"It is easy to confuse what is with what ought to be, especially when what is has worked out in your favor."
- Tyrion Lannister
"Lannister. Baratheon. Stark. Tyrell. They're all just spokes on a wheel. This one's on top, then that's ones on top and on and on it spins, crushing those on the ground. I'm not going to stop the wheel. I'm going to break the wheel."
- Daenerys Targaryen
"The Lord of Light wants his enemies burned. The Drowned God wants them drowned. Why are all the gods such vicious cunts? Where's the God of Tits and Wine?"
- Tyrion Lannister
"The common people pray for rain, healthy children, and a summer that never ends. It is no matter to them if the high lords play their game of thrones, so long as they are left in peace. They never are."
- Jorah Mormont
"These bad people are what I'm good at. Out talking them. Out thinking them."
- Tyrion Lannister
"What happened? I think fundamentals were trumped by mechanics and, to a lesser extent, by demographics."
- Michael Barone
"If you want to know what God thinks of money, just look at the people he gave it to."
- Dorothy Parker
Saturday, August 21, 2010
Feel the Joe-mentum!
Doug Henwood detects a wavelet of strikes.
PIMCO's Bill Gross is a mensch:
At Tuesday's conference on the Future of Housing Finance, Bill Gross suggested that anyone who was current on a Fannie/Freddie loan should automatically be refinanced to the current mortgage interest rate of about 4.5 percent. This should happen instantaneously, without underwriting.(via Mark Thoma)
I am trying to see the downside of this. It reduces the probability of default, because it reduces the present value of the loan balance and payments. It only rewards those who pay their mortgages on time. And as Bill Gross pointed out, it would amount to an enormous stimulus (what he didn't point out is that the stimulus would be at least partly funded by foreign holders of MBS*).
Ezra Klein points out Gross's idea doesn't need 60 Senate votes and doesn't add to the deficit.
Huffington Post business reporter Shahien Nasiripour writes:
But it's more than just a Wall Street versus Main Street issue. Investors in mortgage-backed securities -- like pension funds, unions and retail investors -- would be hurt by the program. And over the long term, so could homeowners.
Mortgage refinancings involve paying off an old mortgage and taking on a new one with better terms, like a lower rate. Investors who own bonds backed by home loans with 7 percent interest, for example, would essentially lose out on that extra income. Also, wiping out those higher-rate mortgages that back bonds that are trading above par -- meaning their current price is above face value -- would rob investors of that additional gain.
Banks that own those securities would also lose out on that income, as would asset managers and other large investors in mortgage-backed bonds, like the Chinese government, Gross said. Fannie and Freddie, which have tens of billions of dollars in mortgage holdings in their portfolio, would also suffer from that loss of income. PIMCO, too, Gross said.
"At PIMCO, we'd be affected by $3 or $4 billion in terms of a refunding loss," Gross said. "But I'm here as a public advocate, not as a private [investor]. When I go back to Newport I'll be back to managing that portfolio." PIMCO is based in Newport Beach, Calif.
Homeowners could end up losing too, said Joshua Rosner, managing director at independent research consultancy Graham Fisher & Co.
"As a result of another prepayment-shock and the inability to model future prepayment shocks, investors would become even more unwilling to invest in [mortgage-backed securities] going forward, or would begin to demand higher yields going forward," Rosner wrote on the popular finance and economics-focused blog, The Big Picture. The prepayments -- refinancings lead to old mortgages being paid off -- would cost investors "more than half a trillion [dollars] in lost interest income," he wrote.Tough titties, the economic clitoris need stimulation pronto. STAT!**
**Medical term used to imply urgent or rush. It may appear in lower case letters as stat or in capital letters as STAT, as in "Treatment may include STAT surgery." The term is derived from the Latin word "statim" which means immediately. Oh and btw Mr. Joshua Rosner, wasn't the whole problem that investors were stupid about motgage-backed securities in the first place?
Ezra Klein does a parody of Bai.
At first glance I thought the piece was favorable to Obama if you read between the lines, essentially saying he accomplished a lot but the economy turned out worse than they thought it would.* However I usually don't like the memos Bai writes so maybe I was wrong and need to look at it some more...
* I'd argue b/c of the European sovereign debt crisis.
(a policy prescription looking for a rationale)
Krugman blogs on why the administration didn't do a second stimulus:
My understanding is that they bought into the big scare of the time, which was that there was a "carry trade bubble" in the bond market, and terrible things would happen when it burst.
No, this never made sense. Anyone who looked at recent Japanese history should have realized that with a depressed economy, low rates could and did last a very long time.
And some of the scenarios being proposed were just plain bizarre: the bond bubble will burst, and this will plunge us into recession, and the Fed will have to buy up government debt, and this will mean inflation too. Really.
And then the whole story shifted: suddenly it wasn’t the carry trade, it was sovereign debt risks, we’re all Greece.
And now there’s a new one: you see, low interest rates will cause deflation. Really (near the end).
And though the story shifts, the moral is always the same: the little people have to suffer.Maybe Krugman is right on the chronology, but I believe things might have been going fine until the unforeseen European Sovereign debt crisis in the spring. We can't know for sure.
