"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 25, 2010

Better Safe than Sorry

My politics are pretty left-wing in that the legislation I would like to see enacted is very left-wing by any standard. Higher taxes. Reform of the U.S. Senate and Federal Reserve system. Shrinkage of the financial sector. Transforming the banking sector into a public utility.

Recently, however there were a couple of things on which my opinions were moderate. I believe I went with the safer option because failure would have meant disaster. A year after Lehman collapsed, I was for Bernanke's renomination. Six months after Lehman declared bankruptcy, I was against nationalizing the banks and I thought Geithner's* stress tests were worthwhile no matter how lenient they were.

Maybe going the risky route would have been better, but we'll never know. It's like with TARP. Yes it was horribly unfair, but in my opinion better than risking 30 percent unemployment. Again, maybe it's just that I've gotten older and less reckless.

Mark Thoma directs us to this speech by Bernanke.
Although economists have much to learn from this crisis, as I will discuss, I think that calls for a radical reworking of the field go too far. In particular, it seems to me that current critiques of economics sometimes conflate three overlapping yet separate enterprises, which, for the purposes of my remarks today, I will call economic science, economic engineering, and economic management. Economic science concerns itself primarily with theoretical and empirical generalizations about the behavior of individuals, institutions, markets, and national economies. Most academic research falls in this category. Economic engineering is about the design and analysis of frameworks for achieving specific economic objectives. Examples of such frameworks are the risk-management systems of financial institutions and the financial regulatory systems of the United States and other countries. Economic management involves the operation of economic frameworks in real time--for example, in the private sector, the management of complex financial institutions or, in the public sector, the day-to-day supervision of those institutions.
As you may have already guessed, my terminology is intended to invoke a loose analogy with science and engineering. Underpinning any practical scientific or engineering endeavor, such as a moon shot, a heart transplant, or the construction of a skyscraper are: first, fundamental scientific knowledge; second, principles of design and engineering, derived from experience and the application of fundamental knowledge; and third, the management of the particular endeavor, often including the coordination of the efforts of many people in a complex enterprise while dealing with myriad uncertainties. Success in any practical undertaking requires all three components. For example, the fight to control AIDS requires scientific knowledge about the causes and mechanisms of the disease (the scientific component), the development of medical technologies and public health strategies (the engineering applications), and the implementation of those technologies and strategies in specific communities and for individual patients (the management aspect). Twenty years ago, AIDS mortality rates mostly reflected gaps in scientific understanding and in the design of drugs and treatment technologies; today, the problem is more likely to be a lack of funding or trained personnel to carry out programs or to apply treatments.
With that taxonomy in hand, I would argue that the recent financial crisis was more a failure of economic engineering and economic management than of what I have called economic science....
------------------------------
*Atrios's nickname for Geithner was "Timmeh." I thought this was lame.
Krugman on the Fallacy of Composition
when everyone tries to pay down debt at the same time, the result is a depressed economy and falling inflation, which cause the ratio of debt to income to rise if anything. That is, we’re living in a world in which the twin paradoxes of thrift and deleveraging hold, and hence in which individual virtue ends up being collective vice.
The Default Setting is Ugly, but We Need to Switch to Cleanly
Krugman continues:
So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt.
And that’s what is happening now: as this story in today’s Times points out, the main force behind the gratifying decline in consumer debt appears to be default rather than thrift.
So basically, we can do this cleanly or we can do this ugly. And ugly is the way we’re going.
One thing that struck about Wells and Krugman's article The Way Out of the Slump was the following:
It also means that the rest of Europe needs to start holding Germany to account: the Germans may regard themselves as models, but their surpluses after 2000, by flooding the rest of Europe with cheap money, played a large part in creating the real estate bubble in Europe’s peripheral economies. And Germany’s continuing reliance on export-led growth is in effect a beggar-thy-neighbor strategy of growing at its neighbors’ expense.
But wasn't Germany's cheap money good for the rest of Europe at the time? It was only when the bubble burst and the cheap money turned to expensive money that it hurt the periphery if I understand this correctly.

