"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 24, 2011

I guess I'm confused over the housing sector. Here's some confusion from the other day. DeLong discusses it here in the context of the 3 Fed dissenters. 

Philadelphia Fed Presiendt Charles Plosser said in an interview that " This mess was caused by over-investment in housing, and bringing down unemployment will be a gradual process."

DeLong responds:
It is, I must say, remarkable that Plosser has managed to avoid learning that the housing bust since 2007 has been much larger than the mid-2000s housing boom, and that there is no overhang of overbuilt houses, rather the reverse:

FRED Graph  St Louis Fed 97 2
The story goes:

1) boom in residential construction (in blue)

2) spawns a bubble which takes on a life of its own

3) consumers use houses like ATM machines

In a comment at Crooked Timber Daniel Davies writes
The fact that houses became so expensive is hardly unrelated to the fact that financial means were created which then allowed people to bid the prices up further.
I don’t really agree, (surprisingly) – the price bubble was policy-caused. In the early 00s, when I started covering the UK banking industry in serious depth, the main upward driver of house prices was simply the fact that (as base rate plummeted to the historically low level of 4%!) they were so, so damn affordable – remember that mortgage rates went from nearly 10% to about 5% on a simple, vanilla standard variable rate mortgage, basically halving the monthly payment. The product innovations were a response to, not a cause of, the housing boom (in Spain, where financial regulation was and is very strict, they still had a housing boom on 100% vanilla products).
Is what Davies says related to the Global Savings Glut? After witnessing the 1997 East Asian financial crisis, the Chinese - who avoided the worst because of capital controls - decided they would never ever be put in a position to be forced to go to the IMF and so built up their reserves. This caused mortgage rates to drop.

In 2005 what happens? Housing bubble deflates. Exports and business investment continue to grow. Unemployment level remains unchanged and people lose jobs and others are hired. Then in 2008 as the bubble deflates, financial institutions are put under pressure. Bear Stearns is bailed out. Lehman isn't and there's a panic, a run on the shadow banking system and a credit crunch. All sectors decline. Fiscal stimulus by the White House and Congress and monetary stimulus by the Federal Reserve stops the credit crunch and causes the economy to recover although growth is at a painfully slow pace and far from catching up to trend levels.

Spain's Banking Mess by Floyd Norris

Friday, September 23, 2011

The Myth of Cash on the Sidelines

(or This Time It's Different)

NY Fed's Duddley: Financial Stability and Economic Growth by Calculated Risk
"[W]hen [bubbles] are underway, [they] are typically enjoyable. As a result, regulatory interventions that temper booms normally are going to be unpopular."

From NY Fed President William Dudley: Financial Stability and Economic Growth. Dudley makes several interesting comments. I've long argued that the primary causes of the housing bubble were rapid innovation in the mortgage market combined with a lack of regulatory oversight.
Ron Suskind's Larry Summers problem by Ezra Klein

Good piece by Klein. From what I've heard, the book makes Summers and Obama look better a little bit. (Summers argued for more stimulus. Obama leaned towards the Swedish model and was impressed with Elizabeth Warren.) It makes Orszag look worse. Regarding nationalization of the banks, I thought Obama was undecided but apparently he had the right instincts. At the time I leaned slightly towards the Geithner view that given the fragile state of things, a nationalization could bring about a panic like Lehman Brothers or a Greek default. Better to err on the side of caution but proponents of nationalization had some good points. In hindsight I've changed my view especially given the behavior of bank CEOs and their lobbyists since then.

Was the timing of the release of the book with its portrayal of a mildly frat-house-like White House and the historic ending of DADT a coincidence?

