inequality. However, measures of residential sorting are typically mechanically
related to the income distribution, making it difficult to identify the impact
of inequality on residential choice. This paper presents a measure of
residential segregation by income, the Centile Gap Index (CGI) which is based on
income percentiles. Using the CGI, I find that a one standard deviation increase
in income inequality raises residential segregation by income by 0.4-0.9
standard deviations. Inequality at the top of the distribution is associated
with more segregation of the rich, while inequality at the bottom and declines
in labor demand for less-skilled men are associated with residential isolation
of the poor. Inequality can fully explain the rise in income segregation between
1970 and 2000. ...
Continue reading "Inequality and Residential Segregation" »
Posted by Mark Thoma on Thursday, April 23, 2009 at 03:52 PM in Academic Papers, Economics, Housing, Income Distribution |
Alberto Alesina and Paola Giuliano ask, "Will Americans turn into 'inequality
intolerant' Europeans?" They use the word intolerant because they believe that
"The increase in income inequality of the last three decades in the US is not
extraordinary if viewed from a very long-term perspective," therefore the recent
increase in inequality and social immobility shouldn't be viewed as unfair. But
I don't see why the distribution or degree of immobility in the past was
necessarily fair just because it prevailed, nor why the recent increase in
inequality - which we know was based in large part upon false valuations and
hence false rewards - should be viewed as justifiable in any case:
redistribution: The crisis, reduced inequality, and soak-the-rich populism, by
Alberto Alesina and Paola Giuliano, voxeu.org: The current financial crisis
will reduce income and wealth inequality. The rich who heavily invested in
financial and stock markets have lost much more than the less wealthy. The
relatively poor “young” may face the sale of the century. Go and tell a young
(and poor) just-married couple that the collapse of housing prices is a problem;
mention to a young worker just beginning to accumulate retirement money that low
stock prices are a problem!
Many will consider this reduction in inequality the silver lining of the
crisis and a welcome development. This is especially the case because many
people are acutely aware of the increase in income inequality that occurred in
many (especially English-speaking) countries in the last three decades and
perhaps tend to think of it as “unfair”. Those who became rich from complicated
financial instruments and sophisticated investments in derivatives are now seen
as undeserving of their wealth. The extraordinary bonuses of certain incompetent
managers, especially those bailed out by the taxpayers, have certainly not
helped gain them sympathy. Nevertheless, a frontal attack on the finance world
is pure populism; finance serves a very productive purpose. One cannot mix
criminals like Bernie Madoff with unlucky or even excessively leveraged, overly
risk-taking, sometimes incompetent, and overpaid managers. Politicians should
not throw fuel on any anti-finance or anti-Wall Street sentiments. There is
enough anger against “unfairly” accumulated wealth; we do not need more.
Continue reading ""The Crisis, Reduced Inequality, and Soak-the-Rich Populism"" »
Posted by Mark Thoma on Thursday, April 23, 2009 at 12:48 AM in Economics, Income Distribution |
The TALF program intended to increase auto loans, student loans, and credit
card lending has a lot in common with the Geithner public private investment plan to remove toxic assets
from bank balance sheets, including the valuable non-recourse loan feature. The
fact that the TALF program is not living up to expectations - not even close - leads to questions about whether the Geithner plan will encounter similar problems:
Federal Program to Boost Private Lending Struggles to Get Money to Consumers, by
Neil Irwin, Washington Post: In its first two months, the government's
signature initiative to support consumer lending has fallen well short of
expectations, deploying only a fraction of the amount officials had hoped to
extend to stimulate auto loans, student loans and credit card lending. ...
Under [the Term Asset-Backed Securities Loan Facility, or] TALF, private
investors ... put up a relatively small amount of money to be matched with a
larger loan from the Federal Reserve. The combined funds are then used to
purchase newly created, highly rated securities, which in turn fund a wide range
of consumer and business lending.
If the securities become more valuable, the private investors stand to repay
their government loans and make a healthy profit; if the securities plummet in
value, the investors can lose only what they put up originally...
Officials envisioned TALF supporting tens of billions of dollars a month in
new lending, saying it could eventually total $1 trillion. But in March, when it
was launched, it backed only $4.7 billion in auto loans and credit cards. For
April, it logged only $1.7 billion.
Sources involved in the program said private investors have been reluctant to
work with the government, which they view as an unreliable business partner. ...
There are restrictions on the business activities of participants in the
program. ... But perhaps more significant ... is a fear that the government
could retroactively change the terms, exacting new limits on what investors can
pay their executives, for example, or trying to claw back profits that firms
make in the program. ...
Federal Reserve officials have privately urged President Obama and
congressional leaders to publicly state that the government views investors in
voluntary programs such as TALF differently than it does companies that need a
Investors are not the only ones who need comforting, though. The Fed relies
on primary dealers, or brokerage houses, to play a key role as intermediaries in
But the primary dealers have been extremely cautious..., hobbling the
program's progress... Lawyers at the New York Fed ... have been working to help
the brokers and investors work through the issues, and government officials are
hopeful about the program's future. ...