Friday, September 24, 2010

Stephen Colbert's testimony bumps coverage of a subcommittee hearing "all the way up to CSPAN1." (The hearing was shown on CSPAN3.)
The Way Out of the Slump by Robin Wells and Paul Krugman
Daniel Gross on the Panic of 2008's winners and losers
Annie Lowrey on the Fed's dissenting hawk
Tempest in a Teacup

It is a tale 
Told by an idiot, full of sound and fury,
Signifying nothing.

Prima donna, drama queens whine about so-called "hippie punching."

The only instance I can recall is when a frustrated Gibbs lashed out at Rachel Maddow and the "professional left." I mean the White House did enact the largest government stimulus in history, passed the largest reform in  health care in 40 years, passed the largest financial system reform since the Great Depression, nominated Dawn Johnson, brought in Elizabeth Warren, nominated okay people to the Supreme Court, Federal Reserve and National Labor Relations Board. Ended the war in Iraq. Etc. All in the face of the most obstructionist minority party in history.

Many of the "organized, online" left were against Obama during the Democratic primary. No doubt many hope the Democrats will lose the House so they can blame it on Obama's "lack of nerve."

Again you have to wonder about the actual percentage of people who subscribe to the Prima Donna Left viewpoint. But maybe they will be able to depress turnout. We'll find out, but I bet the the Democrats keep the House. Which will be funny.

Even if Obama had got the public option, and did nationalize the banks and had done a larger stimulus, these people still wouldn't be satisfied. They just like to hear themselves talk.


Not surprising. I'm-A-Dinner-Jacket is a Truther.

100 dollars that none of the liberal, "anti-war" blogs mention this news item. To do so would be "warmongering." Yglesias hasn't yet. Nor has Atrios. Nor has Brad DeLong. Nor has Glenzilla.

It's as if it never happened in Blogsistan.

Also never mentioned, Obama sets up largest arms deal in history with Saudi Arabia.
Brothers Compete to Lead Labour Party in Britain by John Burns

With the winner to be announced Saturday, it seems a virtual certainty that the new leader will be one of two brothers who were running neck and neck: David and Ed Miliband, Oxford graduates in their 40s, former ministers in the Brown government and sons of a Marxist intellectual, Ralph Miliband, who reached Britain in 1940 on the last ship to leave Belgium ahead of advancing Nazi forces.
...
To the extent that popular interest has been stirred, it has been by the spectacle of two brothers competing with each other. David Miliband, at 45 the older brother, seemed surprised and, though he denied it publicly, somewhat resentful when Ed Miliband, 40, announced his candidacy for a job that had been widely considered to be David Miliband’s for the asking.
...
The brothers’ different political paths reflected the wider differences within the party. Both men have embraced a form of parliamentary politics that would have sat uneasily with their father. Their mother, Marion Kozak, a Polish-born migrant to Britain in the early 1950s, remains, at 76, politically active in Labour. Ralph Miliband, who died in 1994, is buried beside Karl Marx in London’s Highgate cemetery.

Poll: 1 In 5 Americans Believe Obama Is A Cactus

Wednesday, September 22, 2010

The Beatings Will Continue Until Morale Improves

Krugman on austerity in Ireland

Yglesias on what the Fed should do
Eschaton: "Everthing's Terrible It's All Our Fault And We're Not Going To Change. The sociopaths at the Fed have spoken."

I think they will change but not until their next meeting around the November elections. It should also be pointed out that Republicans are blocking Obama's there nominees to the Fed. But until November, it's opportunistic disinflation for everyone.

(via DeLong)
Krugman is right and the conventional wisdom is wrong. Again.

As Obama's former Presidential campaign manager David Plouffe has said about Novermber, it all depends on turnout.

This seems obvious, but everyone's saying the loss of the House is a foregone conclusion when it's not.

China's Currency Manipulation

David Leonhardt

Dean Baker

Paul Krugman

Tuesday, September 21, 2010

Slightly over 500 Days of Larry Summers

(h/t Nick Rizzo, via Brian Beutler, ugh, I don't understand the appeal of Twitter...)
Krugman writes about the new OMB director Jacob Lew.
So Obama’s nominee to head OMB told a Senate panel that deregulation didn’t lead to the financial crisis. Urk. I think he may technically be right -- it wasn’t so much deregulation as the failure to extend regulation to keep up with financial innovation that did it. Still, talk about stepping on the message.

