"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, September 04, 2010

John Cassidy on the Financial Crisis Inquiry Commission delving into the circumstances around Lehman's collapse.

Felix Salmon links to Cassidy and writes
Bernanke is now saying that Lehman was in such bad shape that it would have failed whether or not the Fed had stepped in to guarantee its debts; like Cassidy, I’m very suspicious of that argument, since a Fed guarantee would have stopped any bank run cold in its tracks.
So what does Bernanke mean when he says that "the view was that failure was essentially certain in either case"? My feeling is that Bernanke, along with Hank Paulson, had an unnecessarily binary idea of what exactly "failure" meant. They were faced with a choice between the chaotic collapse that we saw, on the one hand, and a much more orderly failure, on the other; and they utterly failed to grok how much worse the first option was than the second
Bernanke has long said that the Treasury "did not have the authority to absorb billions of dollars of expected losses to facilitate Lehman’s acquisition by another firm" -- but now it seems that he’s also saying something which demonstrates much weaker leadership. If we lose billions of dollars and Lehman still fails, goes the argument as I understand it, then we will have failed too. So we might as well just let Lehman fail on its own. Even if the consequences of that decision are orders of magnitude worse.
A leader will take a hit for the greater good. A profit-driven trader like Hank Paulson, not so much. As Cassidy puts it:
Many people from Lehman and Barclays suspect that the real barrier to the Barclays rescue wasn’t the legal niceties in London but a reluctance on the part of Bernanke and others -- Treasury Secretary Hank Paulson in particular -- to fill the gaping gap in Lehman’s balance sheet by providing a Bear-style loan from the Fed, which could have topped fifty billion dollars.
With hindsight, $50 billion would have been a very small price to pay for an orderly wind-down of Lehman Brothers. But Bernanke and Paulson, it seems, were too caught up in wanting to avoid "failure" to work that out.
Cassidy and Salmon may be right, but they don't mention other ramifications. Would another financial firm have failed? Would there have been a panic anyway? Would Congress have passed TARP otherwise?
Bernanke's summer reading list.

Friday, September 03, 2010

Try eBay's Half.com iPhone app to save money on textbooks.
Mea Culpa

Bernanke appeared before the Financial Crisis Inquiry Commission and admitted
he had been wrong.
Mr. Bernanke said that when he made his remarks in 2007 he thought the subprime problems were "manageable."
"What I did not recognize was the extent to which the system had flaws and weaknesses in it that were going to amplify the initial shock from subprime and make it into a much bigger crisis," he said.
He basically agrees with Yale professor Gary Gorton, who I blogged about here.
Professor Gorton has compared the crisis to a classic bank run, but with the "banks" in this case being short-term wholesale financing markets -- a loosely regulated, uninsured system known as shadow banking.
About the housing bubble, Sewell Chan - author of the linked NYTimes piece - writes,
In a 2002 speech when he was a Fed governor, Mr. Bernanke argued that central banks should not try to use monetary policy to pop asset bubbles. As part of his nearly three hours of testimony on Thursday, Mr. Bernanke held to that view, but said that at the time he had called for careful supervision and regulation to maintain financial stability.
"We didn’t do that," conceded Mr. Bernanke, who became Fed chairman in 2006. "Going forward, we need to be able to do that."
and
While Mr. Bernanke stuck with his long-held stance that the Fed had not aided the housing bubble by keeping interest rates too low for too long in 2002-4, he embraced the view of Gary B. Gorton, an influential Yale finance professor.
Dean Baker writes:
Any serious weighing of the benefits and risks of bursting the bubble in 2003-2004 would have surely come down in favor of bursting the bubble. The Fed's decision not to burst the bubble was one of the most disastrous failures of monetary policy in history.
Will the Financial Crisis Inquiry Commission's report reflect that?
Happy Labor Day Weekend!

America's workers remind me of the workhorse Boxer in George Orwell's "Animal Farm."

Robert Reich on how to end the Great Job Recession.
... Organized labor is down to about 7 percent of the private work force. Members of non-organized labor -- most of the rest of us -- are unemployed, underemployed or underwater....
Even though the American economy kept growing, hourly wages flattened. The median male worker earns less today, adjusted for inflation, than he did 30 years ago.
But for years American families kept spending as if their incomes were keeping pace with overall economic growth. And their spending fueled continued growth. How did families manage this trick? First, women streamed into the paid work force. By the late 1990s, more than 60 percent of mothers with young children worked outside the home (in 1966, only 24 percent did).