The Public-Private Investment Program, designed to buy loans and securities
from banks, is structured similarly to TALF. ...
And the differences between the PPIP and TALF programs that I can think of,
e.g. that the PPIP has toxic assets as part of the bargain, and some of the
banks will need a bailout so the reassurances about executive pay, etc. can't be
made in these cases, are additional factors working against the PPIP's success.
Posted by Mark Thoma on Thursday, April 23, 2009 at 12:47 AM in Economics, Policy |
Posted by Mark Thoma on Thursday, April 23, 2009 at 12:06 AM in Economics, Links |
Simon Johnson wants to apply anti-trust laws to financial markets and use it to break
up banks that are too big too fail. More vigorous enforcement of anti-trust laws is
something I've been pushing here for a long time, and as I explain below I agree with this idea, but as I understand it, current anti-trust law is inadequate for this task (particularly on dimensions such as
connectedness and systemic risk). So it will likely take Congressional action before we can proceed.
The reason for bringing this up is that I want to amend remarks I made in the
past. I have said that there is no single villain in this crisis, no one person,
not one change in the law, etc., that caused this. It was a combination of
things. But as I think about it more and more, I'm not so sure. The reason?
According to the story I've been telling about why the crisis happened, there
were incentive failures at just about every step in the process.
Homeowners had no recourse loans giving them one way bets on home values, real estate agents
are paid in a way that causes them to maximize the value of sales,
mortgage brokers faced no long-run consequences from bad loans, real estate
appraisers had incentives to validate sales, ratings agencies were paid by the
people whose assets were being rated, CEOs and upper level management had
incentives to maximize something other than shareholder value, there was a lack
of transparency giving insiders an advantage, it goes on and on.There is not a single step in the process that wasn't compromised by an incentive or market failure of some type.
Looking at this at first, I concluded that it was all of these things, and
more, that caused the crisis, and that it could have been stopped at any one of these steps. Had
anyone at any one of the steps from the sale of the house to the
complex securities traded in the shadow banking system said no, we're not doing that,
the money could not have kept flowing through the system and blowing up the
bubble. For example, if the mortgage brokers would have taken personal losses on
mortgages that later went bad, they might have refused to finance them, and the money could not have been passed upwards to the shadow banking system where it caused such big problems. But
instead, the brokers simply passed the contracts along, sliced and diced as necessary, to the
next person in the finance chain.
But what should we make of the fact that every singe step in the process is compromised? Every market that was supposed to self-regulate failed? Does every single market
in the chain fail at the same time through some highly unlikely coincidence? What are the chances that, on their own,
independently, each and every step in the chain would have been subject to a
market failure that just happened to let the bubble keep inflating? Whatever it took to keep the
money flowing through the system seems to have come to pass.
So more and more I'm starting to thing there may be a single explanation after all, that the
regulators of these markets were captured by powerful forces that wanted the
game to continue. The power of regulators, and the will to enforce the
regulations, must match - in fact exceed - the will and power of those being
regulated to resist having constraints placed on their behavior. I've talked about why ideology may have eroded the will of regulators, but their will is partly a function of their power. So long as we allow
huge, clearly over-sized financial institutions to exist, this problem will
potentially be present.
Therefore, if the current anti-trust legislation is adequate to the task, then yes,
let's give regulators the power to enforce it, and ensure we have people in place with the will to do so. But as I said above, I think current law may have glaring legal holes
that need to be closed before we can use this section of the law effectively. If so, then it's time to get started crafting new legislation that is up to the
task, and I hope Simon Johnson is successful in getting movement in this
direction. He has my support.
Posted by Mark Thoma on Wednesday, April 22, 2009 at 01:26 PM in Economics, Market Failure, Politics |
Jeff Sachs says the government will need to find new sources of tax revenue:
The Costs of Expanding the Government's Economic Role [Extended version],
by Jeffrey D. Sachs, Scientific American: The 10-year budget framework that
President Barack Obama released ... is as much a philosophy of government as a
fiscal action plan. Gone is the Ronald Reagan view that “government is not a
solution to our problem; government is the problem.” Obama rightly sees an
expanded role for government in allocating society’s resources as vital to
meeting the 21st century challenge of sustainable development.
The scientific discipline known as public economics describes why government
is needed alongside markets to allocate resources. These reasons include: the
protection of the poor through a social safety net; the correction of
externalities...; the provision of “merit goods” such as health care and
education that society deems to be essential for all of its members; and the
financing of scientific and technological research that cannot be efficiently
captured by private investors. In all these circumstances, the free-market
system tends to underprovide the resource in question...
Obama’s budget plan properly focuses on areas that public economics
identifies as priorities and where the U.S. discernibly lags behind many parts
of Europe: health..., education..., public infrastructure... and research and
development... The emphasis is on public-private partnerships (PPP), combining
public financing and private sector delivery. ...
