"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, February 16, 2013

The Climb and the Ladder of Chaos




That's Lord Petyr Baelish aka Littlefinger speaking. It's what Eric Cantor is thinking as he maneuvers to take over from Boehner.

In the mythos of Westeros there's a prophecy of a three headed dragon which will save the world. This is taken by fans to mean that three of the protagonists will join forces as dragon-riding saviors against The Others. Daenerys does have three dragons. Could they be the first three pictured here: Daenerys, Tyrion, and Sansa? (Of the Targaryen, Lannister, and Stark houses respectively.) What of Stannis? Or Daenerys's nephew Aegon?

Stanley Fischer for Fed Chair? by Dean Baker
Dylan Matthews has an interesting column discussing former M.I.T. professor Stanley Fischer's career in the context of the possibility of him replacing Ben Bernanke as Fed chair in the fall. There are a couple of important items that are not mentioned in this discussion. 
First, Matthews notes the central role that Fischer played in the I.M.F.'s resolution of the East Asian financial crisis. While this discussion might lead readers to believe the resolution was a success, this crisis actually marked a turning point that led to the major imbalances of the next decade. 
Prior to the crisis there were substantial capital flows from rich countries to poor countries, as textbook economics would predict. However as an outcome of the crisis developing countries began to accumulate massive amounts of foreign exchanges reserves, presumably to avoid ever having to be in the same situation as the East Asian countries were placed when they had to deal with the I.M.F. in the crisis. 
This led to a huge rise in the value of the dollar and large trade deficits. The gap in demand created by the trade deficit with developing countries was filled in the United States by the housing bubble. The predictable outcome of this situation was the collapse in 2007-09, which is likely cost the country close to $10 trillion in lost output before the economy fully recovers. 
This raises the more general point that Fischer is one of the pillars of the school of thought that central banks should target 2.0 percent inflation and otherwise do nothing. If it is in principle possible for an economic theory to be refuted by evidence, this view of the optimal monetary policy has been decisively discredited.

These items may affect how people would view Stanley Fischer's qualifications as a candidate for Fed chair. 
The piece also gets one other important item wrong. It contrasts the ability of Israel (where Fischer now runs the central bank) as a small country to devalue its currency with the United States, as the holder of the world's reserve currency. 
"If Bernanke halved the value of the dollar relative to, say, the Chinese yuan, that would dramatically increase U.S. exports and probably economic growth, too, but it would also wreak havoc with the global financial system. Every dollar-denominated asset in the world, including all manner of bonds, would plummet in value." 
Actually this is very far from being the case. Most holders of dollar denominated assets are not hugely interested in the value of their assets measured in yuan. (Quick, how many yuan is your 401(k) worth?) While the repercussions of a large fall in the value of the dollar against one or more major currencies are certainly greater than the fall of the Israeli shekel, it is certainly not obvious that a major reduction in its value would have disastrous consequences. In fact, over time it is virtually inevitable.

Friday, February 15, 2013

Stan Fischer saved Israel’s economy. Can he save America’s? by Dylan Matthews
As a professor at MIT — arguably the best economics department in the world — he helped found a school of economic thought that has come to dominate departments across the country. He also advised an all-star crew of grad students who went on top jobs in the policy world, including Bernanke, European Central Bank President Mario Draghi and former chief White House economist Greg Mankiw.
Umm, I'd rather it be Janet Yellen or Christina Romer.
Fischer left the IMF in late 2001, and some months later joined Citigroup in New York as a vice president. Three years into that role, in 2005, he was offered the post of governor of the Bank of Israel. At the time, Israel’s central bank was highly centralized at the time, with the governor had having near-absolute power to pursue whatever policy course he wished. Fischer accepted. Though he did not relinquish the U.S. citizenship he had held since 1976, he became an Israeli citizen upon arrival, in accordance with the law of return for non-Israeli Jews.
Citigroup should have been nationalized. It's too bad Geithner slow-walked Obama's request.
Big central banks tend to be cautious about using that lever. If Bernanke halved the value of the dollar relative to, say, the Chinese yuan, that would dramatically increase U.S. exports and probably economic growth, too, but it would also wreak havoc with the global financial system. Every dollar-denominated asset in the world, including all manner of bonds, would plummet in value. 
It’s less risky for small countries. There aren’t massive piles of shekels lying around in other countries as the way there are with dollars and euros, and Fischer took advantage of that fact. On May 30, 2008, a dollar was worth about 3.2 shekels. On March 6, 2009, it was worth 4.2 shekels. In less than a year, Fischer had reduced the value of the shekel by about 25 percent — a massive devaluation. 
It worked. Exports soared, and 2008’s trade deficit of $2 billion became 2009’s trade surplus of $5 billion. While other countries fell deeper into recession, Israel brushed its shoulders off.
Devaluing the dollar by 25 percent would be benefical.
It would be unprecedented for the United States to appoint someone from abroad to one of its most important government jobs. But Fischer’s time in Israel might actually be a plus in the Obama team’s eyes. Obama has a famously frosty relationship with Netanyahu and has battled suggestions that he is insufficiently supportive of Israel. How better to rebuke those critics than by picking an economist whom Netanyahu knows and respects to the most important U.S. economic policy job? That Fischer’s broadly Keynesian approach is a good fit with the administration’s is just gravy.
My guess is that they won't go with Fischer.