And this gets to a point I’ve been trying to formulate: while the Obama’s political problems are largely due to a lousy economy, it’s also true that the administration seems to go out of its way to alienate its supporters.
...
In fact, it often seems to me that there’s an almost compulsive aspect to the administration’s anti-dog whistling. Maybe it comes from hanging out with the political and business establishment, which leads to a desire to seem respectable by dissing the DFHs. But memo to the president: Wall Street will hate you anyway. All you’re doing is undermining the enthusiasm of people you need.
After the Iowa primary, I was for Obama and against Hillary. What Krugman fails to mention is that Lew is/was Hillary's budget guy. He was a Clintonoid like Larry Summers and Robert Rubin.

I don't begrudge Obama for relying on Clintonistas for advice - they know how the Federal government in all of  its complexity works. But they did come from a deregulatory mileu, something Krugman fails to mention. And you have to wonder if they've learned their lesson, especially when Jacob Lew makes such a fundamental mistake.

Krugman's right that technically it wasn't deregulation which caused the crash - DeLong insists repealing Glass-Stegall didn't help cause the crisis. But as he says in the quote above " it wasn’t so much deregulation as the failure to extend regulation to keep up with financial innovation that did it." It was a deregulatory bias which did cause the crisis, something members of the Clinton administration enabled.

Were they going to regulate the shadow banking system while deregulating the plain old vanilla banking system? I don't think so. But Krugman is right in that Jacob Lew here doesn't seem to get it and the Obama people should have prepared him.

Sometimes it seems like DeLong and Krugman bend over backwards and/or go out of their way to defend Bill Clinton. When you consider the Clintonistas' political opponents like Newt Gingrich, John Boehner, George W. Bush, Mitch McConnell, Sarah Palin, Fox News, Rep. Paul Ryan, Rep. Eric Cantor, etc. it's difficult to begrudge them.

I should mention Krugman was discussing a news story by the Huffington Post's excellent business reporter Shahien Nasiripour.

The media gets criticized all the time but I believe journalists Neil Irwin, Sewell Chan and Nasirpour have been doing an exemplary job this past year.

Update: the more I think about what the new OMB nominee said, the more it pisses me off. Fed Chair Ben Bernanke testified to the Financial Crisis Inquiry Commission that the guy to read on the crisis is Gary Gorton. The other day Yglesias pointed to a new paper by Gorton on financial regulation. From the abstract:
We first document the rise of shadow banking over the last three decades, helped by regulatory and legal changes that gave advantages to the main institutions of shadow banking: money-market mutual funds to capture retail deposits from traditional banks, securitization to move assets of traditional banks off their balance sheets, and repurchase agreements ("repo") that facilitated the use of securitized bonds in financial transactions as a form of money.
Shouldn't Jacob Lew, former executive at Citigroup and budget director for Bill and Hillary, know this?
Ezra Klein says Gallup predicts the Democrats will lose in November. For some reason I doubt it.
James Surowiecki makes the case for inflation

(via Yglesias, Ezra Klein)
Lawsuits on flash cookies.


Housing starts top forecasts in August. Dean Baker believes prices still have have 15-20 percent to drop.

Monday, September 20, 2010

Great New York Times editorial about campaign finance.

For all the headlines about the Tea Party and blind voter anger, the most disturbing story of this year’s election is embodied in an odd combination of numbers and letters: 501(c)(4). That is the legal designation for the advocacy committees that are sucking in many millions of anonymous corporate dollars, making this the most secretive election cycle since the Watergate years.
...
Corporations got the power to pour anonymous money into elections from Supreme Court and Federal Election Commission decisions in the last two years, culminating in the Citizens United opinion earlier this year. The effect is drastic: In 2004 and 2006, virtually all independent groups receiving electioneering donations revealed their donors. In 2008, less than half of the groups reported their donors, according to a study issued last week by the watchdog group Public Citizen. So far this year, only 32 percent of the groups have done so.

Most of the cash has gone to Republican operatives like Karl Rove who have set up tax-exempt 501(c)(4) organizations. In theory, these groups, with disingenuously innocuous names like American Crossroads and the American Action Network, are meant to promote social welfare. The value to the political operatives is that they are a funnel for anonymous campaign donations.

