"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, November 19, 2011

Kenyan Socialism

My grand unified theory (GUT) of macroeconomics is hereby named Kenyan Socialism. It combines elements of Marx, Keynes, Fisher, Minsky, Hicks, Wicksell, Kindleberger, Bagehot, etc. Like its cousin Marxism, it attempts an accurate description of our macroeconomic situation. It describes how things work - what are the variables in the various equations - and what the problems are. By defining problems, one has entered the political realm for a problem entails a value judgement. The problem needs to be "fixed" so that a desirable end-state / trend or goal can be reached. Fixing a problem in the economy necessarily involves political analysis. What is the best way to get it done. Will there be compromise?

Regarding macro and its variables, KS is falsifible and subject to revision. It is supported by empirical studies and historical case studies.

Basically, we are in agreement with the Krugman/Thoma/DeLong axis.
As Krugman writes:
By contrast, the Krugman/Thoma/DeLong axis (I still like it!) is basically using standard macroeconomics, applied to a nonstandard situation. The Hicks/Keynes model — in which demand drives output in the short run, interest rates are determined by the tradeoff between liquidity and yield, and extreme negative shocks push you into a liquidity trap in which conventional monetary policy loses traction and deficits don’t crowd out private spending — has worked very well in this crisis, which is why we keep using it with a few twiddles (such as emphasizing the role of private debt).
The point is that at this point we’re not having a debate between opposing models; we’re having a conflict in which one side has a model that has been working, while the other side has prejudices, and makes stuff up to justify those prejudices.

The Immediate Problem or the Task At Hand

Kenyan Socialists (me) have entered into a popular front with market monetarists against the great Output Gap* menace. This is out of political necessity and may change once the gap is closed.

The reason Kenyan Socialists are against the output gap and wish to close it as soon as possible is that it entails high unemployment. This means a lot of misery right here, right now with all that follows from that,** and means that labor is in a weakened bargaining position. It means higher inequality levels in the future and a general "banana-republicization" of society as well as making the economy more instable and vulnerable to speculative bubbles. It's bad.

How did we arrive at this output gap and what can we do to fix it?

The output gap is a result of long-term trends and instabilities. It came to a head in 2008 when the government didn't bail out Lehman Brothers. There was a panic; the velocity of money slowed; and aggregate demand dropped. Many people were thrown out of work. Having learned from what happened during the Great Depression and other economic crises, the government stepped in substituted its aggregate demand for the demand that had vanished.

Here - on page 17 - Romer describes the dialogue she had with Geithner:
Secretary of the Treasury Timothy Geithner and I used to have a running back and forth on just this topic. He liked to say there is more fiscal stimulus in financial rescue than in the Recovery Act. By this he meant that healing the financial system could have a big impact on things like consumer spending and investment—the same things that fiscal stimulus was supposed to stimulate.

I used to come back with, there is more financial rescue in fiscal stimulus than in the Treasury’s Financial Stability Plan. By this I meant that by stopping the freefall in the economy, the Recovery Act greatly helped to heal the financial system. Turning the economy around helped to raise the value of banks’ capital and lower loan defaults—two things that greatly reduced the chance of further panics.

The truth is, both the Recovery Act and actions to stabilize the banks were important and helped to reinforce each other. But I think there is a good case to be made that the Recovery Act was even more important than fiscal stimulus usually is, because this time the financial system was in such a precarious state.
A KS would point out to Geithner that being overly solicitous of Wall Street is what got us into this mess. I would point out to the less focused OWS types that the economy needs banks and credit to run, at least it does as currently constituted.

In tandem with Bernanke they stabilized the economy and growth returned. Conservatives argued that all of the government action would cause inflation, but inflation never came. Conservatives said all of that government spending would invoke the bond vigilantes but they remained invisible and never arrived.

They stabilized the economy but did not create a "V" shaped recovery with catch up growth retuning us to trend level NGPD. Instead we are left with an "L" shaped recovery. Actually the Fed forecast that the output gap will be closed very gradually, but they have been wrong before. KS argues for government action to encourage a "V"-shaped recovery and close the gap more quickly seeing as the economy is vulnerable to shocks (see Europe for example) and long term unemployment damages the economy and society. And so we enter the realm of politics.

What is to be done?

Maybe it help to elucidate what Keynan Socialism - henceforth abbreviated as KS - is about by discussing what it is not.

KS does not embrace the theory of expansionary austerity. Expansionary  austerity as proposed by the David Cameron and others is the notion that a government can summon the confidence fairy*** by balancing its budget via fiscal austerity. According to this theory, a government that cuts spending will inspire confidence in the investing class and business community so that they will create jobs and grow the economy. Empirical evidence contradicts this theory which suggest its a manifestation of ideology.

Bernanke appears to be a devotee of Irving Fisher and sees the Fed's job as being to prevent a deflationary spiral to take hold and hence to be the Lender of Last Resort. The European Central Bank should follow his example.

But he does not see the urgency of encouraging catch up growth in contrast to his colleague Charlie Evans who wants the Fed to target 3 percent inflation and 7 percent unemployment. And so we get opportunistic disinflation with a weak labor market.  A weak labor market hurts demand and hurts workers' bargaining power. It makes it difficult for them to agitate for higher wages. Their compensation does not keep up with productivity growth, so where does the rest of the money go? To rents and capital or rather the top 1 percent.