The "Currency Wars" Wars Heat Up by Yglesias

Yglesias links to Greg Ip who I linked to below.
The clear implication of the term “war” is that these policies are zero-sum games: America and Japan are trying to push down their currencies to boost exports and limit imports, and thereby divert demand from their trading partners to themselves.
(Not totally clear on this.) China was doing this with its "currency manipulations" because it was buying U.S. Treasuries and has "capital controls." Japan has said it won't intervene in foreign exchange markets to lower its currency. Also Japan is supposedly now in surplus (need to check) while China's currency has strengthened (need to check). In any event emerging markets like Brazil should institute limited capital controls to regulate hot money and make sure they don't end up like Spain.

Part of the problem is the domestic politics of each country. China is allowing the U.S. to borrow cheaply in order to subsidize its exporters. The U.S. should use the cheap money to "invest in the future" and close the output gap. Republicans are blocking this. (But if China didn't have capital controls, money would be flowing in and strengthening their currency and they would get more inflation and would have to borrow more from the U.S. Again not crystal clear on the arguments.)


The marketers for "Zero Dark Thirty" ran a full-page reprint of Roger Cohen's column on the film as an advertisement. I found myself agreeing with Cohen about Bigelow and the screenwriter Mark Boal (who also worked with Kathryn Bigelow on "The Hurt Locker" for which she won Best Director in 2009.)

Why ‘Zero Dark Thirty’ Works by Roger Cohen
...George W. Bush has been rightly mocked for once commenting on Bin Laden that, “I just don’t spend that much time on him.” But the truth is not that many people did. Bin Laden had vanished, perhaps he was already dead. Anyway he was best not dwelled upon. Years went by, 9/11 receded. Bigelow lasers in on those for whom finding the mastermind behind the killing of almost 3,000 Americans was an undying obsession. 
Or rather she and her scriptwriter Mark Boal, a former journalist, focus on a single C.I.A. analyst, “Maya,” played by Jessica Chastain. (The film has much to say about female single-mindedness and good sense as contrasted with male huffiness and volatility.)
...
 
Maya's single-mindedness and competence reminds me of Clare Daines's Carrie Mathison on "Homeland" and Keri Russell's Elizabeth Jennings on "The Americans."
Watching torture — the C.I.A. should abandon its ghastly euphemism — is profoundly unsettling. But Bigelow and Boal have done an important service in setting before a wide U.S. and global audience images of a traumatized America’s dark side. This happened: the waterboarding, the sleep deprivation, the sexual humiliation, the cruelty. Not exactly as depicted, but yes it did, in places that, as if in a totalitarian world, existed on no map. 
And I think the movie’s portrayal of torture is truthful: It helped at times but at others did not. It provided clues that might have been gleaned by other means. And the ultimate success in finding Bin Laden occurred after President Obama had banned the methods “Zero Dark Thirty” portrays so powerfully....
[I'd question if torture ever helped at times. Even if it did it's morally wrong and will backfire and ultimately "not help."*]
The charge of inaccuracy is a poor thing measured against the potency of truth. “Zero Dark Thirty” is a truthful artistic creation, one reason it has provoked debate. Boal told The New York Times he did not want “to play fast and loose with history” — a statement held against him by several of the movie’s critics, most eloquently Steve Coll in The New York Review of Books. My sense, however, is that Boal has honored those words.**
There were few more minute observers of fact than George Orwell. As Timothy Garton Ash has written, if Orwell had a God it was Kipling’s “God of Things as They are.” Yet, as Garton Ash says of Orwell: “One of his most powerful early essays describes witnessing a hanging in Burma. But he later told three separate people that this was ‘only a story.’ So did he ever witness a hanging? He annotates a copy of “Down and Out in Paris and London” for a girlfriend: this really happened, this happened almost like this, but “this incident is invented.”’ 
Truth is art’s highest calling. For it the facts must sometimes be adjusted. “Zero Dark Thirty” meets the demands of truth.
Cohen is a Brit in America and Ash is British. The late, great Christopher Hitchens admired Orwell and was a friend of Ash. Cohen was obviously influenced by him and tends to share his viewpoints. I wonder what Hitchens would have made of Boal's script. Most likely, he would have dismissed Maya's argument that the ISI wasn't supporting bin Laden because al Qaeda tried to kill Musharraf. Technically no, but elements of the ISI were/are treasonous and part of the problem. The ISI was supporting him in that they didn't turn him over to the Americans when they knew where he was. Of course the ISI and Pakistan were helpful to the U.S. in other ways so it's a complicated picture.