Mr. Rove’s group, American Crossroads, hopes to spend $50 million, and is already advertising against Democratic candidates in California, Pennsylvania, Nevada and other states. The American Action Network, led by Norm Coleman, the former Republican senator from Minnesota, is spending $25 million, and has been blasting the Democratic senators Patty Murray in Washington and Russell Feingold in Wisconsin.


Back in 1999, Jamie Kennedy confronts Christine O'Donnell, the Republican's current "Tea Party" candidate for the Delaware Senate seat. O'Donnell reminds me of this post I did on Michelle Bachmann which I reproduce below. O'Donnell does seem nicer than Palin or Bachmann.



Her eyes tell me that in a former life she organized doomed children’s crusades and burned heretics by the gross.

And yet this zealous flame is imprisoned in the body of a suburban, would-be-folksy Minnesotan. It’s that contrast, I think, that makes her so hypnotic.


Skills Mishmash

There are two competing memes or narratives about the slump's low levels of employment. As Mike Konczal at Rortybomb blogs (via Krugman), "The first is a story of aggregate demand. The second theory is one of a mismatch in skills."

Dean Baker blogs:
Actually, the statistics do not show that the number of job openings is anywhere close to the number of unemployed workers. The most recent data show the number of openings at just over 3 million, a bit more than 1 opening for every 5 unemployed workers. This is still down by more than one-third from pre-recession levels.

It is also worth noting that we don't see evidence of the other factors that would be consistent with growing structural unemployment. This mismatch story would imply that there are sectors of the economy in which wages are rising rapidly and average hours per worker are increasing, as employers increase hours due to their inability to find qualified workers. There is no major sector of the economy that fits this description.
Commenting on Konczal, Krugman blogs:
So how would you decide between these theories? The answer is to look at the evidence -- specifically, to ask whether what we see bears the "signature" of one story or the other. The aggregate demand story suggests that we should see depressed employment in all industries, that we should see workers of every skill type facing a poor job market. The mishmash mismatch story says that we should see surpluses of labor in some places, but shortages in others.

And Mike shows that the data overwhelmingly fit the demand story, not the mismatch story; Every single major industry has seen a rise in involuntary part-time work; so has every major occupation. There’s no hint that any major kind of labor, in any sector, is in short supply.
...
The evidence, then, is overwhelmingly in favor of a demand story. But the mismatch people don’t want to hear that -- and they have substantial influence. And so the slump goes on.

"Fiscal Gridlock"

Baker was commenting on a New York Times story by Sewell Chan which gave space to Minnesota Fed President Kocherlakota, a leading proponent of the skills mismatch argument. Chan reports he said:
"We are unabashed technocrats, seeking to solve an unabashedly technical problem: how do we manage monetary policy so as to ensure lower unemployment and maintain inflation at an appropriate rate?" he said. Disagreements, he added, "ultimately stem from different assessments of the complicated economic situation and not from political differences"
I disagree with Kocherlakota. It's very political.* Elsewhere in the article Chan writes:
Although the Fed considers that danger [of deflation] remote, it is worried because inflation is running at only about half the desired level of about 2 percent, while unemployment stands at 9.6 percent. 
The committee’s Aug. 10 meeting was dominated by a vigorous discussion over the decision to reinvest the mortgage-related bond proceeds -- an approach Mr. Bernanke favored. The meeting on Tuesday will probably be used to assess actions the committee might take at its meetings on Nov. 2 and 3 and Dec. 14. 
...
Continued "fiscal gridlock" -- an inability to reach agreement on how to handle the impending expiration of the Bush-era tax cuts -- would put pressure on the Fed to act, Mr. Berner added. A second round of quantitative easing could lower the yield on the benchmark 10-year Treasury note to 2 percent, from its current level of about 2.75 percent, he estimated.

Laurence H. Meyer, an economic forecaster and former Fed governor, said additional quantitative easing would have a meaningful effect on the economy but would not be a "game changer." 