Second, everyone put in more hours. What families didn’t receive in wage increases they made up for in work increases. By the mid-2000s, the typical male worker was putting in roughly 100 hours more each year than two decades before, and the typical female worker about 200 hours more.

When American families couldn’t squeeze any more income out of these two coping mechanisms, they embarked on a third: going ever deeper into debt. This seemed painless -- as long as home prices were soaring. From 2002 to 2007, American households extracted $2.3 trillion from their homes.

Eventually, of course, the debt bubble burst -- and with it, the last coping mechanism. Now we’re left to deal with the underlying problem that we’ve avoided for decades. Even if nearly everyone was employed, the vast middle class still wouldn’t have enough money to buy what the economy is capable of producing.

Where have all the economic gains gone? Mostly to the top. The economists Emmanuel Saez and Thomas Piketty examined tax returns from 1913 to 2008. They discovered an interesting pattern. In the late 1970s, the richest 1 percent of American families took in about 9 percent of the nation’s total income; by 2007, the top 1 percent took in 23.5 percent of total income.
...
The rich spend a much smaller proportion of their incomes than the rest of us. So when they get a disproportionate share of total income, the economy is robbed of the demand it needs to keep growing and creating jobs.
What’s more, the rich don’t necessarily invest their earnings and savings in the American economy; they send them anywhere around the globe where they’ll summon the highest returns -- sometimes that’s here, but often it’s the Cayman Islands, China or elsewhere. The rich also put their money into assets most likely to attract other big investors (commodities, stocks, dot-coms or real estate), which can become wildly inflated as a result.
Meanwhile, as the economy grows, the vast majority in the middle naturally want to live better. Their consequent spending fuels continued growth and creates enough jobs for almost everyone, at least for a time. But because this situation can’t be sustained, at some point -- 1929 and 2008 offer ready examples -- the bill comes due.

Thursday, September 02, 2010



Christina Romer is My Heroine.


Earlier I noted Yglesias linked to her farewell speech she gave at the National Press Club.

DeLong quotes from her farewell speech.

Thoma links to DeLong and adds a few words.

She ended it with:
On election night almost two years ago, my husband and I did a most uncharacteristic thing. We’d had friends over to watch the returns and had celebrated the Obama victory with a sedate glass of champagne around 8:00 California time. By 8:30 our friends had gone home and we were left wondering what to do with our joy. I finally declared that I needed to be part of a crowd.
So, we hopped in the car and followed the sounds of honking horns into downtown Oakland. We stopped at the first street corner where people were gathering. There we were, two middle-aged economists, dancing in the street with the Oakland teenagers. Like so many that evening, we were celebrating the promise of a new President who shared our values and our dreams for a better America.
I did the same thing! We went to Chicago's Grant Park to celebrate with Obama and Oprah on that fateful evening.

She didn't mention the $1.2 trillion number they came up for the stimulus which Summers didn't pass on to Obama, but did say that Congress only wanted $500 billion. So anyway, it doesn't look like she'll speak out of school and add to Ryan Lizza's classic account.

Atrios was a dick about the famous unemployment chart and today of course some jackass is being ungracious once more which is why I don't read Eschaton. When your're right it's okay to be rude. It's Okay if You're a Hardcore Liberal.

Maybe Obama will pick another woman to chair the CEA like Laura Tyson? Hopefully he'll pick Elizabeth Warren for the Consumer Financial Protection Agency.

Strangely, DeLong links to an Arcade Fire video. Here's a "Ready to Start" house party:


Sorry, I'm Just Really Bad With Names And Faces Of People Who Are Not Attractive And Can't Help Advance My Career


The Fear
(or a bubble in money)