So, to reiterate: the primary goal of KS is to manage the economy so that it grows at its trend rate NGDP. This means price stability and full employment. Conservatives will not argue outright against this goal. In fact a faction* of conservatives do support NGDP targeting and so support this goal. This heterodox group includes Ramesh Ponnuru of the National Review, Scott Summer, David Glaesner and other who are not wedded to the ideology of "hard" or "sound" money. They are not paranoid about inflation. This group may also include the economists at Goldman Sachs and JP Morgan who favor NGDP level targeting. I am not aware of their politics but would guess they are the socially liberal, fiscally conservative types. Since they are economists they may be less ideological they your average Wall Street denizen.

However some may argue for a lower NGDP trend rate like 3 percent whereas Kenyan Socialists would place it near 5 percent dependent on a number of economic variables like population growth rate and productivity. This could be argued once the gap is closed.

NGDP targeting by the Fed is not the only means to close the output gap. A more effective means would be Keynesian stimulus and fiscal policy. This would provide the most bang for the buck, but it is difficult to enact because of the dysfunctional politics of the United States. President Obama recently proposed a $450 jobs bill to lower unemployment and close the gap, but only the most ineffective parts of the plan were enacted into law by an obstructionist Republican Party who appears intent on wrecking so that their "anybody but Mitt" candidate can beat Obama. This is a policy of "destroy the town in order to save it."

KS believes fiscal action is the best way to close the output gap. In the previously linked speech, Romer discusses empirical studies which bear this theory out. Conservatives will favor tax cuts which are inefficient but may help with deleveraging.

Economic History

The 19th century was characterized by many booms and busts and great technological advancement. After World War I, the attempt by central banks to reinstate the gold standard helped start the Great Depression. The earlier countries went off the gold standard, the sooner they exited the Great Depression. Fiscal stimulus via rearmament for WWII was key in pulling countries out of the depression. Post-war inflation helped with deleveraging which led to the golden era of 1945-1973 where rising productivity combined with rising wages and income.

In around 1973, the U.S.'s competitors in Europe and Japan come online. Inflation from the Vietnam war deficits, oil shocks and easy money was brought to an end by Paul Volker. The 1980s until 2007 saw the Great Moderation, where monetary policy moderated booms and recessions. This came to an end in 2008.


Countercyclical polices


Bernanke and delfationary spiral

Latin American debt crices, 1997 East Asian Finanical crisi, Greece-Argentina, original sin and Italy, Dutch Tulip bubble, South Sea bubble,

[1st pass - to be continued and to be tightened and cleaned up - a work in progress]


** Fascism
*** coined by Krugman.

Friday, November 18, 2011

Deflation or Devaluation?

That's the choice. I'm rereading Liaquat Ahamed's Lords of Finance and he portray's the Bank of England's choice in the early 20s as one between deflation and devaluation. Going on the gold standard would be deflationary, while the other choice would be devaluing the currency.

So when people say they are against devaluation, they are saying in effect that they are for deflation.

The other option is fiscal stimulus and creating government debt by funding job programs. This will create demand. At the moment it's politically impossible.

Was the ARRA better than nothing? Was the ACA better than nothing?

Back in Sept. 2008 I thought this cartoon was clever how it melded news  from the hard sciences over apocalyptic concerns that the super collider would create tiny black holes with news from the economy that the swirling mortgage crisis had sucked down Lehman brothers.

Today you have the strange world of economics when you're near the zero bound / stuck in a liquidity trap and in the world of hard sciences:
The team which found that neutrinos may travel faster than light has carried out an improved version of their experiment - and confirmed the result.
In my previous post I quoted Glasner as writing:
I don’t think that his comment that I have been rehashing Krugman’s ideas without attribution is correct. What I am trying to do is to show how to apply the Fisher equation in a somewhat novel way and to come up with a result that fits in with Keynes. In the process, I think that I am shedding some light on both Fisher and Keynes. It is also not true that Krugman is the first one to understand the possibility of an equilibrium negative real rate. Pigou discussed the possibility in his review of the General Theory in 1936. But instead of introducing a positive rate of inflation to resolve the paradox, Pigou invented the Pigou effect as the way out.
I don't know enough about the Fisher equation or Pigou or negative real rates to know if any of this is true or not. Which makes it interesting to me. Glasner's original post was here.

Krugman blogged "I see that David Glasner is worried about what appears to be a need for negative real interest rates, and suggests that this may be close to concerns about the liquidity trap."

I suspect that a lot of time and effort has been wasted because smart commentators like Glasner “knew” that Keynesians were crude thinkers using mechanical approaches — I don’t know if that’s actually true for Glasner, but I’ve seen it a lot in others — leading them to spend several years laboriously arriving at the same conclusions people like me, Woodford, Eggertsson, Svensson etc. had already laid out in detail a decade ago.
OK, venting over. Now, what’s the proposal?
So Glasner could have just pointed to Krugman, etc. instead of writing his blog post? Glasner says no, that he is doing something new by pointing to the Fisher equation.

Glasner refers to the Fisher equation. Fisher is mostly known for his conception of a "deflationary spiral" which happened during the Great Depression. It is what Bernanke has been acting to avoid.

