Audio of Doug Henwood on LIBOR rate fixing

The Common People

In Latest Data on Economy, Experts See Signs of Pickup by Annie Lowrey

Very Bakeresque contrarian take on the direction of the economy by Ezra Klein's wife. Also she's reporting in essence what Jared Bernstein has been saying.

Birthday Boasts by Dean Baker

The Washington Post Throws a Barrage of Non Sequiturs at Readers in Fed Editorial by Dean Baker

As a practical matter, investment in equipment and software is already pretty much back to its pre-recession level measured as share of GDP. Given the large amounts of excess capacity in many sectors this is a very strong pace of investment. If surveys can be trusted, the National Federation of Independent Businesses tells us that their members see a lack of demand as the major factor restraining hiring and investment, not uncertainty about entitlement programs. 

In short, the Post doesn't seem to have any obvious source of demand to show Mr. Arithmetic that would replace whatever demand the Fed might be able to stimulate. Many economists would point to the last part of the equation, X-M, as the way to boost the economy. This could be helped by additional quantitative easing from the Fed, since that would put downward pressure on the dollar. 

In a system of floating exchange rates, the way in which countries with large trade deficits like the United States are supposed to see their deficits move toward balance is to have their currencies fall in value. The Fed could play a large role in this process. If the dollar fell enough to bring the trade deficit into balance, it could generate close to 5 million new jobs in manufacturing. That would be a solid boost to the economy and to middle class living standards.

My uzi weigh a ton son carry it

Yellow Plenty

I'm reading Krugman's The Return of Depression Economics and he has an interesting hypothesis about the collapse of the Soviet Empire. He believes it might have been partly caused by the Soviets being demoralized by the success of capitalist development in Asia. Specifically, Japan from 1953-1973 developed at warp speed going from a largely agricultural economy to an economic powerhouse cranking out steel, autos and consumer electronics. And now robots. I wonder how they managed their monetary policy.

Don't Mess with Walmart

Janet Maslin reviews Kurt Andersen's "True Believers."

What would a young left-wing radical from the 1960s think of the 21st century? Kurt Andersen poses that question in “True Believers,” his fact-packed new book about the differences between the eras. In his opinion, a time-traveling radical might think the revolution had succeeded: no more draft, ecology taken seriously, Communist China on the rise, women in the work force, old guys with marijuana listening to rock music in sneakers and jeans. And instead of scarcity, too much information at any hour of night or day.

By coincidence I saw Oliver Stone's Savages (see above) and one of the young protaganists, Ben, seemed like a 60s throwback, or rather an example of how the 1960s ethos lives on to this day. From A.O. Scott's review of the movie:

Ben (Aaron Johnson) and Chon (Taylor Kitsch), best buds who grow the best buds on the planet, never think twice about sampling their own wares. Nor does O, the movie’s narrator and the hypotenuse of a happily triangular domestic ménage. Played with radiant vagueness by Blake Lively, O explains a lot to us, about her own household and the world beyond it. Her real name is Ophelia, and the nickname suggests, among other things, a certain emptiness. But Mr. Stone and Mr. Winslow (who collaborated on the script, along with Shane Salerno) don’t quite make her into a caricature of vacuous rich-girl blonditude. Instead they allow O to pursue and to represent a version of the American dream that is open to reverence as well as ridicule. She has everything she wants, and why shouldn’t she? 

Ben and Chon are the equal and opposite loves of her life, while she is, in her own words, “the only thing they have in common.” Chon is a combat veteran, whose tours of duty in Iraq and Afghanistan have left him cynical and suspicious, as well as tactically adept when it comes to dealing with trouble. Ben, a Berkeley graduate, is sensitive and soulful, the poetic yang to Chon’s warrior yin. Together they satisfy O and run a lucrative business, which Ben enhances by “going all Bono” and putting some of the profits to global do-gooder use.