Friday, August 20, 2010
Release the Kraken
(or Damn the Gods)
Appeasing the Bond Gods by Paul Krugman
Release the Kraken Part Deux
Floyd Norris on government controlled behemoth zombies Fannie and Freddie:
Already the four big commercial banks -- JPMorgan Chase, Bank of America, Wells Fargo and Citigroup -- have taken losses of $9.8 billion on loans they have repurchased or expect to be forced to repurchase. Moshe Orenbuch, an analyst at Credit Suisse, says he thinks that figure will rise to $20 billion or $30 billion before the wave is over. Other analysts think the number could be significantly higher.
So far, most of the money the banks have paid has gone to Fannie Mae and Freddie Mac, which used to be government-sponsored enterprises and now, after the bailouts, are government-controlled. But even though they have collected billions, Fannie and Freddie are getting increasingly frustrated with the banks for what they see as foot-dragging.
Freddie, in its quarterly report filed this month, said it was now requiring banks "to commit to plans for completing repurchases, with financial consequences or with stated remedies for noncompliance, as part of the annual renewals of our contracts with them."
A spokesman for Freddie would not say just what those remedies or financial consequences might be. But any bank that wants to keep offering mortgages must have contracts with Fannie and Freddie. Tying the repurchases to contract renewals could be a strong bargaining chip.
The mortgages sold to Fannie and Freddie were supposed to conform to specified requirements. Those requirements did get weaker as the credit bubble intensified -- a fact some bankers privately mutter the government now wants to forget -- but they were still of higher quality than many mortgages sold into private securitizations.
The "antiwar" movement's favorite dictator, Saddam Hussein. How they miss him....
In 1979 al-Bakr started to make treaties with Syria, also under Ba'athist leadership, that would lead to unification between the two countries. Syrian President Hafez al-Assad would become deputy leader in a union, and this would drive Saddam to obscurity. Saddam acted to secure his grip on power. He forced the ailing al-Bakr to resign on 16 July 1979, and formally assumed the presidency.
Shortly afterwards, he convened an assembly of Ba'ath party leaders on 22 July 1979. During the assembly, which he ordered videotaped (viewable via this reference), Saddam claimed to have found a fifth column within the Ba'ath Party and directed Muhyi Abdel-Hussein to read out a confession and the names of 68 alleged co-conspirators. These members were labelled "disloyal" and were removed from the room one by one and taken into custody. After the list was read, Saddam congratulated those still seated in the room for their past and future loyalty. The 68 people arrested at the meeting were subsequently tried together and found guilty of treason. 22 were sentenced to execution. Other high-ranking members of the party formed the firing squad. By 1 August 1979, hundreds of high-ranking Ba'ath party members had been executed.And so Saddam created a cult of personality. Never a good sign.
And he created the secret police, or the Mukhabarat, which turned Iraq into a police state which Guantanamo Bay and Abu Ghraib pale in comparison to.As a sign of his consolidation of power, Saddam's personality cult pervaded Iraqi society. Thousands of portraits, posters, statues and murals were erected in his honor all over Iraq. His face could be seen on the sides of office buildings, schools, airports, and shops, as well as on Iraqi currency. Saddam's personality cult reflected his efforts to appeal to the various elements in Iraqi society. He appeared in the costumes of the Bedouin, the traditional clothes of the Iraqi peasant (which he essentially wore during his childhood), and even Kurdish clothing, but also appeared in Western suits, projecting the image of an urbane and modern leader. Sometimes he would also be portrayed as a devout Muslim, wearing full headdress and robe, praying toward Mecca.
In 1980, Saddam Hussein invaded revolutionary Iran which resulted in a futile eight year war that cost 500,000 lives. (Hussein's dictatorship consisted of his minority Sunnis who lorded over the majority Shias and minority Kurds and Saddam feared Shia Iran's meddling.) The United States backed Iraq, as did the Soviet Union. Although both countries sold weapons to each side, as did other countries like Spain and Portugal. Britain, France, Japan, China, Saudi Arabia, Kuwait, West Germany, Italy, Egypt, Jordan, and Singapore all backed Iraq as well.IIS is alleged to be responsible for a number of assassinations and attempted assassinations abroad. These include the assassinations of Sheikh Talib al-Suhail al-Tamimi in Beirut (April 1994), Ayatollah Mehdi al-Hakim in Sudan (January 1988), and Dr. Ayad Habashi in Rome (October 1986), as well as the nearly successful assassinations of President George H.W. Bush, former Iraqi Prime Minister Ayad Allawi and the Emir of Kuwait.
The conflict is often compared to World War I, in that the tactics used closely mirrored those of World War I, including large scale trench warfare, manned machine-gun posts, bayonet charges, use of barbed wire across trenches, human wave attacks across no-mans land, and extensive use of chemical weapons such as mustard gas against Iranian troops and civilians as well as Iraqi Kurds.
In the first days of the war, there was heavy ground fighting around strategic ports as Iraq launched an attack on Khuzestan. After making some initial gains, Iraq's troops began to suffer losses from human wave attacks by Iran. By 1982, Iraq was on the defensive and looking for ways to end the war .