In his post on the Fisher equation, Glasner writes:
Although suggestions that weakness in the economy might cause the Fed to resume some form of monetary easing seem to have caused some recovery in inflation expectations, real yields continue to fall. With real yield on capital well into negative territory (the real yield on a constant maturity 5-year TIPS bond is now around -1%, an astonishing circumstance. With real yields that low, 2% expected inflation would almost certainly not be enough to trigger a significant increase in spending. To generate a rebound in spending sufficient to spark a recovery, 3 to 4% inflation (the average rate of inflation in the recovery following the 1981-82 recovery in the golden age of Reagan) is probably the absolute minimum required.
This is what Charlie Evan is saying. Would it be "Keynesian" to advocate getting inflation to 3 or 4 percent? Would this be done by the Fed or fiscal stimulus? I suspect it could be done with a combo.

In Christina Romer's paper on fiscal stimulus she says
When I was in the White House, I used to bristle when people would say I was a Keynesian economist. They acted as if I believed that fiscal stimulus mattered because of some theoretical book written in 1936, or because of what I was taught in graduate school. I used to say that I am not a Keynesian economist, I am an empirical economist. I believe what I do because of the empirical evidence.
Daniel Kuehn blogged
There are lots of people who get it who just have a problem with the whole Keynes packaging and perhaps some of the politics that go along with Keynesianism - many of the NGDP targeters are like this. But I read this post by Glasner, and I know he is worried about the same problem as I am, and that he has basically the same solution.
My all-encompassing theory is Kenyan Socialism, named in honor of our President.
James Pethokoukis at the American Entereprise Instiute's online magazine's* blog asks Romney adviser Glenn Hubbard about NGDP level targeting and it turns out he agrees with Doug Henwood.
It’s certainly something that economists have talked about for years. … Economists routinely look it. Having said that, I’m not sure the Fed would be driven to do much more than it’s doing right now. It already has an amazingly accommodative monetary policy and it’s hard to see how they could make it ever more accommodative. … The Fed is almost pushing on a string right now because the usual housing channel for refinancing is blocked. And on the business side, people are sitting on mountains of cash, but it’s not whether the 10-year yield is 1.9 percent or 2.3 percent that’s going to ignite U.S. investment. … What makes me nervous is anything that looks like temporary increases in inflation because our experience is that’s a genie that’s very hard to put back in the bottle. I would much rather see us do the restructuring in the economy that we need for conventional monetary policy to work, which would mean clearing up the policy uncertainty that is limiting the willingness of business to invest, and help facilitate the deleveraging on the household side. Part of the problem is that the Fed is trying to do the job of the government, too, because the government’s has been sitting on its hands.

Glenn Hubbard in July 2008:
The current policy stance of holding the federal funds rate at 2% will keep monetary stimulus in place. With inflationary expectations not declining, this stimulus will almost surely raise inflationary expectations as the economy improves. This consequence can be seen already in surging commodity prices and the weakness in the foreign-exchange value of the dollar.
It is worrisome that the Fed’s own 2008 projections have risen over the year both for headline inflation (by about 1.5 percentage points) and core inflation (by about 0.2 percentage points). Furthermore, the Fed’s projections of receding inflation in 2009 and 2010 coming true will almost surely require increases in the federal funds rate.
A continuation of a negative real federal funds rate and the increase in money growth accompanying it raises the risk of increasing inflationary expectations, a costly mistake to fix.
This is via David Glasner.  He responded to Kevin Donoghue in his comment section as follows:
Kevin, Yeah, I saw his blog. I thought it was kind of interesting. Even if he was a little annoyed with me, it’s still nice to be noticed. And I also saw your comment on Brad DeLong’s blog post about Krugman’s outburst. Thanks for your kind words. Actually, Peter K, who also commented on DeLong’s post, is probably right that the few blogs that I link to probably create a slightly misleading impression of where I am coming from. I don’t think that his comment that I have been rehashing Krugman’s ideas without attribution is correct. What I am trying to do is to show how to apply the Fisher equation in a somewhat novel way and to come up with a result that fits in with Keynes. In the process, I think that I am shedding some light on both Fisher and Keynes. It is also not true that Krugman is the first one to understand the possibility of an equilibrium negative real rate. Pigou discussed the possibility in his review of the General Theory in 1936. But instead of introducing a positive rate of inflation to resolve the paradox, Pigou invented the Pigou effect as the way out. I discussed this in two of my early posts “Krugman and Sumner on the Zero Interest Lower Bound: Some History of Thought” and “Krugman on Mr. Keynes and the Moderns.”
Well I was wrong. Fascinating stuff.
*The American online magazine contributing editors are Jonah Goldberg, Mark Perry, and Marc Thiessen.
What Do We Know About the Effects of Fiscal Policy? Separating Evidence from Ideology by Christina Romer

(via DeLong)

Obama and Zuccotti Park: What He Didn't Say by John Cassidy

(via Dean Baker)

Thursday, November 17, 2011

Well Richard Koo agrees with MMTer Dan Kervick that the Fed has "shot its wad" as the President of the United States was wont to say, but Koo has some idiosyncratic views as Krugman has pointed out.
...But even at the best of circumstances, those so-called non-traditional policies achieve very little. I mean, probably better than nothing, but just a little of positive, whereas having the correct fiscal policy can have a huge impact on economy in the current circumstances.  Because so many people are pinning their hope on the federal reserve, there's little discussion on what is the right fiscal policy and that I think is very unfortunate.
And the second part of the problem is that if central banks are viewed in such a way that these guys are going to pump money into the system so that something happens to the nominal GDP, that can cause people to worry that if they're gonna pump that much money into the system, the dollar may collapse. And that can cause another set of problems like foreign investors dumping U.S. treasuries or something because if they know that central bank has limited capacity but are forced to do something to get the nominal GDP going, people might assume that "Well then, the central banks might really do something crazy," and thats not good for the credibility of the dollar or the central bank.