I don't understand why everyone in the book is saying they were misquoted. Maybe at the the time they gave quotes they thought Obama was shoe-in for re-election and now they feel Obama could lose and are feeling disloyal?
Martin Scorsese documetary on George Harrison
review of Moneyball by Manohla Dargis
Like “The Social Network,” which is about the creation of Facebook and yet so much more (it was also written by Mr. Sorkin) “Moneyball” is about a fundamental cultural shift and the rise of the information elite. Instead of going by instinct, Peter knows what he knows because he’s a disciple of Bill James, a once-marginal figure who, starting in 1977, began publishing an abstract that offered a new, rationalized way of looking at the game. In a nutshell, Mr. James looked at baseball statistics in a different light, less by breaking the numbers down in another way but by seeing that what appeared to be objective facts, like fielding statistics, were, as he wrote, “a record of opinions.” And these numbers didn’t just describe baseball; they gave the game its language, its “fiction and drama and poetry.”
Like a linguist Mr. James studied that language, looked at its form, context, meaning, and called his new approach sabermetrics. Among other things he could see value in underappreciated, often underpaid and ignored players whom conventional thinkers saw as destined for the minors. In the movie Peter preaches this new gospel to Billy, who embraces it with born-again fervor, partly because it clarifies the mystery of why he never became the player he was drafted to be: he had the tools, as the scouts like to say, but they just didn’t work in the majors. (In reality it was a former general manager of the A’s, Sandy Alderson, now with the Mets, who introduced Mr. Beane to Mr. James’s work.)
Reminds me of progressives like Yglesias and Ezra Klein and their recourse to data and charts, especially during the health care debate. In macroeconomics, though freshwater economists lost their way by focusing too much on models and equations.
Origins of the Euro Crisis by Krugman

Reminds me of the 1997 East Asian financial crisis and others have pointed to the Latin American debt crisis of the 1980s.
U Mad Bro? 
(or why so serious?)

Krauthammer in Full Rant Mode by Dean Baker

Krauthammer is a longstanding member of my rogues gallery so it's good to see Obama's rhetoric sending him into fits of rage.

Thursday, September 22, 2011

Young Adults Make Gains in Health Insurance Coverage

Housing Boom / Housing Bubble

Be Warned: Mr. Bubble is Worried Again by David Leonhardt (August 21, 2005)

Robert Shiller's graph of housing prices ending in 2005 or so.

This post is sort of free-floating working-out of my ideas on the issues. The context of this is series of back and forth blog posts between Matt Yglesias and Doug Henwood. Yglesias's first post is a reaction to a piece by Jeffrey Sachs published in the Huffington Post. Right off the bat, I'm distrustful of Sachs and more trusting that Yglesias will be correct. They're both liberals so they both want the same things or ends, but Sachs can be all over the place and became famous after putting the Russian people through the wringer via "Shock Therapy." My view is that he had sort of a crisis of conscience over the experience and became more liberal if not really that rigorous in his thinking. I could be wrong. Also, Huffington Post will publish good stuff, but also will run hokey stuff. So my BS detector is on high alert. Anyway Sachs writes:
The housing boom between 1998 and 2008 was an indirect reaction to the loss of manufacturing. As the US shed manufacturing jobs in the 1980s and 1990s, the Federal Government and Federal Reserve tried to compensate by boosting jobs in construction and other sectors shielded from international competition (so-called non-traded sectors). The Fed cut interest rates and the White House and Congress promoted housing finance, including through reckless deregulation and irresponsible behavior by government-backed entities like Fannie Mae. These efforts produced a temporary boom in housing, followed by the bust in 2008.
Obama and his advisors have believed, in effect, that they can reignite the housing boom. Rather than reacting to the underlying problem -- the loss of manufacturing competitiveness -- they have acted as if a bit of pump priming and the passage of time will recreate consumer-led growth in housing, autos, and other sectors.
Yet this approach has been doomed to fail, and continues to do so. Consumers will not return quickly to buying houses, cars, and other big-ticket items in large numbers. They are exhausted and in debt, and in no mood to repeat the earlier disasters of over-borrowing.