At this point, Saddam asked his ministers for candid advice. Health Minister Dr. Riyadh Ibrahim suggested that Saddam temporarily step down to promote peace negotiations. Initially, Saddam Hussein appeared to take in this opinion as part of his cabinet democracy. A few weeks later, Dr Ibrahim was sacked when held responsible for a fatal incident in an Iraqi hospital where a patient died from intravenous administration of the wrong concentration of Potassium supplement.
Dr Ibrahim was arrested a few days after he started his new life as a sacked Minister. He was known to have publicly declared before that arrest that he was "glad that he got away alive." Pieces of Ibrahim's dismembered body were delivered to his wife the next day.Against the Iraqi minority Kurds, Saddam lauched the Al-Anfal Campaign (genocide).
According to the HRW during the Anfal campaign, the Iraqi government:Then the war ended with the Halabja poison gas attack (Kurdish: Kîmyabarana Helebce)
- Massacred 50,000 to 100,000 non-combatant civilians including women and children;
- Destroyed about 4,000 villages (out of 4,655) in Iraqi Kurdistan. Between April 1987 and August 1988, 250 towns and villages were exposed to chemical weapons;
- Destroyed 1,754 schools, 270 hospitals, 2,450 mosques, 27 churches;
- Wiped out around 90% of Kurdish villages in targeted areas.
a chemical weapons attack that took place on March 16, 1988, during the closing days of the Iran-Iraq War. The weapons were used by Iraqi government forces in the Kurdish town of Halabja in Iraqi Kurdistan.
The attack quickly killed thousands of people (around 5,000 dead) and injured around 11,000, most of them civilians. The incident, which has been officially defined as an act of genocide against the Kurdish people is the largest chemical weapons attack directed against a civilian-populated area in history.
And yet the so-called "antiwar" movement wishes Saddam was still in power.
After the Iran-Iraq war Saddam was deep in debt:
The financial loss was also enormous, at the time exceeding US$600 billion for each country (US$1.2 trillion in total). But shortly after the war it turned out that the economic cost of war is more profound and long-lasting than the estimates right after the war suggested. Economic development was stalled and oil exports disrupted. These economic woes were of a more serious nature for Iraq that had to incur huge debts during the war as compared to the very small debt of Iran, as Iranians had used bloodier but economically cheaper tactics during the war, in effect substituting soldiers lives for lack of financial funding during their defense. This put Saddam in a difficult position, particularly with his war-time allies, as by then Iraq was under more than $130 billion of international debt, excluding the interest in an after war economy with a slowed GDP growth. A large portion of this debt was loaned by Paris Club amounting to $21 billion, 85% of which had originated from seven countries of Japan, Russia, France, Germany, United States, Italy and United Kingdom. But the largest portion of $130 billion debt was to Iraq's former Arab backers of the war including the US$67 billion loaned by Kuwait, Saudi Arabia, Qatar, UAE and Jordan, a debt which contributed to Saddam's 1990 decision to invade Kuwait and threaten Saudi Arabia.And so Saddam went rogue like Sarah Palin and annexed a member of the United Nations, Kuwait, and raped her population. After he was kicked out of Kuwait, Saddam ordered the retreating Iraqi army to set all of the oil fields on fire. The environmental destruction of the BP oil spill pales in comparison to this spiteful act.
The Kuwaiti oil fires were caused by Iraqi military forces setting fire to 700 oil wells as part of a scorched earth policy while retreating from Kuwait in 1991 after conquering the country but being driven out by Coalition military forces. The fires started in January and February 1991 and the last one was extinguished by November 1991.
The resulting fires burned out of control because of the dangers of sending in firefighting crews. Land mines had been placed in areas around the oil wells, and a military cleaning of the areas was necessary before the fires could be put out. Somewhere around 6 million barrels (950,000 m3) of oil were lost each day. Eventually, privately contracted crews extinguished the fires, at a total cost of US$1.5 billion to Kuwait. By that time, however, the fires had burned for approximately ten months, causing widespread pollution.Also after the war in 1991, the majority Shia Iraqis in the south revolted.
With little more than small arms, machine guns, rocket-propelled grenades and some captured tanks and artillery pieces, the rebels had few surface-to-air missiles, which made them almost defenseless against Iraqi helicopter gunships and indiscriminate artillery barrages. The central government responded to the uprisings with crushing force.Saddam also responded with the draining of the Mesopotamian Marshes:
According to a 2001 United Nations Environmental Programme report by Hassan Paltrow, the projects resulted in:
For all the damage he inflicted over the years, Saddam was admirably dignified at his execution, in contrast to his Shia executioners who behaved like taunting thugs to the camera.
- The loss of a migration area for birds migrating from Eurasia to Africa, and consequent decrease in bird populations in areas such as Ukraine and the Caucasus
- Probable extinction of several plant and animal species endemic to the Marshes
- Higher soil salinity in the Marshes and adjacent areas, resulting in loss of dairy production, fishing, and rice cultivation.
- Desertification of over 7500 square miles.
- Saltwater intrusion and increased flow of pollutants into the Shatt-al-Arab waterway, causing disruption of fisheries in the Persian Gulf
John Burns and Marc Santora, writing in The New York Times, described the execution as "a sectarian free-for-all that had the effect, on the video recordings, of making Mr. Hussein, a mass murderer, appear dignified and restrained, and his executioners, representing Shi'ites who were his principal victims, seem like bullying street thugs."