Obama’s vision of an expanded federal role is on-target and transformative,
but the financing will be tricky. This year’s deficit will reach an astounding
$1.75 trillion, or 12 percent of GDP...
Obama’s budget plan aims to reduce the deficit to 3 percent of GNP by 2013,
and to level off till 2019..., but ... that target will be very difficult to
achieve and sustain as planned. ...[T]he plan is to cut the deficit mainly
through higher taxes on the rich, reduced military outlays for Iraq and
Afghanistan, new revenues from auctioning carbon-emission permits and, finally,
a squeeze on non-defense discretionary spending... Such a squeeze on non-defense
spending seems unlikely—and indeed undesirable—at a time when government is
launching several much-needed programs in education, health, energy and
The truth is that the U.S. ... will probably have to raise new revenues ...
to carry out its vital roles in protecting the poor, promoting health and
education and building a modern infrastructure with ... sustainable technology.
Ending the Bush-era tax cuts on the rich certainly is merited, but further
taxing the rich much beyond that will come up against political and practical
limits. Within a few years, we’ll probably see the need for new broader-based
taxes, perhaps a national sales or value-added tax such as those widely used in
other high-income countries. If we continue to assume that we can have the
expanded government that we need but without the tax revenues to pay for it, the
unacceptable build-up of public debt will threaten the well-being of our
children and our children’s children. ...
I doubt will see any major changes in the tax structure anytime soon, but if
we do, value added taxes are regressive, but in countries where they are used,
they're an important source of revenue for highly progressive tax-and-transfer
systems (but not without
problems). So the characteristic of these taxes overall depends upon their
implementation, i.e. how the extra revenue from the tax is used.
Posted by Mark Thoma on Wednesday, April 22, 2009 at 12:33 AM in Economics, Market Failure, Taxes |
Posted by Mark Thoma on Wednesday, April 22, 2009 at 12:06 AM in Economics, Links |
Michael Pomerleano at Martin Wolf's Economist's Forum calls for more
The crisis: holding the professionals to account, by Michael Pomerleano, Economists' Forum: My education (Harvard Business School and
economics department) and professional experience prime me to advocate finance’s
role in the growth of economies. ... However, the conduct of professionals in
the financial crisis leads me to reassess these beliefs. ...
In this context,... the professionals are not being held accountable. As
Viral V. Acharya and Rangarajan Sundaram point out: “The US recapitalization
scheme ... is ... generous to the banks in that it imposes little direct
discipline in the form of replacement of top management or curbs on executive
pay, and secures no voting rights for the government“.
We seem to forget one of the successful lessons from the late 1980s savings
and loan crisis in structuring positive and negative incentives: holding
accountable the directors and officers, lawyers, accountants of the banks,
investment banks and the rating agencies. ... The Office of Thrift Supervision,
which regulates the US’s thrifts, and its sister agency, the Resolution Trust
Corp which was in charge of disposing of the assets of failed S&Ls, embarked on
a deliberate deterrence strategy targeting lawyers, accountants, directors and
officers of failed thrifts that aided and abetted the excesses leading to the
S&L crisis. The intent was to discourage futures abuses and recover some of the
lost taxpayer funds. ...
In the US, we are told that there are no culprits in the crisis. The attitude
of the policy makers, regulators, bankers and traders involved in the crisis is
virtually fatalistic, treating the crisis as an inevitable “force majeure”. All
of them were observers and “no one saw it coming”. In short, the crisis is a
Lemony Snicket’s “Series of Unfortunate Events”.
In reality the regulators that should have kept a close eye on the rapid
growth of the shadow banking system were complacent, and the boards did not have
the background in the industry and didn’t understand the risks. It is clear that
the policy makers and regulators lack the moral authority to lead us out of the
The US Treasury plans to rely on the same firms and people that were involved
in leading to the crisis to get us out of it. ... Clearly, nothing learned,
nothing gained from the S&L crisis or the Swedish experience. Maybe this will
Saying it's not your fault you crashed the ship into the rock because the rock was underwater and hidden - nobody could have seen it coming - loses its force when you are navigating in waters that are known to be rocky. Even if you have the latest sonar based upon fancy, innovative math that is supposed to detect the rock before you hit it, and even if regulators were supposed to clearly map and mark all danger, if you hit it anyway, there's a reason why captains are expected to go down with - or at best be the last ones off - the ship. It ensures they'll do all they can to avoid hitting it in the first place.
Posted by Mark Thoma on Tuesday, April 21, 2009 at 06:57 PM in Economics, Financial System, Regulation |
John Bogle says "self-interest got out of hand":
A Crisis of
Ethic Proportions, by John Bogle, Commentary, WSJ: I recently received a
letter from a Vanguard shareholder who described the global financial crisis as
"a crisis of ethic proportions." Substituting "ethic" for "epic" is a fine turn
of phrase, and it accurately places a heavy responsibility for the meltdown on a
broad deterioration in traditional ethical standards. ... Relying on [the]
"invisible hand," through which our self-interest advances the interests of
society, we have depended on the marketplace and competition to create
prosperity and well-being.