Ygelsias argues there wasn't a boom in housing, but a boom in prices or a bubble. Doug Henwood responds to this. He's usually pretty good, but can bitchy towards others like Yglesias. Henwood's response is that there was a boom, along with a bubble. A bubble starts with a boom and then takes on a life of its own. And then as far a I can tell Yglesias responds and agrees there was a boom but that it wasn't that big. Henwood says it was pretty big:
To reprise a couple of points from yesterday’s post: 1) As a share of GDP, residential investment—that is, the building of new houses and work done on older ones—hit a peak of almost 60% above its long-term trend in the mid-00s. And, 2) between 2001 and 2006, residential investment accounted for 12% of GDP growth, twice its share of the economy. If “60%” and “twice” don’t sound like big numbers, then I don’t know what does.
See where I'm confused is where inflated prices work into the equation of residential investment. Is the bubble reflected in the numbers? And when working with fractions and percentages it gets kind of tricky. My guess is that Yglesias doesn't want to admit there was a boom of any sort in the Bush years, but maybe that's not fair or true.

Calculated Risk* has had some interesting posts on the housing market. The construction industry builds a certain number of houses a year to keep up with new housing formation. Because of the crisis and bust, there's a big overhang of available housing. Once that is worked through, which will be slower than the past because of a slowdown in household formation, the construction industry will start building again to meet demand and create jobs and more demand. New construction won't be at the boom level of the past though because there won't be the boom level of demand in new housing formation. Dean Baker repeatedly points out at his blog that housing prices need to come down to their trend before the market can turnaround. I admittedly don't have a handle on it.

But back to Sach's long history. It interesting that Sachs says the boom is from 1998-2008 whereas Henwood says 2001-2006. There was an Interent bubble in the late Nineties and then a mild crash. Sachs says the US shed manufacturing jobs in the 1980s and 1990s and I guess it's true, although the 1990s had a period of growing wages and full employment during the Clinton years right before the Internet bubble burst. Sachs asserts that the government created the housing boom through design and I don't know if that's quite true. There was the Global Savings Glut which lowered mortgage rates and the Bush tax cuts and the weakening of loan restrictions so that more people could pile on debt. Was this a housing boom policy or more accidental? Growth would have been worse with out these things. I agree that Clinton and Bush both pushed "the American Dream" with more access to housing with the Bush administration probably inflicting more unintended consecquenses.

Sachs says this "artificial" housing boom demand won't be replaced so the Obama administration's "pump-priming" is futile. He argues they need to address the long-term structural problems of "competitiveness" and the loss of demand caused by the loss of manufacturing jobs. Dean Baker has pointed to the trade deficit.

Maybe after priming the economy won't pick back up to its previous boom levels, but after financial crises economies do usually come back (except Japan of course). The world economies came back after the Great Depression but only because of the pump-priming of war time spending and moentary policies.

In sum, I agree that there's a lack of demand because consumers were relying on credit during the boom years and they are not now. Plus the loss of demand cause by job losses and government budget cuts. But it's also the case that the fear caused by the crisis and recession is making credit and spending less than they need be. The Fed and White House pump-priming are trying to get people to be less cautious and help them deleverage. There's no reason why corporations and people with money are sitting on it, demanding safe places to park it and low returns, other than the fact that they are anxious and see years of slow growth ahead.
*This might be wrong. It's not that there's an overhang, it's that prices are too high and demand is too low. Anyway I'm confused.

Greece might default.
For the moment, Greek officials are adamant that neither a default nor a euro exit and devaluation is in the cards. One senior policy maker in Greece’s Finance Ministry, who declined to be identified because of the delicacy of the matter, even offered to send his questioner a case of 2005 Dom Perignon Champagne if Greece ever repudiated its debt.
But close followers of Greece’s budget dynamics point to the fact that, despite the country’s deficit woes, by next year Greece is likely to have achieved a primary budget surplus, meaning that after taking out the high levels of interest it pays on its debt, it will be running a surplus.
History shows that a country tends only to take such a drastic step as cutting ties with its international lenders when it has tightened its belt enough to achieve a budget surplus, and it is only payments to its bankers that is keeping it in the red.
Such was the case in most of the recent country defaults, including Argentina, Ecuador, Indonesia and Jamaica, economists at the I.M.F. found in a paper published last year that addressed when a country finds its interest is served by default.
“My view is that it is very much in Greece’s interest to default now, as there is no prospect that it can repay its debt,” said Desmond Lachman, a former I.M.F. economist at the American Enterprise Institute. “If it is inevitable that an insolvent Greece is going to have to restructure, it would be better for Greece to do it now.”
FT Alphaville:

The Oregon Office of Economic Analysis has ventured an update to Carmen Reinhart and Ken Rogoff’s ‘This Time it’s Different‘, the seminal work on financial crises of the past – and their related analysis on the aftermath of financial crises.