Hitchens wrote, "The disgusting video of Saddam Hussein's last moments on the planet is more than a reminder of the inescapable barbarity of capital punishment and of the intelligible and conventional reasons why it should always be opposed. The zoolike scenes in that dank, filthy shed (it seems that those attending were not even asked to turn off their cell phones or forbidden to use them to record souvenir film) were more like a lynching than an execution. At one point, one of the attending magistrates can be heard appealing for decency and calm, but otherwise the fact must be faced: In spite of his mad invective against "the Persians" and other traitors, the only character with a rag of dignity in the whole scene is the father of all hangmen, Saddam Hussein himself."
Thursday, August 19, 2010
Farmer Bernanke, dry fields, and other monetary policy metaphors By Neil Irwin
Irwin is reponding to the metaphor Christopher Hayes used on Rachel Maddows's cable show.
If the nation were a farm, Hayes argued, the Fed would be the agency in charge of water and irrigation. Its job is to keep water (money) flowing enough to maximize crops (strong job creation), but not pump in so much water as to cause flooding (inflation). We're currently in an extreme drought (a deep recession), but the Fed is refusing to pump in more water because it's afraid that doing so will cause flooding down the road.Irwin adds:
The problem is, while the Fed has lots of experience and knowledge about how the controls on its normal reservoir work, and how much to open the valves to get the right amount of water onto the fields, these other tools are untested. If they pipe water in, they're not sure how much will get to the fields--it might be too little to do much good, and it might be so much as to cause flooding.
They're not sure about the impact of helicopter airlifts either; they might be effective at getting more water onto the fields, but there's a small chance they'll crash and burn and thereby set the fields on fire. (That's what would happen if quantitative easing by the Fed caused global investors to believe they would continue printing money to fund budget deficits indefinitely, which could cause a big rise in inflation expectations and a long-term loss of confidence in the U.S. economy).
I don't see global investors believing that the Fed will continue printing money, so the unusual measures are worth a try. Especially if we are entering a double dip rather than just seeing really, really slow growth. Before he was Fed chair Bernanke said the Japanese could have performed these measures but didn't in an act of malfeasance.Meanwhile, while the fields are still awfully dry, there has been a little bit of rain in the last few months (the economic recovery is underway, though it is sluggish). And Fed leaders' weather forecasting suggests that rain levels will continue to gradually return toward normal (their economic forecast is for continued expansion), which would render airlifts of water unnecessary.
(via Ezra Klein)
Wednesday, August 18, 2010
In my previous post, I linked to Dean Baker's fisking of today's Friedman column. I wrote about Friedman's column before reading Baker. Friedman only alludes to the lack of consumer demand and I mentioned it in my previous post, but Baker really focuses on it:
The main problem facing the U.S. economy of the last decade was a lack of demand. This was in large part due to the fact that China lent to us. China's lending was its policy of propping up the value of the dollar in order to maintain its export market in the United States. (At the start of the decade, the Clinton administration had also tried to promote an over-valued dollar.) The over-valued U.S. dollar made imports from China and other countries very cheap in the United States and made our exports expensive in other countries. This led to a large and growing trade deficit over most of the business cycle. The trade deficit replaced domestic demand, preventing the economy from approaching normal levels of employment (even with the boost from the housing bubble) until just before the crash.
There is no reason whatsoever to believe that China's decision to prop up the dollar was in any way affected by the Bush tax cuts. In other words, neither the Bush tax cuts nor the growth in entitlements had anything to do with our borrowing from China. The issue was China's decision to lend and thereby prop up the dollar. Given the weakness of demand through most of the decade, these expenses could have been easily filled by domestic production without borrowing from abroad.After the tech bubble burst in 2000, Greenspan had to keep interest rates low to fight deflation. This along with deregulation led to the unsustainable housing bubble.
Baker says there's no uncertainty, just a lack of demand for labor and a slow uptick in the hours worked per worker:
Of course there is no reluctance to hire, there is simply a lack of demand for labor. A reluctance to hire would be reflected in an increasing number of hours per worker, as employers sought to meet their demand for labor by working the existing workforce more hours.
This is not happening. There is a modest uptick in hours from the low point of the downturn, but the increase in hours per worker is certainly no more rapid than in other recessions and the average workweek is still far shorter in just about every sector than it was before the downturn.Baker rightly criticizes Friedman's misinformation on Germany on multiple fronts. Baker points out that European's universal health care systems are much efficient than ours,* something I failed to catch. It's really impressive how much Friedman gets wrong - not somewhat wrong, but exactly wrong. Baker ends his fisking with the following summation:
If Friedman's intention was to scare us, he succeeded. After all, if senior economic policy makers in the U.S. and Germany are as badly misinformed as Friedman implies, then we can expect some very bad times ahead.Yeah but as I said Friedman is advising more fiscal stimulus in the face of "unusual uncertainty" - code for a lack of demand - so hopefully "senior economic policy makers" will as well. The most likely scenario for me is slow growth and a slow reduction in unemployment. The question is whether there will be another asset bubble. I don't see persistent deflation because Bernanke has sworn to prevent it.