Roubini says there's a bond bubble which will have a disasterous correction. Nick Rowe explains the "bond bubble" in plain English and points out it's bad but not for the reasons Roubini says.
A bubble in house prices is a bad thing. It will cause over-investment in building new houses, under-investment in other things, and under-consumption. A bubble in bond prices is a much worse thing. It will cause under-investment in everything, and under-consumption in everything, because it causes under-employment of everything. That's because bonds and money are close substitutes. A bubble in bonds causes a bubble in money. And a bubble in money can cause a bubble in bonds. Or perhaps they are just different aspects of the same bubble, in both money and bonds.
It's not the bubble in bonds per se that is the big problem. If there were only a bubble in bonds, and no bubble in money, it would be no worse than a bubble in houses. It might lead to the wrong mix of real investment and consumption (presumably too little real investment and too much consumption, due to a wealth effect). It's when a bubble in bonds spills over into a bubble in money, the medium of exchange, that we get a big problem. An excess demand for the medium of exchange is what causes, and is the only thing that can cause, a general glut of all goods. And that causes employment and output to fall, and both consumption and investment to fall.
That's why we should be worried about the bond bubble.
If the US and world economy returned immediately to long-run equilibrium, and expected and actual inflation increased to target, the price of US government bonds would immediately fall. And people who held bonds would suffer a large loss when the bubble burst. But perhaps it won't return to long-run equilibrium for a long time. That is what holders of bonds must be forecasting, because if they are right in this forecast, their decisions to hold bonds at current prices are rational.
And maybe they are right. Who am I to know better? But, like all bubbles, the beliefs that sustain the bond bubble are, at least partly, self-fulfilling. The bond bubble, and the associated money bubble, create the general glut, and prevent the economy returning to long-run equilibrium. And the belief that the economy will not return soon to long-run equilibrium is what sustains the bond bubble.
We need to burst the bond bubble. Bursting the bond bubble will help the economy recover more quickly.
(via Andy Harless, via DeLong)

But maybe he agrees with Roubini? In the comment section Rowe is asked
Or alternatively, why the old-fashioned Keynesian idea of liquidity preference -- which is all that excess bond demand amounts to -- is usefully re-labeled as a bubble?
and he responds:
Precisely because the people who are now saying that bonds are not a bubble, might be lead to rethink their position, and think that in some important sense, the demand for bonds and money is too high, and that the thing we ought to be doing is worrying about this, and bursting that bubble, not propping it up. Rhetorical? Sure.
Someone else in the comments writes along the lines of what DeLong has written
The bubble in bond prices exists only in crazy minds of fixed income traders. Shut them down and get to something more productive and worth talking about. Any bond of US government will pay 100 at maturity with coupons which were fixed at issue date.
Yes the government's debt costs will go up if rates rise, but the United States is not Greece.

Rowe links to Daniel Gross's "The Bubble that Isn't." So I don't think he agrees with Dr. Doom.


Krugman on "Eurosclerosis:"
Kurzarbeit
I’m not the first to make this point, but when people make Germany-US comparisons, there’s an important contrast between the GDP comparison, in which Germany actually does slightly worse:
DESCRIPTION 
Eurostat
and the employment picture, in which Germany does much better:
DESCRIPTION 
OECD
What is this telling us? German growth hasn’t been great, one quarter notwithstanding; but it avoided US-style mass layoffs even when it was slumping badly. Part of the explanation is the Kurzarbeit program of work-sharing; also, Germany’s labor laws and its strong unions have led to a situation in which workers aren’t treated as much as variable costs as they are here.
So American conservatives now holding up Germany as a role model are actually praising the virtues of Eurosclerosis, and disparaging American-style capitalism.
The differences in GDP change I'd argue reflect the fact that Germany is more export-oriented. They probably would have had bigger losses except for their "automatic stablilizers." Meanwhile the U.S. had "50 little Hoovers" - the states whose budget cutting made a bad situation worse. So in effect austerity-obsessed Germany had a bigger Keynesian stimulus.
Inflate Away the Debt

Krugman seems to be changing his course here, along with expanding on an earlier blog posting about WWII. He used to argue that the Fed needs to create inflation, just what Bernanke used to argue with respect to Japan. Now he says:
Just saying "monetary policy" doesn’t cut it. Yes, the Fed has tools available even though short-term rates are up against the zero lower bound, and it should be using them to the max. But their effect is highly uncertain; I don’t think anyone can count on the Fed to deliver, on cue, Rogoff’s "two or three years of slightly elevated inflation." In fact, the whole logic of the liquidity trap suggests that if central banks can gain any leverage at all, it’s only by credibly committing to inflation over a fairly sustained period.
So how might inflation be achieved? Actually, we have a good example: the end of the Great Depression.
The immediate cause of the depression’s end was, of course, a very large fiscal stimulus, also known as World War II. But why didn’t the US slide back into depression when the war was over? Many people thought it would; the decline of Montgomery Ward had a lot to do with Sewell Avery’s policy of refusing to expand and hoarding cash in preparation for the return of depression.
Why, then, didn’t depression return? The best answer I’ve come up with is that the depression was, at least in part, a Koo-type balance sheet slump -- and the private sector emerged from World War II with much-improved balance sheets.
And inflation was an important part of that improvement. Here’s the GDP deflator (a measure of the overall price of things America produces) from 1929 to 1948:
DESCRIPTION 
Bureau of Economic Analysis 
Prices rose about 70 percent during the buildup to war, the war itself, and the immediate aftermath. This greatly reduced the real value of outstanding debt– the reverse of the debt deflation that took place in the early stages of the depression. 
What this example suggests is that yes, inflation can be helpful in getting out of a prolonged slump -- but that getting that inflation probably requires a combination of loose monetary policy with strong fiscal stimulus.
... During WWII we saw something like a 35 percent of GDP rise in government spending; this led to a big rise in GDP.
Emphasis added.
Christina Romer's farewell speech.