-------------------------------------------
*I liked Robb Stark's response to the Roose "is loose!" Bolton within the brutal context of war in Westeros on the topic of flaying. First he says that his father (and moral authority) outlawed flaying in the North. "We're not in the North," replied Bolton. Robb then says something along the lines of "they have my sisters and I won't give them an excuse to abuse them."
** From Coll's review:
The result of such secrecy is that what is often described as America’s “debate” about the use of torture on al-Qaeda suspects largely consists of assertions, without evidence, by public officials with security clearances who have access to the classified record and who have expressed diametrically opposed opinions about what the record proves. Senator Dianne Feinstein, for example, has said that waterboarding and other harsh techniques were “not central” in developing the clues that led to Osama bin Laden’s hideout. Yet Michael Hayden, the final CIA director of the Bush administration, wrote last year that information gleaned from detainees who were “subjected to some form of enhanced interrogation” proved “crucial” to the search. The most thorough, independent account published on the bin Laden hunt to date—Manhunt, by the journalist Peter Bergen1 —mainly supports Feinstein’s view, but the CIA and other officials Bergen interviewed also asserted that some al-Qaeda detainees who were tortured provided relevant pieces of evidence.
...
In virtually every instance in the film where Maya extracts important clues from prisoners, then, torture is a factor. Arguably, the film’s degree of emphasis on torture’s significance goes beyond what even the most die-hard defenders of the CIA interrogation regime, such as Rodriguez, have argued. Rodriguez’s position in his memoir is that “enhanced interrogation” was indispensible to the search for bin Laden—not that it was the predominant means of gathering important clues.
The mere fact that the record is classified causes me to believe that Feinstein is not telling the truth. Rodriguez isn't as die-hard a defender as Michael Hayden and others. Rodriguez, Feinstein and Coll may all be covering the CIA's ass (and America's self image and image to the world). There's an exploration of this theme in the movie.

Allan Sloan Explains the Relationship Between Interest Rates and Bond Prices and How the Government Can Costlessly Eliminate Large Amounts of Debt by Dean Baker
Allan Sloan used his column today to explain a simple but often overlooked point, when interest rates rise, bond prices fall. This means that if long-term interest rates rise substantially in a few years, as the Congressional Budget Office predicts, then the bonds issued at very low interest rates today will be selling at large discounts. 
The implication of this fact is that in 2015 or 2016, the Treasury would be able to purchase back much of the debt issued today at substantial discounts. This would allow it to drastically reduce the government's debt at no cost. For example, if it bought back debt with a face value of $4 trillion at an average discount of 20 percent, it could instantly eliminate $800 billion in debt, reducing the debt to GDP ratio by almost 5 percentage points. 
This step would be pointless from either an economic or financial standpoint since it would not change the interest burden facing the country, but it should make many of the deficit cultists happy. Since these cultists, who largely control the economic debate in the United States, assign some mystical power to specific debt to GDP ratios, they should be pacified by the knowledge that we can buy bonds back at a discount to keep the debt burden under their magic number. This route is much simpler than raising taxes or cutting spending.


