"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 20, 2012

Ever Bipartisan, Bloomberg Jabs Both Candidates
I am reading Sheil Bair's new book. She criticizes the deregulatory ideology that preceded the housing bubble.

She names Alan Greenspan as responsible. Also she names Republican John Dugan who was on the FDIC board and the Fed's Susan Bies as supporting Basel II which lowered capital requirements and made banks more vulnerable. The Europeans (the German and French) were for Basel II also.

As was New York City Mayor Bloomberg and Senator Chuck Schumer. They commissioned a study in January 2007 which surveyed financial CEOs who all said they wanted Basel II.

In 2004, the SEC had allowed investment banks to use Basel II easy capital standards which set the stage for the financial crisis.

I'm only a little of the way into the book. Has Bloomberg admitted his error?

demand management


What Dean Baker and Neil Irwin were discussing. Rogoff and Reinhart's "This Time It's Different" is often used by the usual suspect Centrists as an excuse to be fatalistic and say nothing can be done. Which is wrong. A bigger stimulus, a back-up Plan B stimulus and more unconventional monetary policy would have helped. If we had had no stimulus and the Fed has been even more complacent, things would have been worse.

What Krugman Said, With a Not So Small Addendum by Dean Baker
Anyhow, that is the quick story on the recession. My difference with Krugman is that it is the story of a collapsed bubble, not a financial crisis. (I recall in 2009 hearing folks like Stiglitz praise the well-regulated Spanish financial system and how this had allowed Spain to avoid a financial crisis. Well, maybe that wasn't quite right.) Furthermore, deleveraging will not get us back to full employment. We will need more fiscal stimulus or a lower dollar. Alternatively, we can go the German route of using work sharing to sustain full employment even in an economy that is operating below its potential. 
Demand management in economics 
In economicsdemand management is the art or science of controlling economic demand to avoid a recession. In natural resources management and environmental policy more generally, it refers to policies to control consumer demand for environmentally sensitive or harmful goods such as water and energy. Within manufacturing firms the term is used to describe the activities of demand forecasting, planning, and order fulfillment. 
In economics the term is also used to refer to management of the distribution of, and access to goods and services on the basis of needs. An example is social security and welfare services. Rather than increasing budgets for these things, governments may develop policies that allocate existing resources according to a hierarchy of needs. 
It is inspired by Keynesian macroeconomics, though today elements of it are part of the economic mainstream. 
The underlying idea is for the government to use tools like interest ratestaxation, and public expenditure to change key economic decisions like consumptioninvestment, the balance of trade, and public sector borrowing resulting in an 'evening out' of the business cycle. 
Demand management was widely adopted in the 1950s to 1970s, and was for a time successful. However, it is widely regarded as a force behind the stagflation of the 1970s, though the supply shock caused by the 1973 oil crisis could have also caused that. 
Theoretical criticisms of demand management are that it relies on a long-run Phillips Curve for which there is no evidence, and that it produces dynamic inconsistency and can therefore be non-credible. 
Today, most governments relatively limit interventions in demand management to tackling short-term crises, and rely on policies like independent central banks and fiscal policy rules to prevent long-run economic disruption. 
In the environmental context demand management is increasingly taken seriously to reduce the economy's throughput of scarce resources for which market pricing does not reflect true costs. Examples include metering of municipal water, and carbon taxes on gasoline.
 Note the uncertainty when the 1970s comes up.
IS-LM, WICKSELL-KEYNES-HICKS, AND THIS TIME REALLY DOES LOOK DIFFERENT! by DeLong

Past time to add Portes and Wren-Lewis to the links.

Friday, October 19, 2012

September’s housing figures may be a sign of a recovery by Neil Irwin
Here’s the thing, however: The overbuilding of houses during the boom years, while real, was not extraordinary by historical standards. The underbuilding of houses has been far greater than the excess housing construction during the boom relative to demographic trends. 
That means that other factors are probably major culprits in the housing weakness of the past four years: A terrible job market that has made people unwilling or unable to get a mortgage, an overhang of foreclosures that has kept the market for houses from clearing and extreme caution by banks and other lenders that has made it hard to get mortgages. 
Now each of those trends seems to be healing. Few would argue that a return to the housing bubble days of 2005 is attractive, but what if, over the coming year, housing returned to its longer-term trend? 
In the second quarter of 2012, residential investment was 2.39 percent of GDP. As a rough estimate of the longer-term trend for that number, let us use its average level for the entire decade of the 1990s: 4.07 percent. (Using the 1990s is a bit arbitrary; even using various other base lines yields similar numbers.) 
If residential investment converged to that longer-term average, it would add 1.7 percentage points to overall growth in the coming year.

Baker is right, this good article helped elucidate the subject for me. I was confused by DeLong's graphs which showed now recovery in the housing sector. As Irwin writes, it's because of an overhang of foreclosers and a lack of demand for new housing. So DeLong's graph isn't showing that that there's a lack of demand overall, but that the housing market isn't clearing. That's true but there is also a lack of demand overall. A Fed targeting NGPD would fix this.

Simon Johnson on Citi, too-big-to-fail banks, Sheila Bair and Fed governor Tarullo

Wednesday, October 17, 2012

Correlation does not imply causation

"Correlation does not imply causation" is a phrase used in science and statistics to emphasize that a correlation between two variables does not necessarily imply that one causes the other.