The two reminded me of the Stone's two contrasting sergeants in Platoon played by Willem Defoe and Tom Berenger. The movie is sort of an answer to Maslin's question. The time-traveling 60s radical would find a thriving weed industry (demand is high). But sixties radicals believed small is beautiful and the 21st century witnessed the rise of Walmart and the big box store rather than the flourishing of small anarchist co-ops. The plot of the movie involves a Mexican drug cartel (Walmart) moving north of the border and attempting to acquire Ben and Chon's boutique operation. As their paid-off D.E.A. agent tells them "You don't mess with Walmart."

Why is the cartel moving north? The pie is smaller because of the recession (i.e. Fed policy) and the screenplay correctly predicts PRI has taken back over from PAN in Mexico and the PRI favors a different cartel, pushing the PAN cartel north in reaction.

Fed Fail Part XXIV

Fed Harms Itself by Missing Goals by Betsey Stevenson and Justin Wolfers

STEVENSON AND WOLFERS ON HOW NOT TO BUILD CREDIBILITY by DeLong

Explaining the Federal Reserve's Complacency by Yglesias

Betsey Stevenson and Justin Wolfers note that if the Federal Reserve didn't care about unemployment at all and merely tried to hit a two percent inflation target that would imply that we need monetary easing. So why doesn't the Fed ease? They say that failing to hit either inflation or job-creation targets undermines credibility: 

There are real costs to the Fed’s failures. Millions remain unemployed in the service of keeping inflation below its target level. We risk the possibility they may not work again as their skills atrophy and they lose hope. The Fed’s confused communications have undermined its own effectiveness and harmed its institutional prestige.

In the long run, a Fed whose word we don’t believe, and whose principles it views as optional, is a Fed that will be less able to influence the expectations of consumers and investors, rendering it less effective at pulling us out of the next economic decline.

The costs to workers and to the real economy are a quite serious matter. But as for the Fed's reputation, I'm much less sure. It seems sort of odd to think that the Fed is persistently missing its inflation target on the downside while also leaving millions to languish unemployed. The parsimonious explanation is that regardless of stated objectives the Fed is in fact trying to target something like the current inflation trajectory. You could characterize it as a policy of "inflation that's as low as possible without pushing the economy into a new recession."

The technical term is "opportunistic disinflation." When recession hits, you try to bring back growth. But you also seize advantage of the slack in the economy to push the trend level of inflation down, rather than seeking a rapid return to full employment conditions. It's morally wrong, but very consistent with the value system of modern central bankers. Recall that Jean-Claude Trichet proclaimed his disastrous turn helming the European Central Bank to be a smashing success because inflation was lower than it had ever been under the Bundesbank. By the same token, Ben Bernanke has brought us the lowest inflation of any Federal Reserve Chairman of the postwar period. You may call it prolonged mass unemployment, but he may see it as a huge success.

With Johnny Depp’s Help, Woody Guthrie Novel to Arrive in 2013

This Land Was His Land: Woody Guthrie’s Dust Bowl Novel By Douglas Brinkley and Johnny Depp

Price Data Suggest Specter of Deflation in China

True Blood serves up crazy in a pair of He-Man Footie Pajamas by Meredith Woerner

A Song of Ice and Ire

A Bruised Iceland Heals Amid Europe’s Malaise by Sarah Lyall

But during the crisis, the country did many things different from its European counterparts. It let its three largest banks fail, instead of bailing them out. It ensured that domestic depositors got their money back and gave debt relief to struggling homeowners and to businesses facing bankruptcy. 

“Taking down a company with positive cash flow but negative equity would in the given circumstances have a domino effect, causing otherwise sound companies to collapse,” said Thorolfur Matthiasson, an economics professor at the University of Iceland. “Forgiving debt under those circumstances can be profitable for the financial institutions and help the economy and reduce unemployment as well.” 

Iceland also had some advantages when it entered the crisis: relatively few government debts, a strong social safety net and a fluctuating currency whose rapid devaluation in 2008 caused pain for consumers but helped buoy the all-important export market.

Iceland's unemployment rate is at 6 percent while Ireland's is at 15 percent.  Australia has done well also.

What is a bank loan? by Steve Randy Waldman

Gas and Housing

Prices: You've Got a Friend by Jared Bernstein

No mention of housing bubble by Samuelson.

Robert Samuelson Blames the 60s Again by Dean Baker