Quantitative Easing, Intervention, and Currency Wars, Again (Thinking about what is driving -- and will drive -- the yen) by Menzie Chinn
While I understand that shifts in exchange rates complicate policy makers’ lives (particularly in the euro area [2]), to some extent I think that competitive depreciations can lead to a desirable outcome insofar as it leads to a modest global (or at least G-7 wide) acceleration of inflation.[3] [4][5] 
Where the real conflict will come is in the G-20 forum. [6] There it is not so clear at all that China and the rest of the emerging market economies need higher inflation. Rather, they need to continue to allow their currencies to appreciate in order to prevent overheating. We shall see if they follow this path -- hope springs eternal.
In "Currency War or International Policy Coordination", Barry Eichengreen succinctly summarizes the current situation as compared against that of the 1930's:
...when the U.S., the Eurozone, the United Kingdom and Japan once again all experienced broadly similar deflationary pressures, quantitative easing bringing about some currency depreciation was again an appropriate symmetrical response. More focus on first-best monetary measures would again have been better, and international coordination of monetary easing might again have reduced uncertainty, although how much difference this would have made is, once more, an open question.  
The difference in the recent episode is the presence of a second group of economies that were not affected symmetrically. Emerging markets were worried about inflation rather than deflation and about currencies, asset prices and, in some cases, growth rates that were too strong rather than too weak. Their first-best response was fiscal tightening. International coordination of monetary easing in the advanced countries with fiscal tightening in emerging markets would have been better, although once again how much better is a matter for debate. More concentration on first-best fiscal measures appropriate for countering over-strong demand, overheated growth, overvalued currencies and inflation and less recourse to second-best interventions like trade and capital controls, this time too, would have been better still. But once again binding political constraints prevented full recourse to first best measures. And once again they made effective international coordination impossible to achieve.

What QE means for the world: Positive-sum currency wars by Greg Ip

Phoney currency wars: The world should welcome the monetary assertiveness of Japan and America (Economist)

Thursday, February 14, 2013

Persnickety followups on inequality and demand by Steve Randy Waldman



The FHA and the Role of Government When Markets Fail by Jared Bernstein

Commenter "readerOfTeaLeaves" writes at OTE:
To put in another (background) layer, which has been brilliantly documented by Sen. Elizabeth Warren, in the background of these housing problems were underlying, quiet changes to the usury and banking laws. These changes occurred in the 80s and 90s, while the GOP controlled Congress and had great sway over federal judicial appointments that interpret legislation related to usury and banking. 
By the early 2000s, the economic pressures for housing – in part because it represented access to good schools (and consequent social mobility) – were almost unprecedented. And many families were loaded with debt at usurious rates that had *not* been permitted in the 30s, 40s, 50s, or 60s because we still had usury laws back then. 
But changes to the banking and usury laws preceded the 2000s, and by 2008 ‘finance’ had become about 40% of America’s GDP. 
I’m not defending FHA (which is beyond my knowledge base). Nevertheless, GOP political expediency in smearing federal agencies, without admitting their own culpability in making changes to usury and banking laws that affected economic security for millions of Americans, is a sign of intellectual cowardice. Is the GOP actually incapable of recognizing the linkages between the fact that suddenly banks could change 16+% interest on credit cards, and the fact that ‘finance’ morphed out of proportion to the rest of the economy…?

Tuesday, February 12, 2013



Janet Yellen Speaks, Makes Critical Points, and Presents a Graph I Shoulda Made by Jared Bernstein

JANET YELLEN POINTS OUT THAT THE FEDERAL RESERVE HAS HAD NO HELP IN STEMMING THE DEPRESSION by DeLong


It’s Always 1923 by Krugman
David Glasner writes sensibly about the “currency war” issue and related subjects, set off by recent commentary by Irwin Stelzer. As Glasner says, expansionary monetary policy can cause currency depreciation — but it is not currency manipulation. There’s a world of difference between Chinese-style intervention-plus-tight-money and either the Fed’s quantitative easing or Japan’s new turn to inflation targeting. 
But what really seems to get Glasner going is Stelzer’s bad history — bad history that is, one has to say, very widely accepted out there. No, the 1923 hyperinflation didn’t bring Hitler to power; it was the BrĂ¼ning deflation and depression. Hard money and a gold standard obsession, not excessive money printing, was the proximate disaster. 
One thing Glasner doesn’t do, though, is point out not just that Stelzer seems weirdly obsessed with inflation risks despite the complete absence of any evidence, but the unchanging nature of that obsession. A quick bit of googling says that Stelzer has been warning about an inflationary explosion for at least four years (pdf). (In the same piece he also insisted that it would be very hard to find anyone to buy all the bonds the US would be issuing). 
This gets at one of the true wonders of this ongoing economic crisis: the inflation-and-soaring-rates crowd has been wrong, again and again, year after year, yet seems completely undaunted in its certainty that it possesses The Truth. You might think that someone, at some point, would have a creeping suspicion that he might be working with the wrong model. But it never seems to happen.