*That's a nice double-gotcha by Baker. Friedman mischaracterizes Germany's welfare state as the "sick man of Europe" and asserts America's health care reform is costly and adds to the debt, when in reality Europe's universal health care systems are more efficient than ours and Obama has moved us in their direcetion which will help reduce the deficit.
The Next Six Months are Crucial
(or Dylan Matthews Reduces Uncertainty*)
I see Dean Baker has a lengthy fisking of Thomas Friedman's column for today, but I'm not going to read it until I perform the exercise of doing it myself. Then I'll compare notes and see how I did.
Friedman takes the title of his column "Really Unusually Uncertain" from a description Bernanke recently made about the economy in testimony to Congress. The Fed Chairman described the atmosphere as "unusually uncertain" because the economy was giving off mixed signals. Economists are also divided on where the economy is heading, with many saying they don't know.
Right from the start, Friedman puts on his pundit hat and quotes PIMCO's** C.E.O Mohamed El-Erian to the effect that "Structural problems need structural solutions." The Consenus seems to have latched on to the term "structural."*** Yesterday, the Minnesota Fed President asserted that the labor market had "structural" problems that would take time to sort out. Friedman opines:
There are no quick fixes. In America and Europe, we are going to need some big structural fixes to get back on a sustained growth path -- changes that will require a level of political consensus and sacrifice that has been sorely lacking in most countries up to now."We" are all going to need to compromise and sacrifice. But what exactly are these "structural problems"?
The first big structural problem is America’s. We’ve just ended more than a decade of debt-fueled growth during which we borrowed money from China to give ourselves a tax cut and more entitlements but did nothing to curtail spending or make long-term investments in new growth engines. Now our government owes more than ever and has more future obligations than ever -- like expanded Medicare prescription drug benefits, expanded health care, an expanded war in Afghanistan and expanded Social Security payments (because the baby boomers are about to retire) -- and less real growth to pay for it all.Well Obama's health care reform should help with the deficit and government debt. Social Security isn't that bad off and the government's debt problems should ease with growth. Bill Clinton balanced the budget ten years ago, but he did it with "debt-fueled growth" - or rather with help from a stock market tech bubble and Alan Greenspan. Here Friedman raises an interesting issue. How do we get "sustained" growth rather than "debt-fueled" growth? Or more accurately, how do we get sustained debt-fueled growth, rather than bubblicious debt-fueled growth?
Structurally speaking, our political elites allowed the housing bubble to blow up and pop. And just to make sure the resulting financial crisis would be severe and sink us in recession, they allowed the shadow banking system to metastasize and outgrow Depression-era government regulations, some of which were scrapped anyway. At least Friedman, along with Rogoff and Reinhart, call for more fiscal**** stimulus in the face of weak employment levels:
Government to the rescue! Golden straightjackets and invisible bond vigilantes be damned! (The world may be flat, but US Treasuries are still the safest investment.)America will probably need some added stimulus to kick start employment, but any stimulus right now must be in growth-enabling investments that will yield more than their costs, or they just increase debt. That means investments in skill building and infrastructure plus tax incentives for starting new businesses and export promotion. To get a stimulus through Congress it must be paired with spending cuts and/or tax increases timed for when the economy improves.
Second, America’s solvency inflection point is coinciding with a technological one. Thanks to Internet diffusion, the rise of cloud computing, social networking and the shift from laptops and desktops to hand-held iPads and iPhones, technology is destroying older, less skilled jobs that paid a decent wage at a faster pace than ever while spinning off more new skilled jobs that pay a decent wage but require more education than ever.I'm not sure but here things may be much more ominous than Friedman lets on. There's no class conflict or "outsourcing" in Friedman's (flat) world, just much less controversial concepts like "retraining" and "entrepreneurial innovation," even if the jobs aren't there thanks to a lack of aggregate demand. And why is there less demand? Because as Friedman acknowledges, older, less skilled jobs are getting destroyed. Without consumers getting paid, they can't have demand - without incurring debt - and the US economy can't grow. (Without rising house prices they can't get loans.) And finally, Friedman turns to Europe:
But the global economy needs a healthy Europe as well, and the third structural challenge we face is that the European Union, a huge market, is facing what the former U.S. ambassador to Germany, John Kornblum, calls its first "existential crisis." For the first time, he noted, the E.U. "saw the possibility of collapse." Germany has made clear that if the eurozone is to continue, it will be on the German work ethic not the Greek one. Will its euro-partners be able to raise their games? Uncertain.Greece couldn't devalue - as Argentina did - because they're on the euro, whereas the euro has been lower against the dollar which helped Germany's exports. Germany has basically exported its way to growth, something everyone can't do simultaneously, unless we find another planet to import our goods. Also Germany has better "automatic stabilizers" in times of recession and an innovative work-sharing program which reduced the fall in employment. So Germany - who didn't have a housing bubble even when England and Spain did - is doing better than the United States whose only social safety net is low interest rates/full employment and is suffering because of the fact.
*My favorite recent blog subject title which was composed by Ezra Klein about his research assistant. Or perhaps Matthews wrote it himself?