Nick Rowe asks why isn't NGDP targeting a lefty thing?

Yglesias has been pushing it. MMTer Dan Kervick believes it's a ploy to let Obama off the hook. He calls it fadish. He just makes up stuff about QE1 and QE2 not working and then turns around and asserts that runaway inflation will hurt the vulnerable.

The Ur-troll of econoblogs is the one who goes on about inflation when we're facing deflation. My gas and rent is going up!!! The have to be brainless conservative dittoheads.

The Popular Front of NGDP targeting consists of "market monetarists" who don't believe in fiscal policy and Keynesians who do. The output gap is our fascist enemy.

Rightwingers want tax breaks to spur demand. Monetarists want cheaper credit distributed by the Federal Reserve to banks to lend out to businesses.

Leftwingers want the government to bypass banks and invest in infrastructure to create demand.

Or better yet, create a 21st century WPA to create jobs and add demand that way.

Tax breaks don't work well in my opinion and are too unequal in their impact on creating demand. Anything else will do. We need to close that output gap.

He just left his keys back that way.

(via Yglesias)
Less than Zero by Yglesias
Paul Krugman says he’s been a bit surprised about inflation dynamics during the Great Recession. Of course the people who thought a giant increase in the monetary base would automatically be inflationary have been proven wrong, but we haven’t seen the kind of “clockwise spiral” that would have pushed us below zero:
He attributes this to “[d]ownward nominal rigidity — the great difficulty of actually cutting wages and many prices.” I agree that this is an important factor. But I think an equally important role is being played by the Federal Reserve’s meandering behavior. As Krugman has shown elsewhere, monetary policy near the zero bound is all about expectations and credibility. What I think’s happened is that with Ben “Making Sure ‘It’ Doesn’t Happen Here” Bernanke at the helm, the Fed has successfully embedded the expectation of non-deflation. People (or at least the people who matter) know that the Fed will push the panic button and show Rooseveltian resolve to set things aright. But contrary to what I would have expected three years ago, he’s shown no inclination to reach into the Helicopter Ben toolkit to actively reflate a depressed economy that’s not teetering on the brink of a deflationary spiral. So we kind of bounce along, with no new disasters really striking after the terrible winter of 2008-2009 but no catchup and real recovery either.

Through the Zero Bound
(maybe this is the way to get back to my "real" timeline)

Wikipedia entry on the Fisher equation.

Irving, Maynard and Me (Wonkish) by Krugman

I know Krugman has discussed Fisher favorably before.

Why Hasn't the Fed Lowered the Rate It Pays on Reserves? by Mark Thoma

Ryan Avent tweets: "Maybe the Fed should open retail banking locations branded "The Discount Window", offering loans to individuals at negative interest rates."

Deflation and the Fisher Equation by William T. Gavin, Vice President and Economist at the St. Louis Fed (Oct. 2010)

[St. Louis Fed President] Bullard Warns Additional Stimulus Risks Emergence of 1970s-Style Inflation
If [Europe] blows up in a big disorderly way, which is what everybody is worried about, then that could come back to haunt the U.S.," he told CNBC. "If it just kind of tumbles along for a long period of time, which is the most likely outcome, then I am not sure you would get much feedback to the U.S.”
So Europe could blow up but the Fed shouldn't take out insurance? Makes no sense. Richmond Fed President Lacker also see risk of runaway inflation where none exists.

Republican candidate Herman Cain and President of Godfather's Pizza was on the Kansas City Fed's board of directors which explains a lot.

Why does Missouri get two Federal Reserve Banks? Because at the creation of the Fed, the Susan Collins / Olympia Snow holdout was from Missouri.

"You Say "Fischer Effect Under Delfationary Expectations," I Say "Liquidity Trap" by Daniel Kuehn
One thing I've been pondering more and more lately is "how long do you keep spending time discussing this with people who don't get it?". There are lots of people who get it who just have a problem with the whole Keynes packaging and perhaps some of the politics that go along with Keynesianism - many of the NGDP targeters are like this. But I read this post by Glasner, and I know he is worried about the same problem as I am, and that he has basically the same solution. But many people don't get it - do we still invest time in interacting with them, even if we're heading towards a double dip?? I think you still do.
Tony Crescenzi of PIMCO writes:

Irving Fisher developed a theory about the relationship between nominal and real (inflation-adjusted) interest rates determined by borrowers and lenders. When borrowers and lenders agree upon a nominal interest rate, they have an expectation of inflation but do not know what inflation will be realized over the term of their agreement. As inflation is assumed to be unknown, the nominal interest rate has therefore a component of an expected real interest rate and expected inflation rate. This became known as the “Fisher equation” that says when expectations of real rates and inflation change, nominal market and contractual rates change.
Recently, St. Louis Fed President Bullard used the Fisher equation to identify two combinations of nominal rates and inflation known as “steady states,” one of which occurs in the absence of any shocks, where nominal rates remain in a “steady state.” In cases where the inflation rate is either very low or negative, nominal short-term rates can move to an “unintended steady state.” Figure 1 from the St. Louis Fed shows these steady states occurring where the Fisher relationship crosses the line representing the Taylor rule.   
With the policy rates near zero percent in the developed world and inflation expectations now at around 3% (as measured by the five-year break-even rate on inflation-indexed bonds five years forward – a fancy way of looking past current inflation to where markets believe inflation expectations will be in five years looking five years out) global central bank rates (except for Japan) are currently in-between steady states as depicted in Figure 1. However, unlike what the Fisher equation would describe, even with firmer inflation expectations it has become less natural for nominal policy rates to adjust higher. When the sovereign debt crisis intensified, the construct of the policy rate became further embedded into the real interest rate demanded on government bonds. Since the debt crisis enforces severe austerity onto economies, a risk of deflation remains high and could increase expectations of higher future real borrowing costs. According to the Fisher theory, the borrower and lender would have to agree to a new nominal rate that could be significantly higher. With much higher debt levels and lower growth, higher nominal rates may carry greater risk of insolvency and cause financial instability.
Izabella Kaminska at FT Alphaville on September 14:
Why cutting IOER Could Be Suicidal

As we’ve noted, the introduction of the FDIC fee in April eliminated a very well exploited arbitrage for banks, which saw them borrowing cheaper than 25bps (the IOER rate) from Agencies, who did not have access to IOER, and parking the cash at 25bps at the Fed. The difference was a risk-free profit, and helped to keep the Fed funds in and around 25bps. The FDIC fee ate into those profits, however, discouraging banks from conducting the trade — a fact which immediately put negative pressure on repo rates.

The FDIC fee, however, doesn’t apply to foreign banks, which means they are the main ones left exploiting the IOER arbitrage. Cut the IOER, and that kills that trade, says RBC:
To think of it another way, it would introduce a cost on money.

Which of course is possibly what the Fed wants to do to encourage the money to flow into the real economy — but it also runs the risk of kicking off a deflationary spiral that will be impossible to stop, especially if market expectations catch up with Fed thinking as regards deflation risks.

As Lars Svensson, deputy governor of Sweden’s Riksbank,  noted in a paper in December 2003:

Nominal interest rates cannot fall below zero, since potential lenders would then hold cash rather than lend at negative interest rates. This is the socalled “zero lower bound for interest rates.”
The problem is that the economy is then satiated with liquidity and the private sector is effectively indifferent between holding zero-interest-rate Treasury bills and money.

In other words, money loses the unique characteristic that makes it the optimum liquid instrument for exchange. It loses velocity and instead becomes a store of value.

People don’t differentiate between it and zero-interest-rate Treasury bills.

Vaults of the stuff would accumulate, leading to legislation possibility prohibiting stockpiling or a ban on reserve convertibility into banknotes (a ban which never happened during the Great Depression, and which 
some say made the crisis worse).
"Sterilization" is basically the Fed keeping the money supply or velocity of money unchanged even though it's is giving money to the banks and providing liquidity it is cancelling it out at the government level. The private market becomes more liquid, the government less so as it "retires" debt so the overall liquidity level of the economy remains unchanged?
The Very Brave BoE by Krugman

Mervyn King, Charlie Evans, Christina Romer, Elizabeth Warren, etc.

Old men forget; yet all shall be forgot,
But he'll remember with advantages
What feats he did that day. Then shall our names,
Familiar in his mouth as household words,
Harry the King, Bedford, and Exeter,
Warwick and Talbot, Salisbury and Gloucester,
Be in their flowing cups freshly rememb'red.
This story shall the good man teach his son;
And Crispin Crispian shall ne'er go by,
From this day to the ending of the world,
But we in it shall be remembered-
We few, we happy few, we band of brothers;
For he to-day that sheds his blood with me
Shall be my brother; be he ne'er so vile,
This day shall gentle his condition:
And gentlemen in England now a-bed
Shall think themselves accursed they were not here,
And hold their manhoods cheap whiles any speaks
That fought with us upon Saint Crispin's day."

Wednesday, November 16, 2011

No, Paul, No! You Don't Slaughter the Returning Prodigal Son, You Slaughter the Fatted Calf!! by DeLong
Fleshing Out the Corporate Person by Doug Henwood
There was a witticism circulating—it embarrasses me a bit to say—on Facebook recently that went something like: “I’ll believe that coporations are people when Texas executes one.” Though I’m no fan of capital punishment, but that was the best argument in favor of corporate personhood I’ve ever heard. Because while corporations have the rights of actual living people—more, maybe—they have none of the responsibilities. Corporations routinely get away with murder. Is the problem that they’re legally persons, or that they’re not consistently treated as such?
I’m getting similar feelings now that corporate personhood has exploded onto the scene—first in the wake of the Citizens United decision, and more recently with OWS. There’s a fixation on the legal status of the corporation at the expense of some other, more important things.
As much as I am disappointed by Obama - I wish he had somehow got the public option; I wish he had focused more on the Fed and filled vacancies; I wish he hadn't smoked the green shoots - I tend to give him the benefit of the doubt. I think a lot of the bipartisan stuff is for electoral purposes. He did come on the scene with the "red state blue state speech" in 2004. One of my favorite moments was during his State of the Union Speech when he looked at the Supreme Court judges sitting in front of him and criticized the Citizens United decision.