The Fed could announce that it was buying an additional $2 trillion in securities -- nearly doubling its $2.3 trillion balance sheet, which is already two and a half times where it stood before the financial crisis in 2008. Or it could take a more incremental approach, by buying a modest amount of securities and leaving the door open for more. 

Mr. Meyer estimated that the "shock-and-awe option" would raise economic growth 0.3 percentage point in 2011 and 0.4 percentage point in 2012, but that unemployment would remain high: 9.2 percent at the end of 2011 and 7.7 percent by the end of 2012. 
...
"For me, the ball is in the fiscal court for now," Mr. Fisher [President of Dallas Fed] said. "Any further action by the Fed must be subject to the kind of rigorous cost-benefit analysis that Ben Bernanke cited in Jackson Hole."

The fiscal court ain't doing nothing. There's "fiscal gridlock." It's not the Fed's fault, but it's the case. So, Mr. Fisher is in fact making a political argument. We shouldn't do anything about the low employment levels caused by the bursting of the housing bubble. We should allow the American middle class to be destroyed. Because why? Fisher doesn't say but it's most certainly a political decision and not a technical one.  The economic evidence is there on what needs to be done. Inflation is at one percent and 9 percent unemployment through 2011? Does Fisher really know what the costs of that is?

Perhaps the political legitimacy of the Fed?
--------------------------
* A good rule of thumb: if the argument relies on accurate data, it's technical. If it ignores all evidence and data: it's political.

Sunday, September 19, 2010

Hell Freezes Over
(Firebaggers and Teabaggers see the glass as half-empty)

Glenzilla blogs:
It's true that there are good things Obama has done: as but one example, both Elizabeth Warren and Simon Johnson believe that Warren's appointment today will empower her to help police Wall Street's abusive consumer practices in meaningful ways.
WHAT??? Obama has done something good???

Many people on the left - many who never supported Obama during the Democratic primary and are over-represented on the Internet - congenitally see the glass as half-empty. No matter what the subject is, you can safely assume what the predicate that follows is: Obama is a sell-out and/or Obama is a centrist. Obama doesn't care.

I have my criticisms of the Obama administration but Glenzilla and his ilk just make me more sympathetic towards the Democrats.
Ezra Klein on Obama's "pipe dreams."
Those things are true, of course. And I think that the labor market will eventually recover, and the health-care reform plan will cover 32 million people and make the system better and more secure for a lot of people beyond that, and Obama, like Reagan before him, will be considered an extremely successful president despite struggling with his popularity in the early years of his first term. But for now, that kind of popularity is, well, a pipe dream. And the Obama administration is left running on exactly the record it hoped and promised to have in 2008, but without the level of economic recovery and thus popularity that would've helped convince the American people to deliver a favorable initial review.
I hope Klein's right and suspect he is.
Excellent New York Times journalist Sewell Chan on The U.S.-China Exchange Rate.
Would China benefit by letting the renminbi rise?
Yes, most experts agree that China would probably be better off if the renminbi’s value rose. Doing so would give Chinese consumers more purchasing power, lessen the risk of inflation and asset bubbles, and potentially reduce stark inequalities that have contributed to social unrest.
What’s stopping China, then?
Exporters, concentrated along the southern coast, wield enormous clout in Beijing and benefit from an undervalued currency, said Minxin Pei, a political scientist at Claremont McKenna College in Claremont, Calif. So do state-owned enterprises, which have excess capacity and need to be able to sell goods cheaply abroad. China’s importers are unhappy with the undervalued renminbi -- as are officials at the central bank -- but both groups are relatively weak.
In the United States, there must be someone against a stronger Chinese currency, right?
Large multinational corporations, and Wall Street, are comfortable with a weak renminbi. Many of the biggest American conglomerates make goods in China (or sell them in the United States) and benefit from the undervalued currency. Financial services companies find deal-making easier with a strong dollar and want to help invest the capital sloshing around China.
But aren’t the forces on the other side just as strong?
A high dollar places tremendous competitive pressure on American agricultural producers and domestic manufacturers, and thereby hampers job creation.
So, it’s not surprising that Midwest politicians and labor unions have been among China’s fiercest critics. High unemployment has also prompted the White House and most Congressional Democrats (and a substantial number of Republicans) to side with the critics.
Emphasis added in first answer. I would disagree with Chan and argue that if (when?) "Chinese consumers" get more purchasing power, this could contribute to unrest as one-party rule of the Chinese Communist Party could be challenged. Other nations have evolved from one-party states to multi-party democracies, but it could be messy in China given the size and poverty of the country. Having said that the Chinese have managed their economic growth and the economic crisis well. Chan may be right that reduced inequality would help mollify unrest, but I doubt it.
Why I don't like hippie-peacenick anti-war types.