(via Yglesias)
Scott Tobias reviews the 1999 film adaptation of Bret Easton Ellis’ American Psycho, for the Onion's A.V. Club's New Cult Canon.

Wednesday, September 01, 2010

Mea Culpa

Krugman admits a couple of mistakes. 

I sincerely believe he and the other economists I link to on the right have been fantastic since the current crisis hit. It's very, very encouraging to witness the good guys make mincemeat out of their intellectual opponents, not to mention with humor and style. Really they have been life savers during a scary time.

However the mistakes I would argue Krugman has made our as follows: in the late 1990s he was very pro Free Trade whereas free trade really didn't do much for the middle or lower classes. He's changed on that somewhat.

He argued that the banks needed to be nationalized along the lines of what Sweden successfully did or else we'd have disaster. Maybe he exaggerated to push his case, but I don't believe the banks are as bad as Japan's were. This remains to be seen.

He ignores what happened with the European sovereign debt crisis and how that unexpectedly added some headwinds for the American economy. He doesn't want to give Obama/Summers any breaks.

After being attacked by Krugman, Ken Rogoff went after him about productivity gains in the 90s which Krugman cops to being wrong about, but Krugman has been pretty prescient and right on the arguments whereas Rogoff - former Chief Austerian at the IMF - has been all over the map lately. I'd be a little more modest if I was Rogoff given his inconsistencies.

He was right about Bernanke. If a guy like Hoenig had been in charge we would be in the midst of second Great Depression right now.

I might have been naive to place too much hope in Obama, unlike many older wiser people I respect, but again there's still a lot of time in the game left to play.
Gattaca

William Gibson on Google's Earth.
If Google were sufficiently concerned about this, perhaps the company should issue children with free "training wheels" identities at birth, terminating at the age of majority. One could then either opt to connect one’s adult identity to one’s childhood identity, or not. Childhoodlessness, being obviously suspect on a résumé, would give birth to an industry providing faux adolescences, expensively retro-inserted, the creation of which would gainfully employ a great many writers of fiction. So there would be a silver lining of sorts.
To be sure, I don’t find this a very realistic idea, however much the prospect of millions of people living out their lives in individual witness protection programs, prisoners of their own youthful folly, appeals to my novelistic Kafka glands. Nor do I take much comfort in the thought that Google itself would have to be trusted never to link one’s sober adulthood to one’s wild youth, which surely the search engine, wielding as yet unimagined tools of transparency, eventually could and would do.
I imagine that those who are indiscreet on the Web will continue to have to make the best of it, while sharper cookies, pocketing nyms and proxy cascades (as sharper cookies already do), slouch toward an ever more Googleable future, one in which Google, to some even greater extent than it does now, helps us decide what we’ll do next.
Jonathan Franzen and Lorrie Moore at the 92nd Street Y on Monday November 15th.

When President Obama was vacationing at Martha's Vineyard, a bookstore gave him Franzen's new book "Freedom."

I've long had an unrequited - obviously - literary crush on Moore, like the bird (of America) in this video has on Pete Yorn although the genders are switched about.