Still I'm disappointed when I learn that the Obama administration is against a financial transaction tax. That hurts. But then apparently Obama had been in favor of nationalizing Citigroup.
Neville Chamberlain as Superior to David Cameron (or Barack Obama): Macroeconomic Policy in a Depression Blogging by DeLong

Linking to a Nick Crafts piece in the Financial Times:
The key lesson is that there is scope for monetary policy to stimulate the economy, even though nominal interest rates cannot be cut because they are already at zero. This means that there is an alternative to fiscal stimulus if the economy falls back into recession in 2012. Implementing a “cheap money policy” would, however, mean abandoning the current inflation targeting regime. Today’s equivalent of 1930s policy would imply formally adopting a price level target. The target could be to increase the price level by 15 per cent over four years and to convince the private sector that this will happen while interest rates are held down.
Although inflation has been high recently, the monetary policy committee stresses that it will soon return to and probably undershoot the 2 per cent target, implying that real interest rates remain higher than is desirable at present. The policy would not work if people thought that it would be reversed at the first sign of sustained recovery; the key to success in the 1930s was embedding the belief that prices would rise. The MPC would therefore need a new target that everyone expected to be achieved.
If we recognise that a price-level target worked in the 1930s, could it be equally successful today?
Circumstances may be less favourable now. Politicians would have to choose macroeconomic policy reform, whereas it was forced upon them in the 1930s. Consumers are burdened by debt and struggling to cope with falls in real disposable income, which is a notable contrast with the early 1930s. The eurozone crisis may deliver a bigger adverse shock than anything Britain faced after 1931. The output gap, whose magnitude is highly uncertain, may be much smaller than it was then, so that there is less scope for expansionary policies to raise real output. The chances of success would be greater if planning regulations were relaxed and we could once again envisage building 300,000 houses in a year, but that is politically too difficult...
Emphasis added. Why not get out in front?
Get Ready for A Bigger "Global Savings Glut" by Yglesias

Decline and Fall:
Ed Harrison has a good essay on how the world euro ends if the ECB doesn’t step in on a massive scale. I don’t agree with everything — I think he’s wrong to attribute the commodity spike of 2010-2011 to monetary policy — but he’s basically right about how the thing unravels. I might place greater emphasis on the immediate channel through which falling sovereign bond prices force bank deleveraging, but we’re picking nits here.
And this is totally right:
If the ECB writes the check, the economic and market outcomes are vastly different than if they do not. Your personal outlook as an investor, business person or worker will change dramatically for decades to come based upon this one policy choice and how well-prepared for it you are.
Crunch time. If prejudice and false notions of prudence prevail, the world is about to take a major change for the worse.

Larry and Paul and Dave and Ian
Oh, one thing about Felix’s commentary: he describes me as always pessimistic. But my pessimism has been selective; I’ve been pessimistic about unemployment and growth, but optimistic about interest rates and inflation. So it’s not just about crying doom, doom. I think that counts for something — especially since I’ve been right …
Stone Roses reform.

Tuesday, November 15, 2011

Dedicated to Joe Paterno and the hypocritically corrupt institutions of the Penn State Nittany Lions Football program and the Catholic Church.

Listen to Charlie Evans by Yglesias
How I Stopped Worrying and Learned to Love the OWS Protests by Matt Taibbi
Much more than a movement against big banks, they're a rejection of what our society has become.
That's what I was thinking during the first few weeks of the protests. But I'm beginning to see another angle. Occupy Wall Street was always about something much bigger than a movement against big banks and modern finance. It's about providing a forum for people to show how tired they are not just of Wall Street, but everything. This is a visceral, impassioned, deep-seated rejection of the entire direction of our society, a refusal to take even one more step forward into the shallow commercial abyss of phoniness, short-term calculation, withered idealism and intellectual bankruptcy that American mass society has become. If there is such a thing as going on strike from one's own culture, this is it. And by being so broad in scope and so elemental in its motivation, it's flown over the heads of many on both the right and the left.
The right-wing media wasted no time in cannon-blasting the movement with its usual idiotic clich├ęs, casting Occupy Wall Street as a bunch of dirty hippies who should get a job and stop chewing up Mike Bloomberg's police overtime budget with their urban sleepovers. Just like they did a half-century ago, when the debate over the Vietnam War somehow stopped being about why we were brutally murdering millions of innocent Indochinese civilians and instead became a referendum on bralessness and long hair and flower-child rhetoric, the depraved flacks of the right-wing media have breezily blown off a generation of fraud and corruption and market-perverting bailouts, making the whole debate about the protesters themselves – their hygiene, their "envy" of the rich, their "hypocrisy."
The protesters, chirped Supreme Reichskank Ann Coulter, needed three things: "showers, jobs and a point." Her colleague Charles Krauthammer went so far as to label the protesters hypocrites for having iPhones. OWS, he said, is "Starbucks-sipping, Levi's-clad, iPhone-clutching protesters [denouncing] corporate America even as they weep for Steve Jobs, corporate titan, billionaire eight times over." Apparently, because Goldman and Citibank are corporations, no protester can ever consume a corporate product – not jeans, not cellphones and definitely not coffee – if he also wants to complain about tax money going to pay off some billionaire banker's bets against his own crappy mortgages.