The OOEA* uses both updated and revised data and, mostly, confirm that while things have of course gotten worse, they’re still inside the historical norms. For example, equity price declines:
Update crisis duration - Oregon Office of Economic Analysis
Indeed, for most of the key measures used by Reinhart and Rogoff, the OOEA finds newer data only reconfirms the US is experiencing a “garden variety” of financial crisis, as the original works indicated.
The summary of the new data comes out like this:

Oregon Office of Economic Analysis - Reinhart/Rogoff update - summary
However… there’s one area in that list in which the current US appears to be significantly better than the crises past: unemployment.
While it looks terrible in the context of past US recessions…
Oregon Office of Economic Analysis - US unemployment compared to past US recessions

So far, at least, the US has done reasonably well in terms of unemployment, when compared to global precedents:

Oregon Office of Economic Analysis - historical comparison of recent US unemployment to global financial crisis

It probably won’t be much comfort to anyone in these economic times, but interesting, nonetheless.
Interesting comments, like:
In addition to governments messing with the definition of unemployment, US has less social support than other countries, so impact of unemployment is far greater. Limited time benefits being one example, and health insurance being tied to your job an even larger one, means losing your job can be catastrophic in a way that is inconceivable in Japan, Spain or Scandinavia. This will provide further amplification of the impact of recession on US consumers.

Diagram from Mike Konczal. Via Yglesias, who says "I’m with Woodford in the overlapping fiscal/monetary slice of the Venn diagram." I agree, but I'd add the perspective of Eggertsson/Krugman on debt and deleveraging.
Baddies from Planet Retard*

Mark Thoma:
The unemployment crisis needs to be attacked vigorously, and we need aggressive action from both monetary and fiscal policymakers. But neither the Fed nor Congress has the will to do more than half-hearted measures at this point, and even that might be too much for Congress.

I wish the people making these decisions had to face what households struggling to find a job endure daily -- the world policymakers see from their insulated shell is very different from the world of the unemployed. Maybe then they'd finally get it and, more importantly, do what needs to be done.

Jared Bernstein: Fed Does Twist

Brad DeLong: Good To See But 1/10 of What We Should Be Doing

Dean Baker: Why Do The Bankers Decide How Many People Will Be Unemployed?

Doug Henwood: Does Productivity = Unemployment?

Paul Krugman: New Developments in the Political Business Cycle
But now there’s a new wrinkle. As Stan Collender says, it’s hard to see the GOP letter threatening Ben Bernanke if he does anything to help the economy as anything but an attempt to invert the political business cycle, pressuring the central bank to ensure a weak economy in the year before the election.
Got to give the GOP points for innovation.
*quote I overheard from a teen upset with the incompetence and malfeasance he was witnessing.

Wednesday, September 21, 2011

I saw the movie Drive and really, really liked it. It had some graphic violence and was a little artsy, so people who don't like that stuff won't like the movie but it didn't bother me. It stars Ryan Gossling, Bryan Cranston, Carey Mulligan, Albert Brooks, Oscar Isaac and Ron Perlman.

It's an urban noir set in Los Angeles with an Eighties vibe and a good soundtrack. A few songs sounded Tangerine Dreamish. The opening has a great action sequence.