But self-interest got out of hand. ... Dollars became the coin of the new
realm. Unchecked market forces overwhelmed traditional standards of professional
conduct, developed over centuries. ... We've moved from a society in which
"there are some things that one simply does not do" to one in which "if everyone
else is doing it, I can too." Business ethics and professional standards were
lost in the shuffle. ... The old notion of trusting and being trusted ... came
to be seen as a quaint relic of an era long gone.
The proximate causes of the crisis are usually said to be easy credit,
bankers' cavalier attitudes toward risk, "securitization"..., the extraordinary
leverage built into the financial system by complex derivatives, and the failure
of our regulators to do their job.
But the larger cause was our failure to recognize the sea change in the
nature of capitalism that was occurring right before our eyes. That change was
the growth of giant business corporations and giant financial institutions
controlled not by their owners in the "ownership society" of yore, but by agents
of the owners, which created an "agency society."
The managers of our public corporations came to place their interests ahead
of the interests of their company's owners. ... The malfeasance and misjudgments
by our corporate, financial and government leaders, declining ethical standards,
and the failure of our new agency society reflect a failure of capitalism. ...
What's to be done? We must work to establish a "fiduciary society," where
manager/agents entrusted with managing other people's money are required -- by
federal statute -- to place front and center the interests of the owners they
are duty-bound to serve. The focus needs to be on long-term investment (rather
than short-term speculation), appropriate due diligence in security selection,
and ensuring that corporations are run in the interest of their owners. ...
Making that happen will be no easy task.
Rules will never cover everything, so ethics is part of the problem. But the
solution to the agency problem has to come in large part from changing incentives so that the
self-interest of the managers coincides with the interests of the people they
represent. [Kahneman also
about agency problems in a section I left out of the next post.]
Posted by Mark Thoma on Tuesday, April 21, 2009 at 01:24 AM in Economics, Market Failure |
Daniel Kahneman on economic models:
Irrational everything, by Guy Rolnik, Haaretz: Prof. Daniel Kahneman has
dozens, perhaps hundreds, of stories about people's irrational behavior when it
comes to making economic decisions. ... But the story Kahneman recalls when
asked about the economic models at the root of the current financial crisis is
actually taken from history, not an experiment. It concerns a group of Swiss
soldiers who set out on a long navigation exercise in the Alps. The weather was
severe and they got lost. After several days, with their desperation mounting,
one of the men suddenly realized he had a map of the region.
They followed the map and managed to reach a town. When they returned to base
and their commanding officer asked how they had made their way back, they
replied, "We suddenly found a map." The officer looked at the map and said, "You
found a map, all right, but it's not of the Alps, it's of the Pyrenees."
According to Kahneman, the moral of the story is that some of our economic
models, perhaps those of the investment world, are worthless. But individual
investors need security - maps of the Pyrenees - even if they are, in effect,
"In the last half year, the models simply didn't work. So the question
arises: Why do people use models? I liken what is happening now to a system that
forecasts the weather, and does so very well. People know when to take an
umbrella when they leave the house, or when it will snow. Except what? The
system can't predict hurricanes. Do we use the system anyway, or throw it out?
It turns out they'll use it."
Okay, so they use it. But why don't they buy hurricane insurance?
"The question is, how much will the hurricane insurance cost? Since you can't
predict these events, you would have to take out insurance against many things.
If they had listened to all the warnings and tried to prevent these things, the
economy would look a lot different than it does now. So an interesting question
arises: After this crisis, will we arrive at something like that? It's hard for
me to believe."
The financial world's models are built on the assumption that investors are
rational. You have shown that not only are they not rational, they even deviate
from what is rational or statistical, in predictable, systematic ways. Can we
say that whoever recognized and accepted these deviations could have seen this
"It was possible to foresee, and some people did. ... I have a colleague at
Princeton who says there were exactly five people who foresaw this crisis, and
this does not include ... Ben Bernanke. One of them is Prof. Robert Shiller, who
also predicted the previous bubble. The problem is there were other economists
who predicted this crisis, like Nouriel Roubini, but he also predicted some
crises that never came to be."
He was one of those who predicted 10 crises out of three.
"Ten out of three is a pretty good record, relatively. But I conclude from the
fact that only five people predicted the current crisis that it was impossible
to predict it. In hindsight, it all seems obvious: Everyone seemed to be blind,
only these five appeared to be smart. But there were a lot of smart people who
looked at the situation and knew all the facts, and they did not predict the
The interesting psychological problem is why economists believe in their theory,
but this is the problem with the theory, any theory. It leads to a certain
blindness. It's difficult to see anything that deviates from it."
We only look for information that supports the theory and ignore the rest. "Correct..." ...
Let's end with your story of the Swiss soldiers and the map of the Pyrenees. I
know why the map helped the soldiers: it gave them confidence. But why didn't
they use a map of the Alps? Why don't we use the right economic models, ones
that are relevant to extreme cases as well?