Onion's A.V. Club interview with Franzen.
Matt Taibbi once famously wrote of Goldman Sachs,
The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.
And yet just as the Wall Street Journal's reporting is world-class* - as opposed to its loco Op-Ed pages - Goldman Sachs's economic analysts have always been very accurate in spite of the firm's destructive looting behavior. Krugman reprints the reaction of Jan Hatzius, the head of Goldman's econ group, to the FOMC August 10 minutes:
Second, the confidence that deflation will be avoided is at odds with the recent moves in some measures of inflation expectations. Survey expectations have not changed much, but the decline in forward measures of breakeven inflation is noticeable.
...
Third, the statement seems to be at odds with a recent article by President Bullard of St. Louis suggesting that a continuation of the Fed’s current stance on short-term interest rates could result in deflation (see "Seven Faces of 'The Peril'", July 28, 2010). The first sentence of the abstract reads: "In this paper I discuss the possibility that the U.S. economy may become enmeshed in a Japanese-style, deflationary outcome within the next several years"
...
Fourth, the statement about the risk of deflation follows the observation a few paragraphs earlier that "[o]ne [participant] noted that survey measures of longer-run inflation expectations had remained positive in Japan throughout that country’s bout of deflation." This is at least noteworthy because Fed officials have frequently pointed to the stability of inflation expectations as a reason to downplay deflation concerns.
Hatzius noticed the same things I did, and it looks like Bullard is turning out to be the anti-Hoenig.  Bernanke has said he'll do whatever it takes to prevent deflation, but as Krugman, Hatzius, and presumably Bullard would argue, you need to get out in front of deflation and not merely react, especially when you're at the zero bound.
 --------------------------
* It wouldn't be surprising to see the Wall Street Journal's reporting lose its quality with Fox "News's" Rupert Murdoch as the new owner. He recently gave a $1,000,000 to the Republican Governors Association.
We're Turning Japanese I Really Think So

Interesting e-mail from St. Louis Fed President Jim Bullard to blogger Tim Duy. (via Mark Thoma)

Which is funny because Duy seems despondent lately.* Bullard seems to say that he sees more positive data than Duy does and suggests that Fed policy will happen incrementally not in big "shock and awe" doses. I do remember reading that Bullard was warning of deflation. So maybe the Fed will keep acting incrementally until the data turns positive. Also according to the committee minutes, they believe the economy will turn around very, very slowly, so maybe that's what we're experiencing and the negative data points are just "noise." But they keep having to revise downwards, just at the Obama administration low-balled the stimulus.
--------------------------------
 * He links Krugman about America turning Japanese.
The whole point of that paper was that when you’re up against the zero lower bound, it doesn’t matter how much money you print -- not unless you credibly promise higher inflation.
And of course, now we’re all Japanese.
And at Jackson Hole, Bernanke said there is no desire on the committee to promise higher inflation. So either the private sector will pick up on its own or we're up a creek without a paddle. Japanese punk:


GISM was a Japanese mid-paced hardcore punk band (with heavy metal influence) formed in Tokyo, Japan in 1980. Even though the guitar style resembled heavy metal style riffs and solos, GISM were one of the first Japanese hardcore bands, while at the same time drawing influence from the early industrial/avant-garde music scene; something extremely uncommon in punk bands at that time.
The acronym GISM had many different variations; they include: God In the Schizoid Mind, Guerrilla Incendiary Sabotage Mutineer, General Imperialism Social Murder, Genocide Infanticide Suicide Menticide & Gnostic Idiosyncrasy Sonic Militant.
...
In Lady Gaga's video for the song "Telephone," released in March of 2010, the performer wears a spiked leather jacket featuring a GISM back patch. Whether Lady Gaga is actually a fan of the band is unclear. However, the director of the music video, Jonas Akerlund, is former member of the Swedish metal band Bathory and could very well be the reason for the jacket's appearance in the video. The jacket also features patches for the UK crust bands Icons of Filth and Doom.
Lady Gaga knows we're turning Japanese. The difference with the Japanese Lost Decade is that our banking system seems to be in better shape with lots of bad banks going under or being absorbed by other banks. The banks are still profitable but are not lending because of a lack of demand. This seems different to me than the Japanese Lost Decade's legions of "zombie banks."

Tuesday, August 31, 2010


The Fed released the August 10th FOMC minutes and there's no nice chart like there was in June:


Instead they say "Thus, while they saw growth as likely to be more modest in the near term, participants continued to anticipate that growth would pick up in 2011." So, 3.5 to 4.2 percent in 2011 with unemployment going down to 8.3 to 8.7 percent? Doubt it.
Many said they expected underlying inflation to stay, for some time, below levels they judged most consistent with the dual mandate to promote maximum employment and price stability. Participants viewed the risk of deflation as quite small, but a number judged that the risk of further disinflation had increased somewhat despite the stability of longer-run inflation expectations. One noted that survey measures of longer-run inflation expectations had remained positive in Japan throughout that country's bout of deflation.
Yeah markets are wrong sometimes. Like with the housing bubble.
He who does battle with monsters needs to watch out lest he in the process becomes a monster himself. And if you stare too long into the abyss, the abyss will stare right back at you.
----- Friedrich Nietzsche, Beyond Good and Evil
John Burns on the end of the Iraq War.

