"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, October 06, 2012


The Silver Fox: Nate Silver has made a career out of predicting things better than other people. How? by Yglesias

Book review: ‘The Escape Artists’ by Noam Scheiber and ‘The New New Deal’ by Michael Grunwald by Simon Johnson

(via Thoma)
Raghuram G. Rajan hired by India's government
In August, Mr. Singh, who has frequently sought Mr. Rajan’s advice, called and asked him to take a leave from his job as a professor at the University of Chicago to return to India, where he was born, to help revive the country’s flagging economy. Within weeks, he was at work as the chief economic adviser in the Finance Ministry.... 
Mr. Rajan, 49, became famous in the economics profession for his prescience in warning about the growing risks in the financial system at a Federal Reserve conference in 2005, three years before the failure of Lehman Brothers. He argued that innovations and deregulation appeared to have made the global financial system riskier, rather than safer and more stable as many economists and top policy makers like Alan Greenspan then believed. 
The son of an Indian diplomat, Mr. Rajan grew up around the world and in New Delhi, earning degrees from prestigious Indian universities before studying economics at the Massachusetts Institute of Technology. His first big policy job came when he was appointed the chief economist of the International Monetary Fund. Since 2008, he has been an external adviser to Mr. Singh, who is his highest-placed champion in India and who also asked him to lead a committee to propose changes to the country’s financial system.

Wednesday, October 03, 2012

A monetary policy pop quiz by Noah Smith

Problem 1. People now expect near 2% inflation. Presumably they will keep expecting this until something happens to change their mind. What might happen, and how would it change their mind? 

Most likely, I think: the adult population keeps growing (as it will for the next 15 years with near 100% probability) and eventually the rising demand for housing causes rising rents and home prices and a boom in construction, as well as consumption via mortgage equity withdrawal, along with the associated multiplier effects. Eventually the associated increase in aggregate demand uses up all easily available labor and starts to bid up prices. People notice that the Fed is not raising rates despite an increase in the inflation rate. As more and more people realize that the Fed is not going to raise rates, they come to expect a higher inflation rate, and you get Friedman-Phelps-Lucas effects. So the inflation rate just keeps rising. Eventually people realize that the Fed is never, ever going to raise rates, and you get hyperinflation.

Another possibility: Profit margins are very high right now, on average. Maybe firms will start competing aggressively and prices will fall. And since there's high unemployment, once they compete away those profits, maybe they will start cutting wages. So you get deflation. This raises the real interest rate and makes investment less attractive, which reduces demand, which accelerates the deflation, so you get a deflationary spiral. Note however, that this deflationary spiral would happen no matter what the Fed does with interest rates. Also note that it seems intuitively kind of implausible that we could have a bubble in the value of money that never pops. So if I had to choose, I think that my first possibility is much more likely -- at least it's more likely to be the eventual endgame, although you could get some temporary deflation along the way.

Problem 2. Given the Fed's current asset base, the only way it could keep the interest rate at 50% is by paying 50% interest on reserves. That would effectively suck nearly all the money out of the economy, because banks would stop lending and start bidding aggressively for deposits. But it would all be funny money, because the Fed's net worth would go ever deeper into negative territory. (It's assets are mostly longer duration assets that would lose most of their value if the 50% interest rates were expected to persist.) It's hard to say what the endgame would be. Maybe extreme deflation and increasing use of alternative means of payment. Or maybe not, maybe people would lose confidence in money -- these credits the Fed would be making without anything to back them up -- and we would get inflation instead.
I am currently reading Kristen Grind's The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History.  Next in the queue are Nicholas Dunbar's
The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . and Are Ready to Do It Again.

The Lost Bank has some interesting anecdotes. One is that the head economist for the National Association of Realtors, David Lereah, earned the nickname Baghdad Dave, which refers to Iraq's Baghdad Bob. Also, there's a scene where a farsighted executive at WaMu predicts the housing bubble in a presentation given to WaMu employees at the 2003 "State of the Group" annual event. 
...Customers, unable to make much money on the stock market, would invest in homes instead. "The consumer," Longbrake told the group, "has found that small increases in housing prices, given the substantial leverage that is much greater than ever was possible in the stock market, can lead to large gains in home equity." At the same time, refinancing a mortgage would become easier for the customer, as would taking out a home equity line of credit.
"The bubble then build through a reinforcing cycle of rising home prices and rising consumer confidence. This leads to an increase in the demand for investor properties and second homes, which, in turn, places further upward pressure on home prices."
Second homes?