Italy's NGDP Problem by Yglesias
This is a long-winded way of saying that while there’s more to Italy’s budget situation than the ECB’s tight money policies, the ECB’s tight money policies are also very relevant. It’s extremely strange for a country forecast to run a primary surplus to be facing a sovereign debt crisis.
Protesters Vow to Retake Emptied Park
The Cold War is Over.

The Arab Spring led to the American Autumn.

The Arab League has suspended Syria's membership.

South Korea
GDP(PPP)    $1.556 trillion
Per capita  $31,753
GDP (PPP) $810.5 billion
Per capita $31,776
GDP (PPP) $273.967 billion  
Per capita $3,104
Maybe the Vietnamese should have cut a deal with the U.S. Empire.

India's State Roads Become a Protest Tool

In the last Republican debate, centrist Huntsman and looney libertarian Ron Paul both agreed with Obama that waterboarding* is torture, illegal, un-American and wrong. Torture-victim John McCain tweeted disappointment with the other "hopefuls."

That sick fuck Mormon wouldn't answer one way or the other at the debate but his official position is that it is not torture. He should be asked to undergo a session to prove it's not torture.

The token candidates Bachmann and Cain were enthusiastically pro-torture.

Conservatives for NGDP targeting by David Beckworth

*saw a preview for a Denzel Washington-Ryan Reynolds action flick that features waterboarding.

Occupy The Bundesbank by Yglesias

News Analysis: Lending a Hand to Banks, but Not to Nations by Jack Ewing

Informative piece on the ECB.
Correction: November 15, 2011

An earlier version of this article mischaracterized the practices of the United States Federal Reserve.  It does not buy government bonds directly from the United States Treasury; it does so on the open market.
As a central bank, the E.C.B. could theoretically use its ability to print money to buy huge amounts of debt from Italy and other countries. That would drive down their borrowing costs and ensure that they could continue to service their debts — that they would remain liquid, in other words.
The central bank’s charter does not allow it to buy bonds directly from national treasuries. And yet, the central bank can and does do essentially the same thing, by buying government bonds on the open market.
Since last year, the bank has spent 187 billion euros intervening in bond markets. But the relatively modest sums, less than 10 percent of the central bank’s total balance sheet, have not been enough to prevent yields on Italian bonds from rising.
[Except that after breaching 7 percent last week, the Italian 10-year did head back down because of the E.C.B. I assume. It might have been reported, I can't remember. But it's back up even after Berlosconi was replaced with a technocrat.)
If the interest rates that Italy must pay to borrow remain at their current levels, the government could eventually go bankrupt.
The only limit to the central bank’s ability to create money is a psychological one — the fear of setting off too much inflation. Mainstream economists, though, do not see any risk of significant inflation under current circumstances. The euro area is headed for recession, unemployment is rising and factories are not producing as much as they could. That is why economists tend to encourage the bank to put more money into circulation.
Seems to me that that the ECB could be the lender of last resort by buying up Italian bonds.

Monday, November 14, 2011

David Wessel tweets:
White House eyes ex-Bush Tsy official Jay Powell for one Fed vacancy, Harvard's Jeremy Stein for another
Finally. Although Powell is a Republican... This is not the change I was hoping for seeing as Republicans are trying to destroy the town in order to save it, metaphorically speaking. They want to make Obama a one term President by blocking any legislation or appointments which might help fix the economy.

Maybe Powell is a closet NGDP targeting supporter...

In August they floated Stein and Richard Clarinda of PIMCO. I assume Senator Dick Shelby didn't go for Clarinda.
Yes, Europe Needs a Central Bank. Why Do You Ask? by DeLong
Eurocrisis: Financial-Prudence-Is-Contractionary Watch by DeLong

Doug Henwood:
I was a Teenage-Reactionary
The moment I got to college, I joined Yale's Party of the Right. The POR was founded by Chairman Bill himself, along with a few others, which gave it lots of cachet. Buckley, like Reagan after him, was able to finesse some of the tensions in conservative thought and politics — the traditionalist vs. libertarian schism. Unlike the European Catholic right, which hated the market's destabilizing, anarchic, dynamism, Buckley loved capitalism unreservedly and yet embraced Catholic social disciplines. After 25 years of study, I still haven't figured out how right-wingers can tout Trad Vals at the same they tout the market; capitalism destroys tradition and recognizes only monetary values.
There does seem to be a contradiction, but if you think of wealth as "divine right" or the rentier class as the new aristocracy it kind of makes sense.
With any right-wing movement, the Nazi Question is never far from the surface. Publicly, most of U.S. conservatism, given its market-libertarian bent, is anti-Nazi, because fascism is that worst of all things, statist. It's also suspiciously European; though the POR, like most U.S. right-wing formations, was full of Anglophiles, the Continent is thought to be deeply "unsound" (a favorite POR word, as was "sound"). Privately, though, many right-wingers (non-Jewish right-wingers, of course) are titillated by Nazis....
"Sound" as in "sound money"?
Thanks to one of these maneuvers, I was elected secretary of the Political Union in the spring of 1971 for service in the fall. That spring, the Union tried to give an award to Secretary of State William Rogers, but when Rogers came to campus to pick it up, protesters were so thick he quickly retreated to Washington. That fall, the new group of officers inherited the privilege of delivering Rogers' award, so we took the train to DC to give it to him. The right-wing contingent — there were a couple of liberals and one George Bush Republican (he was from Bush's district in Houston, and urged us all to watch this guy) — complained about having to take the "socialist" railroad. Rogers fed us lunch in his personal dining room, showed us around a bit.
I've been watching AMC's Hell on Wheels which is about the building of the transcontinental railroad. A crony capitalist is driving "progress." Better then expected.