"Look, it's possible that there simply is no map of the Alps, that there is
nothing that can predict hurricanes."
Posted by Mark Thoma on Tuesday, April 21, 2009 at 01:24 AM in Economics, Methodology |
What Baseball Can Teach Policymakers, by Robert Stavins: ...Uncertainty is
an absolutely fundamental aspect of environmental problems and the policies that
are employed to address those problems. Any analysis that fails to recognize
this runs the risk not only of being incomplete, but misleading as well. ...
To estimate proposed regulations’ benefits and costs, analysts frequently
rely on inputs that are uncertain – sometimes substantially so. Such
uncertainties in underlying inputs are propagated through analyses, leading to
uncertainty in ultimate benefit and cost estimates...
Despite this uncertainty, the most prominently displayed results ... are
typically single, apparently precise point estimates of benefits, costs, and net
benefits (benefits minus costs), masking uncertainties inherent in their
calculation and possibly obscuring tradeoffs among competing policy options.
Historically, efforts to address uncertainty ... have been very limited...
Over the years, formal quantitative uncertainty assessments — known as Monte
Carlo analyses — have become common in a variety of fields, including
engineering, finance, and a number of scientific disciplines...
The first step in a Monte Carlo analysis involves the development of
probability distributions of uncertain inputs to an analysis. These probability
distributions reflect the implications of uncertainty regarding an input for the
range of its possible values and the likelihood that each value is the true
value. Once probability distributions of inputs to a benefit‑cost analysis are
established, a Monte Carlo analysis is used to simulate the probability
distribution of the regulation’s net benefits by carrying out the calculation of
benefits and costs thousands, or even millions, of times. With each iteration
of the calculations, new values are randomly drawn from each input’s probability
distribution and used in the benefit and/or cost calculations. ...
Importantly, any correlations among individual items in the benefit and cost
calculations are taken into account. The resulting set of net benefit estimates
characterizes the complete probability distribution of net benefits.
Uncertainty is inevitable in estimates of environmental regulations’ economic
impacts, and assessments of the extent and nature of such uncertainty provides
important information for policymakers evaluating proposed regulations. Such
information offers a context for interpreting benefit and cost estimates, and
can lead to point estimates of regulations= benefits and costs that differ from
what would be produced by purely deterministic analyses (that ignore
uncertainty). In addition, these assessments can help establish priorities for
Due to the complexity of interactions among uncertainties in inputs..., an
accurate assessment of uncertainty can be gained only through the use of formal
quantitative methods, such as Monte Carlo analysis. Although these methods can
offer significant insights, they require only limited additional effort... Much
of the data required for these analyses are already obtained...; and widely
available software allows the execution of Monte Carlo analysis in common
spreadsheet programs on a desktop computer. ...
Formal quantitative assessments of uncertainty can mark a truly significant
step forward in enhancing regulatory analysis... They have the potential to improve substantially our understanding of
the impact of environmental regulations, and thereby to lead to more informed
Macroeconomic policy uses the same type of framework for looking at
uncertainty, but with additional twists, the addition of model uncertainty,
and the addition of parameter uncertainty within a given model. The steps above are carried out
over a variety of different policies, models, and a distribution of parameter values, and the goal is to find the most likely outcomes as
well as the distribution of outcomes for each policy. The monetary and fiscal authorities then choose policies that, for
example, avoid the chance that the policies will backfire and cause severe
problems. But if the true model (or a close approximation to it) is not well represented by the models used in the uncertainty analysis, big policy errors are still possible. That's something we tend to forget when we do these types of analyses characterizing the degree of uncertainty that we face.
Posted by Mark Thoma on Tuesday, April 21, 2009 at 12:24 AM in Economics, Environment, Policy |
Posted by Mark Thoma on Tuesday, April 21, 2009 at 12:06 AM in Economics, Links |
Robert Solow reviews Richard Posner's A
Failure of Capitalism: The Crisis of '08 and the Descent into Depression:
How to Understand the
Disaster, by Robert M. Solow, NY Review of Books: ...Judge Posner ... has an
extraordinarily sharp mind... But I also have to say that, in some respects, his
grasp of economic ideas is precarious. ...Posner has taught at the University of
Chicago. Much of his thought exhibits an affinity to Chicago school economics:
libertarian, monetarist, sensitive to even small matters of economic efficiency,
dismissive of large matters of equity, and therefore protective of property
rights even at the expense of larger and softer "human" rights.
But not this time, at least not at one central point, the main point of this
book. ... The underlying argument—it is not novel but it is sound—goes something
like this. A modern ... economy ... can probably adapt to minor shocks ... with
just a little help from monetary policy and ... automatic fiscal stabilizers...
It is easy to be lulled into the comfortable belief that the system can take
care of itself if only do-gooders will leave it alone. But that same financial
system has intrinsic characteristics that can make it self-destructively
unstable when it meets a large shock. ...
In that kind of world, imagine a period of low interest rates. Once a set of
profit opportunities is found, big operators will be tempted to borrow so that
they can play with much more than their own capital, and thus make very large
profits. This has come to be called "leverage." ...