** PIMCO's co-founder and co-chief investor Bill Gross was at Geithner's pow-wow on the housing market.
*** Is Structuralism back in vogue? I'd prefer post-structuralism.
**** Even though Friedman mentions Bernanke, he has no opinion on what the Fed can or should do. He's like the Mark Wahlberg character in the movie The Other Guys who has no idea what the Federal Reserve Bank is or does.
Tuesday, August 17, 2010
President of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota says "Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy."
What does this change in the relationship between job openings and unemployment connote? In a word, mismatch. Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs. There are many possible sources of mismatch--geography, skills, demography--and they are probably all at work. Whatever the source, though, it is hard to see how the Fed can do much to cure this problem. Monetary stimulus has provided conditions so that manufacturing plants want to hire new workers. But the Fed does not have a means to transform construction workers into manufacturing workers.
Of course, the key question is: How much of the current unemployment rate is really due to mismatch, as opposed to conditions that the Fed can readily ameliorate? The answer seems to be a lot. I mentioned that the relationship between unemployment and job openings was stable from December 2000 through June 2008. Were that stable relationship still in place today, and given the current job opening rate of 2.2 percent, we would have an unemployment rate of closer to 6.5 percent, not 9.5 percent. Most of the existing unemployment represents mismatch that is not readily amenable to monetary policy.
Given the structural problems in the labor market, I do not expect unemployment to decline rapidly. My own prediction is that unemployment will remain above 8 percent into 2012. Persistently high unemployment of this kind will impose considerable losses on many of our citizens. Good public policy requires that we help mitigate their losses via a well-designed unemployment insurance program. Recent economic research, including some done at the Federal Reserve Bank of Minneapolis, shows that such a program will not feature the termination of benefits after 26, 52, or 99 weeks. Instead, a good insurance program should offer constant benefits over the entire duration of an unemployment spell, however long. It should provide incentives only through the level of those benefits, not through their timing.
That was essentially my input about the national economy in the economics go-round of the FOMC last week. GDP is growing, but more slowly than we would like. Inflation is a little low, but only temporarily. The behavior of unemployment is deeply troubling.
After the economics go-round, the FOMC meeting then transitions to its second phase, the policy go-round. Again, the 17 meeting participants have a chance to speak in turn about what they perceive to be the appropriate policy choices for the committee. We are all committed to achieving the Fed’s dual mandate to attain both price stability and maximum employment. As I mentioned, the former objective is generally understood as keeping inflation in a tight range around 2 percent. The second part of the mandate is much more of a moving target. Everyone knows that employment is shaped by many determinants beyond the Fed’s control: demographics, social custom, taxes, and so on. The Fed’s job is to keep employment as high as possible, given these other factors.He's forecasting a weak recovery: "Based on estimates from our Minneapolis forecasting model, I expect GDP growth to be around 2.5 percent in the second half of 2010 and close to 3.0 percent in 2011. There is a recovery under way in the United States, and I expect it to continue." Sounds to me like they're looking for excuses not to do more to lower unemployment more quickly than their targets of 8.3 to 8.7 percent for 2011 and 7.1 to 7.5 percent for 2012. These were laid out in the FOMC's minutes from June. They had been revised upwards from April when they were 8.1 to 8.5 and 6.6 to 7.5, respectively.
(via Calculated Risk)
Keep an eye out for Krugman's coming multi-book review:
There’s a lot to like in Koo’s idea of balance-sheet recessions -- how an overhang of corporate debt held down Japan’s economy, how an overhang of household debt is doing the same to America. And Koo is unique -- which is a good thing -- in arguing both that protracted deficits are sometimes desirable, and that Japan is actually a success story in the sense that its deficits made it possible to repair corporate balance sheets without a Great-Depression-level slump.
And I don’t understand at all his argument that monetary expansion is positively harmful. He seems to be making up arguments on the fly here; he’s so determined to defend the primacy of fiscal policy that he has to insist that anything else is a very bad thing. (In that sense, I guess, he’s the anti-Scott Sumner).
Oh, and finally, surely some inflation would help by reducing the real debt overhang; that’s arguably an important part of the reason World War II put a final period on the Great Depression.Bernanke, Paulson and Geithner (and then Obama) - in tandem with foreign governments - were successful in preventing another depression also. So maybe humanity has learned a bit.
Floyd Norris on invisible bond vigilantes.
As 2010 began, there was nearly unanimous agreement in financial circles on at least one thing: Interest rates were sure to rise during the year.
(via Yglesias)Quite to the contrary. As Labor Day approaches, interest rates have collapsed, plunging along with economic optimism.
Part of it probably was Greece and the European Sovereign Debt crisis. There was a large increase in deficit spending because of the housing bubble bursting and the ensuing financial crisis and recession. There should be more until the housing market is sorted and aggregate demand is back at capacity levels. The good news is that with interest rates low, it's easier for the government to finance needed deficit spending. Calculated Risk reports that the Federal Reserve reports industrial production and capacity utilization increased in July:
The capacity utilization rate for total industry moved up to 74.8 percent, a rate 5.7 percentage points above the rate from a year earlier but 5.8 percentage points below its average from 1972 to 2009.Krugman on how the past year has proven Niall Ferguson* wrong and Krugman and those of us who agree with him as correct. It's about liquidity and the prospects for recovery, not about righteous bond vigilantes enforcing discipline on profligate governments like Greece.