The Lady opens December 2nd in the U.S. Michelle Yeoh is the best. I want to see Melancholia* because two of my other favorites, Charlotte Rampling and John Hurt, are in it. It also has Charlotte Gainsbourg whose father was Serge Gainsbourg.

* The film dramatizes the fact that depressed people react better under crisis circumstances, like the end of the world,** because they are calmer since they have less to lose.
** Two signs of the apocalypse: gladitorial Ultimate Fighting is mainstreaming as it was on Fox TV this past Saturday. The new Showtime show Dave's Old Porn wherein comedian Dave Attell watches porno from the classical era of the 1970s and 80s and discusses it with guests as they did on Mystery Science Theater 3000 or DVD movie extras.
Eurozone slo-mo break-up
(or when push comes to shove)

Will the European Central Bank transform into the lender of last resort and backstop Italy to stop the crisis? This seems to me the only way it ends without more economic growth. What I see as happening is that Italy's new technocratic government will enact austerity measures that will slow growth, worsen Italy's budget picture and move Italy closer to default. They will not bring down rates. Lower rates would ameliorate the situation but that won't happen unless the ECB backstops Italy. But the ECB says that's not in its job-description. Will it do it when Greece defaults?

What happens when Greece defaults? Is that when push comes to shove and the ECB announces it will backstop Italy or does it continue to buy Italian bonds on the secondary market? Would simply buying bonds be enough to help Italy finance its debt?

What would help the situation would be economic growth. The ECB lowered its rate by .25 percent but that's not enough.
Greece, Italy, and financial stability by James Hamilton
A significant economic contraction in Europe will reduce demand for U.S. exports. But my bigger concern is with international financial linkages. Which financial institutions have made loans or entered into derivatives with exposure to these troubled debts? A recent assessment by the Congressional Research Service estimated that U.S. banks have $641 billion in loan exposure to Portugal, Ireland, Italy, Greece and Spain. But French and German banks themselves have considerable debt to those same countries, and U.S. banks have another $1.2 trillion in loan exposure to German and French banks.
And this is the heart of the problem. Who takes the losses, and if they fall, who do they then bring down in turn? If you're somebody with funds to lend and don't know the answer, in response to these fears what you do is cut back all kinds of lending. If that sounds familiar, it should, because it's exactly this kind of ricocheting financial uncertainty that brought down the world economy in the fall of 2008.
One key indicator to watch for whether we're about to see a replay of those dynamics is the TED spread, which measures the gap between the rate at which banks can borrow Eurodollars* from each other and the U.S. T-bill rate. This has been edging up, but is nowhere near signaling a crisis yet.
Ted spread

*Note: Wikipedia article on Eurodollar:
Eurodollars are time deposits denominated in U.S. dollars at banks outside the United States, and thus are not under the jurisdiction of the Federal Reserve. Consequently, such deposits are subject to much less regulation than similar deposits within the U.S., allowing for higher margins. The term was originally coined for U.S. dollars in European banks, but it expanded over the years to its present definition: a U.S. dollar-denominated deposit in Tokyo or Beijing would be likewise deemed a Eurodollar deposit. There is no connection with the euro currency or the euro zone.
Get Ready For A Bigger ‘Global Savings Glut’ by Yglesias
Remember the “global savings glut” of the mid-aughts? This was Ben Bernanke’s explanation for the large U.S. current account deficit as of 2005. It’s also an important part of the backdrop for the housing boom and the financial crisis. What happened is that in the late-1990s, many East Asian countries suffered from a classic financial panic. The international investment community, once bullish on places like Thailand and South Korea, suddenly turned pessimistic. Currencies collapsed, and borrowers were left awash in debt. The IMF stepped in to prevent the global financial system from falling apart, but in exchange for liquidity assistance, it imposed tough austerity conditions on the states in need of rescue.
The imposition of austerity is in part supposed to avoid moral hazard problems. And in the case of Asia, it worked. Arguably it worked a bit too well. The entire region became obsessed with amassing foreign exchange reserves to ensure that it would never again need to go hat in hand to the IMF. That created an unusually large level of global demand for AAA-rated dollar-denominated financial assets which helped kick off all manner of events in the American economy.
The IMF qua IMF seems to have decided that this was a mistake, and under Dominique Strauss-Kahn and now Christine Lagarde has largely been pushing a non-austere agenda. But Angela Merkel, European Commissioner Olli Rehn, and the European Central Bank seem to be re-inventing the late-’90s IMF prescription for economic recovery. They’re afraid of creating a situation in which poor economic management isn’t adequately punished, so they’re determined to make sure that troubled European states enact unpopular austerity packages in order to get help even if they need to remove democratically elected governments from office to get the job done. Whatever else this does, it should certainly succeed in persuading European governments that stockpiling foreign exchange isn’t just for Asians anymore. If the world succeeds in coming out through the other side of this crisis, you should expect to see even more countries joining the perpetual surplus brigades leading to even more demand for safe dollar denominated financial assets. That, in turn, means either big U.S. budget deficits or else some bold new innovations in financial engineering to meet the demand.