I'm currently reading Sheila Bair's new book* (published by Simon and Schuster) and this phrase comes to mind in connection with a couple of things. One, in the prologue she slams Vikram Pandit who resigned on 16 October, 2012. Bull by the Horns was released on Sept. 25th but it's really starting to hit now with discussion in the blogosphere (Tyler Cowen here and DeLong here). Bair asserts that Citi was the worst run big bank and that its political connections helped it enormously. She suggests the famous TARP meeting was possibly all for Citi's benefit.

Is she correct that (Two) correlation implies causation in that Citi benefited from political connections? Robert Rubin was as at Citi and helped recruit hedge fund manager Pandit. Tim Geithner was one of Rubin's proteges. Hank Paulson was at Goldman Sachs with Rubin. Geithner and Paulson were in charge of the bailouts. As Bair admits though they were in the midst of a crisis and overkill was preferable to not doing enough (if only Geithner felt that way about fiscal stimulus). 

Bair also says that "Mr. eHarmony"** Geithner (while at the NYFed) had tried to broker a sale of Wachovia to Citi under Pandit with Federal help. Pandit and Geithner were mad at her for not objecting to Wells buying Wachovia without tax payer help, which preempted their deal. At Bair's Wikipedia entry it says, "In a response to the Inspector General for the TARP program, Bair remarked, "We were told by the New York Fed that problems would occur in the global markets if Citi were to fail. We didn't have our own information to verify this statement, so I didn't want to dispute that with them."" Were these European banks?

Regarding Pandit's resignation, there is also this from Citigroup's Wikipedia entry:
On Tuesday, March 13, 2012, the Federal Reserve reported Citigroup is one of the four financial institutions, out of 19 major banks, that have failed its stress tests. The tests make sure banks have enough capital to withstand huge losses in a financial crisis like one Citigroup faced in 2008 and early 2009 when it almost collapsed. The 2012 stress tests determine whether banks could withstand a financial crisis that has unemployment at 13 percent, stock prices to be cut in half, and home prices decreased by 21 percent from current levels.[60][61] According to Citi and the Federal Reserve stress test report, Citi failed the Fed stress tests due to Citi's high capital return plan and its international loans rated by the Fed to be at higher risk than its domestic American loans.
Also:
Over the past several decades, the United States government has engineered at least four different rescues of the institution now known as Citigroup.[52] During the most recent tax-payer funded rescue, by November 2008, Citigroup was insolvent, despite its receipt of $25 billion in federal TARP funds, and on November 17, 2008, Citigroup announced plans for about 52,000 new job cuts, on top of 23,000 cuts already made during 2008 in a huge job cull resulting from four quarters of consecutive losses and reports that it was unlikely to be in profit again before 2010. On the same day, Wall Street responded by dropping its stock market value to $6 billion, down from $300 billion two years prior.[53] As a result, Citigroup and Federal regulators negotiated a plan to stabilize the company and forestall a further deterioration in the company's value. The arrangement calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company. The assets remain on Citigroup's balance sheet; the technical term for this arrangement is ring fencing. In a New York Times op-ed, Michael Lewis and David Einhorn described the $306 billion guarantee as "an undisguised gift" without any real crisis motivating it.[54] The plan was approved late in the evening on November 23, 2008.[10] A joint statement by the US Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp announced: "With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."
and
As a condition of the federal assistance, Citigroup's dividend payment was reduced to one cent per share. 
In September 2011, a book titled Confidence Men|Confidence Men: Wall Street, Washington and the Education of a President, written by former Wall Street reporter Ron Suskind, states that Treasury Secretary Timothy Geithner ignored a 2009 order from PresidentBarack Obama to break up Citigroup in an enormous restructuring and liquidation. According to the book, Obama wanted to consider restructuring the bank into several leaner and smaller companies while Geithner was executing stress tests of American financial institutions. Another book, A Presidency in Peril by Robert Kuttner, says that in spring 2009 Geithner and chief economic adviser Larry Summers believed that they could not seize, liquidate, and break up Citigroup because they lacked the legal authority or the tools to do so. 
The Treasury Department denied the account in an e-mail to the media stating "This account is simply untrue. The directive given by the president in March 2009 was to develop a contingency plan for tough restructurings if the government ended up owning large shares of institutions at the conclusion of the stress tests that Secretary Geithner worked aggressively to put in place as part of the Administration's Financial Stability Plan. While Treasury began work on those contingency plans, there was fortunately never a need to put them in place."[114][115]
So is there fire where there's smoke? What were/are Citi's international entanglements?

Also Suskind was wrong about the Romer quote that Obama said the Fed had "shot its wad." It's a phrase from shooting muskets not sexual. So since he was wrong about that he could be wrong about the Obama order to liquidate Citi.

--------------------------
* The Devil's Derivatives and The New New Deal are in the queue.
** Fictional John Mack's nickname for Geithner in HBO's "Too Big to Fail."
Johnny Depp Starts New Literary Imprint at Harper

Amy Poehler and Tina Fey to Host Golden Globe Awards


Tuesday, October 16, 2012

Krugman's intro to the Foundation Trilogy


Forcing frequent failures by Steve Randy Waldman

Monday, October 15, 2012


IS WOLFGANG MUNCHAU CONFUSING THE SIRENS WITH CASSANDRA? by DeLong

I was surprised by:
  1. John Roberts's ruling on Obamacare
  2. the reemergence of Professor Bernanke
  3. the IMF's turn towards sanity
Who Was Leon Trotsky? by Daniel Little

(via Thoma)

The Self-Destruction of the 1 Percent by Chrystia Freeland