The reason Ferguson and his ilk are wrong in the way they are wrong is because they're free market, antigovernment fundamentalists. And the irony is that those are the types who led us to our current state of affairs.
* Ferguson is bad on economics, but during the Bush years when Cheney pushed to make the executive branch unaccountable - on torture, detention, warrantless surveillance, etc. - and secretive, Ferguson was a conservative voice of reason.
(or in Soviet Russia, you subsidize the government!)
Dean Baker blogs:
Fannie and Freddie were late to the rush into junk mortgages. Most of the junk mortgages were securitzed by private issuers of mortgage backed securities, like Citigroup and Goldman Sachs. Fannie and Freddie got into this market in a big way in 2005 because they were losing market share.
It is likely that the Republican leadership knows these facts, or deliberately has opted not to know them, but blames Fannie and Freddie anyhow because they want to associate the downturn with liberal efforts to extend homeownership to low and moderate income people. This fits better with their political agenda rather than acknowledging that the main problem was greed and fraud perpetuated by major Wall Street banks (who were bailed out by taxpayers) and many lesser actors in the financial sector.Andrew Ross Sorkin writes about the two "zombie giants":
In other words, the sinkhole that is Fannie and Freddie -- Freddie just said it needed an additional $1.8 billion and the Congressional Budget Office says the combined companies could cost taxpayers $389 billion over the next decade -- is not a function of those firms making new loans that have gone bad, but the continued "bleeding," as Mr. Frank put it, from previous loans made before the crisis that are still going belly-up.
More important, shutting down Fannie and Freddie and having the private market step in, as politically popular a sound-bite as that may be, is economically unfeasible. For better or worse, Fannie, Freddie and Ginnie Mae were behind 98 percent of all mortgages in this country so far this year, according to the Mortgage Service News. Pulling the rug out from under them would be pulling the rug from under the entire housing market as it continues to struggle.Basically these two companies were nationalized and are currently part of the state or government. Yet people seem to dance around that fact in their terminology:
"I take offense at the idea that we’ve done nothing," he told me. Far from dragging its feet, he insisted, the government took the bold step of putting Fannie and Freddie into conservatorship in 2008. "There was no political fear to not do it"
One of the more interesting ideas being floated is that the government-sponsored enterprises, Fannie and Freddie, would subsidize loans only for low-income families by lowering the size of a so-called conforming loan. At the moment, Fannie and Freddie are buying up single-family mortgages for up to $417,000, and in some high-cost areas as much as $729,750, clearly benefiting families that don’t need the subsidy.
"Were the G.S.E.’s to cease buying mortgages or guaranteeing mortgage-backed securities, financing for buying homes today would be virtually nonexistent until the banks got back up on their feet. This would result in mortgage prices increasing, causing demand for housing to decrease, taking the value of homes even further down," Anthony Randazzo, director of economic research of the Reason Foundation, wrote in a letter to Mr. Geithner.Reason shouldn't be quoted on anything. It was their free market ideology that caused the Great Clusterfuck. Have they come to terms with this? No.
Sunday, August 15, 2010
Happy Birthday India and Julia Child!
On How India is like Israel
Israel is a democratic ally in a neighborhood that includes Saudi Arabia, Iran, Egypt and Turkey. India is a democratic ally which shares borders with Pakistan and China.
Both Hindu India and Jewish Israel are occupying lands wherein the majority of occupants are Muslims who believe their homelands have been unjustly annexed. Both India and Israel have nuclear weapons.
Summer of rage:
For decades, India maintained hundreds of thousands of security forces in Kashmir to fight an insurgency sponsored by Pakistan, which claims this border region, too. The insurgency has been largely vanquished. But those Indian forces are still here, and today they face a threat potentially more dangerous to the world’s largest democracy: an intifada-like popular revolt against the Indian military presence that includes not just stone-throwing young men but their sisters, mothers, uncles and grandparents.
... This summer there have been nearly 900 clashes between protesters and security forces, which have left more than 50 civilians dead, most of them from gunshot wounds. While more than 1,200 soldiers have been wounded by rock-throwing crowds, not one has been killed in the unrest, leading to questions about why Indian security forces are using deadly force against unarmed civilians -- and why there is so little international outcry.Phone Cameras Fuel Kashmir’s ‘Intifada’
The US gives large amounts of foreign aid to Israel and Egypt so that they won't have a war. The US is trying to keep Pakistan focused on fighting the Afghan and Pakistani Taliban, but Pakistan remains focused on its main enemy India. The Afghan Taliban are Pakistan's means to combat Indian influence in Afghanistan. (The Pakistani Taliban is the Muslim extremism of the Afghan Taliban metastasizing back into nuclear-armed Pakistan.)
The US needs to internationalize the Kashmir issue over India's objection so that the Pakistan can focus on the Taliban.
The disjunction between the city’s national image and reality was underscored by homages to Mr. Rostenkowski, the longtime Congressional titan who died last week at age 82. He was recalled as a tough, master dealmaker without a college education who brought home the pork and used his link to the city’s Democratic machine to create an imposing don’t-mess-with-me aura.