In Korea, a Model for Iraq by Paul Wolfowitz.

Ever since 9/11 and the toppling of Saddam Hussein I have really lost a lot of respect for the so-called "anti-war" left. Their arguments are almost always disingenuous and self-righteous. Very few will face up to how bad Saddam Hussein actually was. It's all about pointing fingers at America and how wrong Republicans are.

I've never had much respect for conservatives as it was, but after 9/11, Afghanistan and Iraq they really let the mask slip. Cheney, Bush, David Addington, George Tenet, John Yoo, Jay Bybee, Rumsfeld, etc. decided to "take the gloves off" and make America into a lawless torture-state, not unlike Saddam's Baathist police state. Now I have even less respect for conservatives.
Hitchens: Glenn Beck's rally was the Waterworld of white self-pity.
Robert Reich is wrong when he says the Fed can't do anything more.

Yes help from the demand side would be more effective in bringing down unemployment. Yes there should be more help on the demand side but that isn't coming. To pretend that it is coming or might be on the way is disingenuous, i.e. lacking in sincerity or candor.
We Have the Technology and Know-How

If the Democrats do lose the House - see post below - it will be because A) the ARRA stimulus wasn't big enough B) Obama didn't nominate people to the Fed right away / Bernake is failing at his job C) a combo of A and B.

Part of the problem I think is that Obama's economic advisers didn't see the European sovereign debt crisis coming and it hit hard in May 2010.

However, Obama and his advisers should have known that financial crises of the type we just experienced are tough to come back from in a timely manner. They seemed to believe that they could come back for more stimulus if they needed it, but as Krugman pointed out, they were wrong. Plus the Fed is up against the zero bound and the FOMC is made up of dipshits.

The one good thing about this crisis is that it once again proves how Keynsian theories are correct for the most part, even though people want to have the debate all over again. Krugman blogs:
On the analytical front: many economists these days reject out of hand the Keynesian model, preferring to believe that a fall in supply rather than a fall in demand is what causes recessions. But there are clear implications of these rival approaches. If the slump reflects some kind of supply shock, the monetary and fiscal policies followed since the beginning of 2008 would have the effects predicted in a supply-constrained world: large expansion of the monetary base should have led to high inflation, large budget deficits should have driven interest rates way up. And as you may recall, a lot of people did make exactly that prediction. A Keynesian approach, on the other hand, said that inflation would fall and interest rates stay low as long as the economy remained depressed. Guess what happened?
On the policy front: there’s certainly a real debate over whether Obama could have gotten a bigger stimulus. What we do know, however, is that his top advisers did not frame the argument for a small stimulus compared with the projected slump purely in political terms. Instead, they argued that too big a plan would alarm the bond markets, and that anyway fiscal stimulus was only needed as an insurance policy. Neither of these arguments came from macroeconomic theory; they were doctrines invented on the fly. Samuelson 1948 would have said to provide a stimulus big enough to restore full employment -- full stop.
So what we have here isn’t really a lack of a workable analytical framework. The disaster we’re facing is the result of the refusal of economists, both in and out of the corridors of power, to go with the perfectly good framework we already had.
Which is reassuring in a way. The Pain Caucus, the Austerians, the "structuralists," the ones who are trying to usher in a new Dark Ages, all believe in conservative economic "thought" and are uncomfortable with Big Government. They can't admit that if it had not been for Big Government we'd currently be experiencing a second Great Depression.
Nate Silver's FiveThrityEight moves to the New York Times website.

I'm always skeptical of polls, but I link to Silver's site. He writes:
A casual reading of trends is somewhat unhelpful: Americans are unhappy with the direction of the country and, increasingly, with President Obama. But in contrast to 1994, the Republicans’ favorability ratings are also near all-time lows. Meanwhile, looking at a single statistical indicator does not provide for precision, and some indicators disagree with one another. It is perhaps necessary to dig a bit deeper -- to look at more data, and to do so in a more robust way -- in order to have a truly good handle on how things are most likely to proceed. And even then there can still be a lot of uncertainty in the forecast. FiveThirtyEight and its statistical models are willing to admit what they don’t know.
I don't think the Democrats will lose either the House or Senate.