Tuesday, October 02, 2012

An Ounce of Prevention

Thoughts that occurred to me while reading Bernanke's recent speech.

Two thing. One: if interest rates at the zero bound are a bad thing, because for instance central banks in that position have to resort to unconventional monetary policy (see Japan and the U.S.) what can countries do to prevent the need to lower interest rates to the zero bound? Lower interest rates are designed to stimulate the economy. Are there other means of stimulating economy. See Michael Grunwald's the New New Deal. 

Two, if Rogoff and Reinhart are right and historically financial crises take a long time to recover from, should there be an emphasis on preventing them. What caused the recent financial crisis? Isn't it the case that it takes a long time to recover from a financial crises because of policy errors and Zombie Ideas like expansionary austerity?

Monday, October 01, 2012

demand management (monetary and fiscal policy)

Five Questions about the Federal Reserve and Monetary Policy by Bernanke

Ben Bernanke's Best Speech Yet, Promises Low Rates "For a Considerable Time After the Economy Strengthens" by Yglesias

What on Earth Is Stephen Roach Talking About? by Ygleisas

If QE Causes Commodity Price Inflation... by Tim Duy

Oceania, Eurasia and Eastasia

Euro Counterfactuals (Wonkish) by Krugman
Via The Irish Economy, a new paper (pdf) from the IMF looks at how, exactly, massive current imbalances emerged within Europe, with Germany running huge surpluses and the GIPSIs running huge deficits. 
The paper shows that there were indeed huge capital flows from the European core to the periphery, in Spain largely taking the form of lending to banks, presumably by other banks:

[chart]

The surprising result in the paper is that much of the rise in imbalances within the euro area involved trade with non-euro nations. Germany sharply increased exports to Asia and Eastern Europe, which had strong demand for German durable manufactures.  Meanwhile, southern Europe saw a sharp increase in imports from low-wage countries.
Emphasis added. So basically the U.S. dollar is undervalued relative to China which has a trade surplus. Germany in turn has a trade surplus with Asia (right?). Southern Europe increased its imports from low-wage countries (China?).

Is the Euro undervalued versus the dollar? Why is Germany and not the U.S. supplying Asia with durable manufactures?

Drama

Also Simon Johnson and Tim Duy have been playing up the budget troubles of Japan. Krugman and Yglesias  have been highlighting the problems with Europe and the Greeks and Spainairds revolt against austerity.
Attacks on 6 Banks Frustrate Customers

Sunday, September 30, 2012


Obamanomics: A Counterhistory by David Leonhardt

The Problem is a Collapsed Housing Bubble, Not a Financial Crisis #4306 by Dean Baker
However, contrary to what is widely asserted, for example by David Leonhardt in hiscolumn today, consumption remains high, not low. The saving rate averaged more than 8.0 percent of disposable income in the years prior to the rise of the stock bubble in the 90s. Currently, it is between 4 and 5 percent of disposable income. If anything, we should be asking why consumption is so high, not why it is low. 
It would be to absurd to expect bubble levels of consumption in the absence of the bubble. However this is what proponents of the financial crisis theory seem to be arguing. In short, the collapse of the bubble led to a gap of more than $1 trillion in lost demand due to the plunge in construction and the falloff in consumption. What if any part of this requires a story about the financial crisis?
This is a bit tricky for me. One way to think of the issue is to imagine an alternate timeline where there had not been a housing bubble.

Could there have been a bubble without the shenanigans in the financial industry?

NGDP (or short run versus long run)

The Short Run Is Short by Eli Duardo

The bottleneck by Ryan Avent

Oh NGDP, is there anything you can't do? by Angus

NGDP in the Long Run and Economic Plasticity by Karl Smith

The NGDP Dilemma Is a Good Dilemma by Yglesias

Economy, Heal Thyself by David Glasner