It played to an overriding caricature of Chicago: bad winters, Al Capone, slimy politics, the lovable loser Cubs. It can be found in the lame narrative advanced by critics of Mr. Obama and his top aides, which portrays them as products of a nefarious, indigenous "Chicago way" of politics in which backstabbing is a fine art.
Lost in the Rostenkowski coverage was this: He came from a very different Chicago than that of Mr. Obama, whose Harvard pedigree, sophistication, itinerant past and cerebral cool are far more in sync with the reality of this new, little-understood city.
Coincidentally, much of the transformation of the city followed Mr. Rostenkowski’s departure from public office after a 1994 criminal indictment and an election defeat. Under his patron’s son, Mayor Richard M. Daley, the city began replacing a dying industrial economy with one built on information. Its exchanges now trade in foreign currencies, insurance risks and other complex uncertainties, not just soybeans, wheat and corn. Not even most Chicagoans understand the vivid symbolism of how the Sears Tower is now the Willis Tower, while the Standard Oil Building, the city’s fourth tallest, is Aon Center. Aon and Willis are the world’s largest and third-largest reinsurers.
THERE remains too much grinding poverty, too much violence and too many pols like Rod R. Blagojevich, the impeached former governor of Illinois. Still, the state has less public corruption than Florida, at least according to the Justice Department. And Saskia Sassen of Columbia University, an expert in the rise of so-called global cities, ranks Chicago as the fifth most important one economically, after New York, London, Tokyo and Singapore.
As someone who has lived here since the late 1970s, I find it pretty easy to see the change. All you have to do is walk through Millennium Park, a 24.5-acre downtown space mixing sculpture, architecture (Renzo Piano, Frank Gehry) and a video-adorned fountain. It’s by far the most democratic space in what remains the most segregated Northern city.The print edition ends here. Online it continues:
Or take in the remade lakefront, the Lazarus-like downtown (with more high-rises built since 1998 than exist in total in Detroit, St. Louis or Milwaukee), the revival of community through a vast expansion of public libraries. There’s also, of course, the elevation to the White House of a Chicagoan and some shrewd and sophisticated former Richard M. Daley associates, notably David Axelrod and Valerie Jarrett, senior advisers, and Rahm Emanuel, the chief of staff.
For sure, one cannot separate Mr. Rostenkowski from his Capitol Hill legacy. "There won’t be one like him again. He was a master of a system that’s been blown apart," said Jim McDermott, an 11-term Democratic representative from Seattle and a Chicago native who served with Mr. Rostenkowski on Ways and Means.
Mr. McDermott joked about some loud sweaters -- "they’re not chichi San Francisco colors" -- he retains as mementos from the weekend retreats Mr. Rostenkowski held for the entire Ways and Means Committee, Democrats and Republicans, whom he sought to fashion into a self-perceived elite. They listened to academics and other experts, talked shop and did heavy socializing. Broaching such a gathering these days is a nonstarter.
The concept of working together is by and large gone, Mr. McDermott argued, first blaming Republicans under Newt Gingrich for their mid-1990s-inspired partisanship, then conceding that Democrats "acted just like the Republicans" when they took over.
But there’s another Rostenkowski legacy, perhaps now echoed by Representative Charles B. Rangel, a Rostenkowski acolyte who stepped down as Ways and Means chairman to fight accusations of ethical violations. Too much power infused both men with a sense of entitlement. Each looked like a deer in the headlights when charges of misdeeds were leveled.
Change can be swift, even if not fully appreciated. It happens with individual politicians, and great cities, too.
What's curious about Giannoulias' move leftward is the timing. He's already cleared the hurdle of the primary campaign. And while Illinois is a decidedly liberal state, there doesn't appear to be any demands on him to cater to this crowd. If anything, Kirk's evolution from Republican moderate to reliable conservative (his waffling and ultimate opposition to a state aid bill being the most recent example) has provided Giannoulias an opening to vie for independent votes.
The calculus, in the end, might be that the Democratic base needs motivation. Among party activists and voters there has been intense frustration over the ability of Senate Republicans to obstruct legislative progress and the capacity of a handful of conservative Democrats to enable them. Giannoulias is exaggerating the power that the Progressive Caucus has over House politics (the caucus, while large in numbers, has lost several high-profile battles with Blue Dogs this year). But his pledge to organize Senate progressives will resonate with those who believe that the procedural processes are inherently weighted toward political moderation.
During a luncheon in early August with select Democratic senators in the Roosevelt Room at the White House, President Obama gave voice to that sentiment. He told his guests, according to lawmakers, that Democrats were winning and that critics within the party were wrongly focused on "what didn’t happen rather than what we have accomplished."
Democrats offer several rationales for why they are not breaking through with their legislative successes. They note that some of the chief benefits of the health care law and the overhaul of the financial industry, for instance, will not be felt for years. And they say that a news media environment that thrives on conflict makes it harder to get out their message about constructive achievements. Most important, they say, difficult economic times produce a disgruntled public.
"People are sour now," said Senator Charles E. Schumer of New York, the No. 3 Democrat in the Senate. "Times are bad, and people are worried about the future. So they say, all these things are good, but are they making my life better?"Maureen Dowd's "No Love from the Lefties" on Obama press secretary Robert Gibbs.