Sunday, February 10, 2013


The Housing Bubble Should Not Have Been Hard to See by Dean Baker
Economists and other policy types are working hard to maintain the absurdity that the housing bubble was hard to see. Hence we have Federal Reserve Board Governor Jeremy Stein pontificating on how the Fed should deal with bubbles and the Post playing along with the gag. 
Let's just run through the basic facts. Nationwide house prices had sharply departed from a 100 year long trend in which they had just kept pace with the overall rate of inflation. At the peak of the bubble in 2006 they were more than 70 percent above their trend level. Housing construction rose from its average of 3-4 percent of GDP to over 6.0 percent of GDP. This was at a point when the demographics would have led observers to expect a drop in construction since the baby boom cohort was seeing their kids move away from home and would have been looking to downsize. On top of this, the vacancy rate was already at record levels as early as 2002. It kept rising to new record highs year by year after that. 
The savings rate had dropped from a pre-stock bubble average of more than 8.0 percent to near zero at the peak of the bubble. Again, the demographics with the baby boom cohort in its peak saving years would have led one to expect a rise in the savings rate. 
Any economist who could look at these monstrous divergences from normality and not recognize a bubble really needs a new line of work. And this is before we even talk about the explosion of the subprime market, the Alt-A market, and the huge number of homeowners buying houses with no money down. 
Folks this was really really easy. The economists and other policy types who are trying to say it was difficult to see are just covering their rears.
In Defense of David Graeber’s Debt by J.W. Mason
...What we do need to know is, should we begin our analysis of the economy, as almost all economics textbooks do, by first imagining it as a system of exchange of goods driven by mutual interest, and then bring in money and debt? Or is it better to start with a vision of an economy composed of units with obligations and objectives expressed in terms of money, and then ask how these money commitments shape production and exchange? [3] 
Some people think it doesn’t matter where you start. I think it does matter. And more to the point, many leading lights of critical economics, from Marx and Keynes through Hyman Minsky and Perry Mehrling, think so as well. 
Keynes, for instance, spent many pages of his pre-General Theory writing in the 1930s working out the distinction between a “real exchange economy” and a “monetary exchange economy,” and criticizing the economics profession for focusing exclusively on the former. Here’s a passage making the point clearly (it’s also, in a nice Malcolm-and-Martin moment, one of the few places where he has kind words for the author of Capital): Karl Marx, Keynes says,
pointed out that the nature of production in the actual world is not, as economists seem often to suppose, a case of C- M- C‘, i. e. of exchanging commodity (or effort) for money in order to obtain another commodity (or effort). That may be the standpoint of the private consumer. But it is not the attitude of business, which is a case of M-C-M‘, i. e. of parting with money for commodity (or effort) in order to obtain more money. This is important… 
There lines up nicely with Graeber’s claim that most economists have gotten the relationship between money and exchange of goods backward. Certainly someone who has read Debt will see what Keynes is talking about here more quickly than someone who has only thought about money through the lens of contemporary economics textbooks — because I am afraid they are no less oriented toward a “real exchange economy” than when Keynes first made his critique. 
One important reason why the priority of debt matters — one reason it is important that capitalism is organized around M-C-M’ and not C-M-C’ — is that while goods are all substitutes for each other to some degree, to satisfy a money obligation, only money will do. Or as Keynes wrote in the General Theory, one defining feature of money is that its elasticity of substitution with other goods is effectively zero.

American Citizens Split On DOJ Memo Authorizing Government To Kill Them

While most Americans expressed conflicted feelings regarding the memo, the poll also found that 28 percent of citizens were unequivocally in favor of being obliterated at any point, for any reason, in a massive airstrike.

(via DeLong)