I believe the Vietnam War was a criminal aggression against the Vietnamese. The anti-war movement of the Sixties was correct.

Nowadays however in the age of the Internet you have four basic types of anti-war agitators.

1) Chomskyites. Although Chomsky criticizes American elites specifically, Chomskyites criticize all Americans. All of the civilian deaths in Iraq since 2003 are America's fault. Stuff like that. Saddam Hussein wasn't that bad of a dictator. Greenwald is a Chomskyite. They believe human rights groups Amnesty International and Human Rights Watch do nothing but gin up war against foreign enemies of the week. America's only foreign policy goals are domination and imperialism according to Chomskyites. Saddam's annexation of Kuwait and 9-11 are just excuses and pretexts.

2) Pacifisits. All war is bad no matter what the specifics, context or circumstances. World War II is no different from Vietnam is no different from the American Civil War.

3) Isolationists. America has problems at home so we shouldn't spend money on foreign "adventures." Other anti-war types will borrow this rhetoric. I'd argue more Americans were selfishly (or rather self-interestedly) isolationist about Iraq and Afghansitan than actually anti-war per se. Human rights violations in other countries our not our concern. Groups like Amnesty International and Human Rights Watch are a waste of money.

4) Politically partisan, as in donkeys versus elephants. They'll use isolationist and Chomskyite rhetoric about Bush's war in Iraq but the rules change for the good war in Afghanistan. Although, now many Democrats are leaning on Obama to end that war also.
Let Them East Cake
(Or the Heartless Bastards)

Why I don't like Tyler Cowen:
Although the unemployed might prefer such a policy [of higher inflation and full employment], they are not well-mobilized politically. And President Obama is himself politically weak at the moment, so he cannot offer the Fed much cover.
The dubious assertion about Obama aside, full employment should be preferred by most voters in the country. Economists should know why. The only people who don't want full employment are those who prefer labor to have a weak bargaining position and prefer an increase in inequality and all that entails. Voters who don't have full employment as a priority are essentially saying they don't want a middle class. They want America to become a banana republic, with a tiny, greedy, corrupt elite and a mass of the desperate, working poor.
Trickle-down Socialism for the Rich

I agree with DeLong:
This crash in prices of risky financial assets would not overly concern the rest of us were it not for the havoc that it has wrought on the price system, which is sending a peculiar message to the real economy. The price system is saying: shut down risky production activities and don’t undertake any new activities that might be risky.
But there aren’t enough safe, secure, and sound enterprises to absorb all the workers laid off from risky enterprises. And if the decline in nominal wages signals that there is an excess supply of labor, matters only get worse. General deflation eliminates the capital of yet more financial intermediaries, and makes risky an even larger share of assets that had previously been regarded as safe.
Ever since 1825, central banks’ standard response in such situations -- except during the Great Depression of the 1930’s -- has been the same: raise and support the prices of risky financial assets, and prevent financial markets from sending a signal to the real economy to shut down risky enterprises and eschew risky investments.
This response is understandably controversial, because it rewards those who bet on risky assets, many of whom accepted risk with open eyes and bear some responsibility for causing the crisis. But an effective rescue cannot be done any other way. A policy that leaves owners of risky financial assets impoverished is a policy that shuts down dynamism in the real economy.
The political problem can be finessed: as Don Kohn, a vice-chairman of the Federal Reserve, recently observed, teaching a few thousand feckless financiers not to over-speculate is much less important than securing the jobs of millions of Americans and tens of millions around the globe. Financial rescue operations that benefit even the unworthy can be accepted if they are seen as benefiting all -- even if the unworthy gain more than their share of the benefits.
John Cassidy also made the point that the bailouts lay bare the unfairness of our economic system for all to see.