In the past, 10-to-1 leverage would have been about par for a
bank. More recently,... many large financial institutions ... reached for 30-to-1 leverage, sometimes
even more. ... [I]t is leverage that turns large banks and financial
institutions into ninepins that cannot fall without knocking down others that
cannot fall without knocking down still others. That seems to be the key to the
potential instability of an unregulated financial system. It happens without any
of the private actors violating the canons of self-interested rationality. ...
It is a noteworthy intellectual event that Posner has come to this
understanding and expressed it forcefully and fearlessly. This same
understanding must ... be the key to designing regulations that can reduce
the frequency of financial crises like the current one...
There are ... weaknesses in Posner's remarks... For
example, more than once he says that the various antirecessionary measures—like
fiscal stimulus, bailouts—are very "costly" and "may do long-term damage to the
economy." He does not explain what these costs and damages are. Sometimes he
seems to have budgetary costs in mind. But bailouts are mostly transfers from
one group in society to another... They are certainly not ethically satisfying
transfers, but it is not clear how they do long-term damage to the economy. The
components of a fiscal stimulus package are costs to the federal budget; but to
the extent that they put otherwise unemployed labor and idle industrial capacity
to work, they do not impoverish the economy; in fact, they enrich it. ...
There is an even odder chapter called "A Silver Lining?" In it Posner flirts
with the idea that a recession, even a depression, has a good side. It weeds out
inefficient firms and practices. This is a little like saying that a plague is
not all bad: it cleans up the gene pool. No doubt there is some truth to this
idea of a purifying effect. But the notion that it could possibly compensate for
years of lost output and lost jobs seems wholly implausible. There is certainly
no calculation of economic costs and benefits behind the thought of a "silver
lining." I think it is another example of overemphasis on minor gains in
efficiency and neglect of first-order facts.
Posner's chapter on "The Way Forward" is all of sixteen pages
long, and fairly disorganized... This means he does not seriously try to imagine ... an effective regulatory regime... It
seems to me that effective limits on leverage ... are basic to controlling the
potential instability of the financial system. ...
The financial system does have a useful social function to perform, and that
is to make the real economy operate more efficiently. Some human institution has
to collect a nation's savings and put them at the disposal of those who have
productive ways to use them. Risks arise in the everyday business of economic
life, and some human institution has to transfer them to those who are most
willing to bear them. When it goes much beyond that, the financial system is
likely to cause more trouble than it averts. I find it hard to believe ... that
our overgrown, largely unregulated financial sector was actually fully engaged
in improving the allocation of real economic resources. It was using modern
financial technology to create fresh risks, to borrow more money, and to gamble
Greed and foolhardiness were not invented just recently. The problem is
rather that Panglossian ideas about "free markets" encouraged, on one hand, lax
regulation, or no regulation, of a potentially unstable financial apparatus and,
on the other, the elaboration of compensation mechanisms that positively
encouraged risk-taking and short-term opportunism. When the environment was
right, as it eventually would be, the disaster hit.
Posted by Mark Thoma on Monday, April 20, 2009 at 05:22 PM in Economics, Regulation |
The last entry in the
Blog War over regulation of the financial sector:
Why Self-Regulation of the Financial System Won’t Work, by Mark Thoma: I
want to finish up by broadening the discussion beyond the regulation of hedge
funds to the more general topic of how attitudes toward regulation have changed in recent
years, how that helped to set the stage for the crisis we are in, and what we
need to do to prevent it from happening again. In the process, I also want to
take on Houman's point that regulators fell down on the job and let this crisis
happen, so we cannot trust them in the future.
As I described in my
first post, after decades and decades of instability in the 1800s and early
1900s, followed by the massive bank failures of the early 1930s, regulations
were imposed to stabilize the banking system. The result was sixty years of calm
in the financial sector. That's hardly a failure of regulation. It wasn't until
the shadow banking system began growing outside of the regulatory umbrella that
problems began to reemerge. A central theme of the posts this week has been that
bringing about another decades long period of relative stability will require
the regulatory umbrella to be extended to cover all firms within both the
traditional and non-traditional (or shadow) banking system, hedge funds
I believe we made two regulatory mistakes that contributed to the present
financial crisis. First, there was a push for deregulation beginning in the
1970s based upon the belief that markets are self-regulating - even to the extent
of self-repairing market failures - and that caused us to go too far toward
deregulation. Even the regulation that was left in place was, in many cases, not enforced vigorously, and there was little chance of new, substantial regulatory
changes being put in place to match the changes in the financial marketplace
brought about by rapid financial innovation. In some cases, deregulation was
needed, but in many other cases the deregulation went much too far.