It was directed by the Danish filmaker Nicolas Winding Refn whose previous movies include Bronson and Valhalla Rising.
Money Shot

Neomonetarist Scott Sumner has a quote from An Outhouse at his blog:
It was Romer’s first meeting with the President-elect in November 2008. According to Ron Suskind’s book  “Confidence Men: Wall Street, Washington, and the Education of a President,”Obama had “a woman problem: too few of them in key jobs” and he was trying to bring in Christina Romer. And “It’s clear monetary policy has shot its wad” is what Obama said to her before even “hello.” Is that how you talk to a woman?
She then quotes the following passage from Suskind:
It was a strange break from decorum for a man who had done so outstandingly well with women voters. The two had never met before, and this made the salty, sexual language hard to read. Later it would seem a foreshadowing of something that came to irk many of the West Wing’s women: the president didn’t have particularly strong “women skills.” The guy’s-guy persona, which the message team would use to show Obama’s down-to-earth side, failed to account for at least one thing: What if you didn’t play basketball or golf? Still, for the moment, the comment didn’t faze Romer. She was curious to hear what he thought.
“What do you mean?” she asked.
Obama extended his hand, now ready to greet her. “I guess we need to focus on fiscal policy,” he said.
“No, you’re wrong,” Romer corrected him. “There’s quite a bit we can still do monetarily, even with the historically low interest rates."
I like Romer so this made me cringe. It's obviously unprofessional even if it is weirdly funny in a surreal way. But interesting that Obama already thought the Fed was "pushing on a string" back then. What sorts of conversations did he have with Bernanke?

I also wonder about the timing of the release of Suskind's book with its picture of the frat-house atmosphere of the White House with the historic repeal of Don't Ask Don't Tell which made the White House seem gay-friendly. Maybe they were cooridnated or maybe it was just a coincidence?
In response to the Fed's statement, Modeled Behavior tweeted
Now rates will finally be low enough to spur consumers into taking out 30 year loans to finance the construction of panic rooms
Central Banks Coordinate Expectations by Yglesias

Tuesday, September 20, 2011

Radiohead on hourlong Colbert Report
Stephen Colbert can’t be influenced by the agendas of politicians and public officials, but if you’re a popular rock group that doesn’t easily embrace television cameras he will gladly roll over for you. On Monday Comedy Central announced that it would expand “The Colbert Report” to an hourlong broadcast for the first time in that show’s history to present a special episode featuring Radiohead, the British rock quintet of “OK Computer” and “Kid A” fame, whose song “How to Disappear Completely” could sometimes be mistaken for their press strategy. (Perhaps in an effort to be more visible, the band will also appear on Saturday’s season premiere of “Saturday Night Live,” and will perform at Roseland Ballroom in Manhattan on Sept. 28 and 29.)
In a news release Comedy Central said that the one-hour “Colbert Report” special would be shown next Monday, Sept. 26, and would present the band in interviews and performances of their songs from their recent album, “The King of Limbs” (including an unreleased track called “The Daily Mail”), along with that program’s usual mix of topical comedy segments. Mr. Colbert, who isn’t afraid to flaunt his rock-music bona fides, has used his show to feature artists like the Decemberists, LCD Soundsystem and Jack White, who appeared in multiple “Colbert Report” segments over the summer. Mr. Colbert said in a statement, “I look forward to meeting the Radioheads and leveraging their anti-corporate indie cred to raise brand awareness for my sponsors.”

Monday, September 19, 2011

Paul Volcker's Recollection of the History of Inflation is a Bit Weak by Dean Baker

Former Federal Reserve Board Chairman Paul Volcker lectured readers on the dangers of inflation in a NYT column today. He warned that a little bit of inflation invariably grows to a lot of inflation, which then carries a huge cost to contain.
Actually this has not in general proven to be the case. The one time in the post-war period where inflation clearly became excessive in the United States was in the 70s. This was due to a number of extraordinary events, including large oil price increases associated with the formation of OPEC and the Iranian revolution, a huge wheat deal with the Soviet Union, and a mis-measurement of the rate of inflation that got directly translated directly into wages and other prices as a result of wide-spread indexing. 
Even in this case, the cost of bringing inflation down with the 1981-82 recession was minor compared to the costs that the country is now enduring as a result of the current prolonged downturn. It is hard to see how any careful analysis of risks and costs would support Mr. Volcker's warnings on inflation.
It is worth noting that the financial sector might view the equation differently. Its assets are directly devalued by even modest rises in the rate of inflation. For this reason, the financial industry tends to be strongly opposed to inflation even at the cost of high unemployment.