Second, we didn’t focus enough on macroeconomic stability. I think we came to
believe that a large crash of the economy was extremely unlikely, particularly
one driven by problems in the financial sector. Several factors were responsible
for this. The transformative financial innovation of recent decades - particularly the slicing and dicing (securitization) of mortgages and other assets into many complex financial products - was supposed
to distribute risk broadly and prevent collapse. We had the "Great Moderation"
after the mid 1980s when the variability of output fell significantly and
inflation stabilized at low levels, and this was widely attributed to the skill
of policymakers and the deregulation of the economy. Because policy had
improved, and because we believed the economy was more stable due to
deregulation, we let our guard down. We continued to recognize that garden
variety fluctuations in output were still possible, though we thought the Fed
could mostly handle those, but big crashes were a thing of the past. Or so we
Hopefully, we have been adequately reminded that large recessions can still
happen, and that will motivate us to take the regulatory steps needed to bring
more stability to the financial system. Some people
argue that any new regulation needs to wait until the financial sector has
re-stabilized to avoid creating another source of uncertainty, a view that has
merit. But the will and hence our ability to impose new regulation tends to
diminish when the economy recovers, and if we wait too long to get started, the
opposition to any new regulation may carry the day and we'll fail to get the
measures we need put into place. The time to start is now.
But what of the charge that regulators blew it and caused this crisis, and
therefore we are foolish to rely upon them for stability in the future? First,
as I've said, I don't think decades of stability is a failure by any definition,
and the recent failure was driven by an ideological belief that markets are
self-regulating and hence best left alone. Most markets can be left alone, but
as Alan Greenspan has
recently acknowledged, financial markets are not among them. Second, I
believe the recent failure did not happen because regulators were incapable of
doing better than they did, it was their belief in the self-healing power of
markets - their belief that what just happened was next to impossible - that
stopped them from intervening as needed. With different beliefs and a different
framework for approaching the problem, the outcome is much different.
So I am not ready to throw up my hands and say this is too hard, either the
private sector finds a way to take care of itself, or it doesn't get done at
all. We have the capacity to learn from our mistakes, to drop ideologies and
theoretical constructs that led us astray, and I have faith we will do just
that (Alan Greenspan's conversion is a prime example). With comprehensive
regulation to prevent the excesses that caused the problems we are having, with
the flexibility for regulations to evolve as new innovations come to the
financial marketplace, and with regulators who have learned the lessons of the
past, we can look forward to another decades long period of stability. But if we
fail to take the steps that are needed and rely too much on private markets to
regulate themselves, we are setting ourselves up for this to happen again.
Houman's response is
here (it's partly in response to the
Posted by Mark Thoma on Monday, April 20, 2009 at 02:07 AM in Economics, Politics, Regulation |
Paul Krugman hopes we don't turn Irish:
Erin Go Broke, by Paul Krugman, Commentary, NY Times: “What,” asked my
interlocutor, “is the worst-case outlook for the world economy?” It wasn’t until
the next day that I came up with the right answer: America could turn Irish.
What’s so bad about that? Well, the Irish government now predicts that this
year G.D.P. will fall more than 10 percent from its peak, crossing the line ...
sometimes used to distinguish between a recession and a depression.
But there’s more to it than that: to satisfy nervous lenders, Ireland is
being forced to raise taxes and slash government spending in the face of an
economic slump — policies that will further deepen the slump. And it’s that
closing off of policy options that I’m afraid might happen to ... us. ...
How did Ireland get into its current bind? By being just like us, only more
so. ...Ireland jumped with both feet into the brave new world of unsupervised
global markets. Last year the Heritage Foundation declared Ireland the third
freest economy..., behind only Hong Kong and Singapore.
One part of the Irish economy that became especially free was the banking
sector, which used its freedom to finance a monstrous housing bubble. ... Then
the bubble burst. The collapse ... sent the economy into a tailspin... The
result, as in the United States, has been a rising tide of defaults and heavy
losses for the banks.
And the troubles of the banks are largely responsible for putting the Irish
government in a policy straitjacket.
On the eve of the crisis Ireland seemed to be in good shape, fiscally
speaking... But the government’s revenue — ...strongly dependent on the housing
boom — collapsed along with the bubble.
Even more important, the Irish government found itself having to take
responsibility for the mistakes of private bankers ... putting taxpayers on the
hook for potential losses of more than twice the country’s GDP, equivalent to
$30 trillion for the United States.
The combination of deficits and exposure to bank losses raised doubts about
Ireland’s long-run solvency, reflected in a rising risk premium on Irish debt
and warnings about possible downgrades from ratings agencies.
Hence the harsh new policies. ... As far as responding to the recession...,
Ireland appears to be really, truly without options, other than to hope for an
export-led recovery if and when the rest of the world bounces back.
So what does all this say about those of us who aren’t Irish?
For now, the United States isn’t confined by an Irish-type fiscal
straitjacket:... financial markets still consider U.S. government debt safer
than anything else.
But we can’t assume that this will always be true. Unfortunately, we didn’t
save for a rainy day: thanks to tax cuts and the war in Iraq, America came out
of the “Bush boom” with a higher ratio of government debt to GDP than it had
going in. And if we push that ratio another 30 or 40 points higher — not out of
the question if economic policy is mishandled over the next few years — we might
start facing our own problems with the bond market.
Not to put too fine a point on it, that’s one reason I’m so concerned about
the Obama administration’s bank plan. If, as some of us fear, taxpayer funds end
up providing windfalls to financial operators instead of fixing what needs to be
fixed, we might not have the money to go back and do it right.
And the lesson of Ireland is that you really, really don’t want to put
yourself in a position where you have to punish your economy in order to save
Posted by Mark Thoma on Monday, April 20, 2009 at 12:42 AM in Economics, Fiscal Policy |
Econoblog rankings and an
explanation of how they were calculated.
Posted by Mark Thoma on Monday, April 20, 2009 at 12:33 AM in Economics, Weblogs |
Posted by Mark Thoma on Monday, April 20, 2009 at 12:06 AM in Economics, Links |
A Primer on the '30s' by John Steinbeck, 1960, pgs. 17-31: Sure I remember the Nineteen Thirties, the terrible, troubled, triumphant,
surging Thirties. ... I remember '29 very well ... the drugged and
happy faces of people who built paper fortunes on stocks they couldn't possibly
have paid for. ... In our little town bank presidents and track workers rushed to
pay phones to call brokers. Everyone was a broker, more or less. At lunch hour,
store clerks and stenographers munched sandwiches while they watched stock
boards and calculated their pyramiding fortunes. Their eyes had the look you see
around a roulette wheel ...
Then the bottom dropped out ... I remember how the Big Boys, the men in the
know, were interviewed and re-interviewed. Some of them bought space to reassure
the crumbling millionaires... "Don't be afraid - buy - keep on buying" Meanwhile
the Big Boys sold and the market fell on its face...
The came panic, and panic changed to dull shock. ... People walked about
looking as if they'd been slugged. ... Then people remembered their little bank
balances, the only certainties in a treacherous world. They rushed to draw the
money out. There were fights and riots and lines of policemen. Some banks
failed; rumors began to fly...
What happened in the seats of power? It looked then and it still looks as
though the Government got scared. The White House, roped off and surrounded by
troops, was taken to indicate that the President was afraid of his own people.
... I speak of this phase at length because it was symptomatic of many positions of leadership. Business leaders panicked, banks
panicked. Workers demanded factories stay open... Voices shrill with terror
continued to tell people what was happening couldn't happen...
We didn't have to steal much... All over the country the WPA was working... [I]t was the fixation of businessmen
that the WPA did nothing but lean on shovels. I had an uncle who was
particularly irritated at shovel-leaning, When he pooh-poohed my contention that
shovel-leaning was necessary, I bet him five dollars, which I didn't have, that
he couldn't shovel sand for fifteen timed minutes without stopping. He ... grabbed [a] shovel. At the end of three
minutes his face was red, at six he was staggering and before eight minutes were
up his wife stopped him to save him from apoplexy. And he never mentioned shovel
leaning again. I've always been amused at the contention that brain work is
harder than manual labor. I never knew a man to leave a desk for a muck-stick if
he could avoid it. ...
[I]n the Thirties when Hitler was successful, when Mussolini made the
trains run on time, a spate of would-be Czars began to rise. Gerald L.K. Smith,
Father Coughlin, Huey Long, Townsend - each one with plans to use the unrest and
confusion and hatred as the material for personal power.
The Klan became powerful, in numbers at least... The Communists were active,
forming united fronts with everyone... Except for the field of organizers of
strikes, who were plenty tough ... and devoted, most of the so-called Communists
I met were middle-class, middle-aged people playing a game of dreams. I remember
a woman in easy circumstances saying to another even more affluent: "After the
revolution we will have more, won't we dear?" ...
One night we got Madison Square Garden [on the radio], a Nazi meeting echoing
with shrill hatred and the drilled litany of the brown-shirted audience. Then a
dissenters voice broke through and we could hear the crunch of fists on flesh as
he was beaten to the floor and flung from the stage. America First came through
our speaker and it sounded to us very much like the Nazi approach. ...
Prosperity had returned, leaving behind the warm and friendly associations of
the dark days. Fierce strikes and retaliations raged in Detroit, race riots in
Chicago: tear gas and night sticks and jeering picket lines and overturned
automobiles. The ferocity showed how frightened both sides were, for men are
invariable cruel when they are scared...
The strange parade of the Thirties was drawing to its close and time seemed
to speed up. Imperceptibly the American nation and its people had changed, and
undergone a real revolution, and we were only partly aware of it as it was happening...
A few weeks ago, I called on a friend ... in midtown New York. On our way out to lunch, he said, "I want to show you something." And he led me into a broker's office. One whole wall was a stock exchange trading board. .. Behind an oaken rail was a tight-packed, standing audience, clerks, stenographers, small businessmen. Most of them munched sandwiches as they spent their lunch hour watching the trading. ... And their eyes had the rapt, glazed look one sees around the roulette table. ... [full version]
Posted by Mark Thoma on Sunday, April 19, 2009 at 06:39 PM in Economics |