"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 23, 2013

Nature Abhors An Output Gap by Mark Thoma

Shame. by Steve Randy Waldman

Economists Discover that Fed Bond Purchases Affect the Budget by Dean Baker

People Driving West Are Getting Closer to Falling Into the Pacific Ocean by Dean Baker

Chronicles of a Reverse Helicopter Drop by Carola Binder

Will the Fed end up losing a boatload of taxpayer money on its QE programs? Would it matter? by Neil Irwin
So, suddenly, instead of being the most profitable bank in the land, the Fed could find itself with much less income to return to the Treasury, and maybe with no income at all.
Last year it sent $89 billion to the Treasury (see below). As Alan Blinder pointed out in his new book "After the Music Stopped" that's more profitable than the biggest oil and gas companies.

Fed Officials Debate Bank’s Losses Once Economy Mends by Binyamin Appelbaum
By law, the Fed sends most of its profits to the Treasury, and in recent years those profits have soared as the Fed has collected interest on its investments. Last year, the central bank contributed $89 billion to the public coffers — essentially refunding a significant portion of the federal government’s annual borrowing costs.
Also this is the first time I've seen the Fed confirm it will raise interest rates on excess reserves:
When the economy grows stronger, the Fed plans to sell some of its vast holdings of Treasury and mortgage-backed securities. The Fed also plans to pay banks to leave some money on deposit with it to limit the pace of new lending.
Predicting a Crisis, Repeatedly by Binyamin Appelbaum
The problem with every attempt to look for debt limit thresholds has a name, and that name is Japan, a country that is able to borrow at one of the lowest average interest rates of any developed country despite a debt burden that is the largest, relative to its economic output, of any developed country. Nor is this an ephemeral anomaly. It has been true for years. 
Japan’s debts total about 230 percent of its annual output, and so far, investors don’t mind. 
In part, the authors address this in the traditional manner, by lopping off 5 percent of their 20-nation sample and simply declaring, “There is something very special about Japan.” 
This is quite possibly true. But because there are not very many developed countries — in this study Japan is just one of 20 — it also might cause a reader to wonder about the universality of any rules derived from the remaining 19 cases, particularly since half of the remaining sample share a currency and an economic union. They are not exactly independent variables. 
Furthermore, it’s quite possible that the United States also is something of a special case. 
Which brings us to the more important acknowledgment, buried deep in the paper: 80 percent is not a magic number. It’s not even a particularly good summary of past experience. Rather, it’s an average of widely divergent experiences. And it doesn’t necessarily tell us much more than common sense: countries with more debt run greater risks of losing the confidence of investors, and have less flexibility to deal with new economic problems. 
“We don’t know where the tipping point is,” Jerome H. Powell, a Federal Reserve governor, said in a response to the paper. But, he continued, “Wherever it is, we’re getting closer to it.”
Powell is a Republican governor who Obama appointed. What a joke. Clinton appointed Greenspan who was a disaster. He was the one who most responsible for the housing bubble/financial crisis.

Don't forget Greenspan's "Deflation is coming; give away the surplus!" scare that enabled Bush to cut taxes for the rich.

If that is Fed independence, I'll take a pass.
Democrats need to become much, much, much better in their appointments to the FOMC.

Thursday, February 21, 2013

ANN MARIE MARCIARILLE: SELF-INSURANCE BY SMALL EMPLOYERS AND THE POSSIBLE BREAKDOWN OF COMMUNITY RATING UNDER THE ACA by DeLong

ANN MARIE MARCIARILLE: CALIFORNIA'S HEALTH INSURANCE EXCHANGE WEB PRESENCE IS UP AND RUNNING by DeLong


Imagine an alternate timeline where Clinton had a beard.



My comment at Economist's View.
Summary/Genealogy

December 22, 2012
Maya and the Vigilantes by Krugman
[O]ne way to tell what’s driving interest rates over any given period is to look at what was happening to other asset prices…. If rates have risen because investors fear default and fiscal chaos, stock prices should plunge. Did this happen during the supposed vigilante attack of the 1990s?

Well, no.

What really happened in 1994? The economy was starting to recover (it was actually adding 300,000 jobs a month for a while),and investors expected the Fed to tighten a lot. Clearly, they overreacted. But the events don’t bear the “signature” of an attack driven by debt fears.
BACK WHEN I FEARED THE BOND-MARKET VIGILANTES: MAUNDERING OLD-TIMER REMINISCENCE WEBLOGGING by DeLong
The right policy, we thought--and I think the evidence is pretty clear that we were 100% right--was to aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak in order to eliminate any market expectations that high deficits would lead to higher inflation, and--more importantly--to eliminate any belief on the part of the [Alan Greenspan] that [he] need to raise rates rapidly and far to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral. 
That was not an attack but a horizon-sighting of bond-market vigilantes--or perhaps only the market thinking [Alan Greenspan] thought [he] was about to get a horizon-sighting of bond market vigilantes. 
I think we were right then to fear and take steps to ward off the bond-market vigilantes--or perhaps only right to fear and take steps to ward off any [Alan Greenspan] decision that i[he] needed to fear and take steps to deal with bond-market vigilantes. In any event, our policies were right. [changed "Federal Reserve" to "Alan Greenspan"].
December 24, 2012
Bond Vigilantes and the Power of Three by Krugman

Matthew Yglesias picks up on a point I’ve tried to make at some length recently: the popular story about how an attack by bond vigilantes can cause an interest rate spike and turn America into Greece, Greece I tell you, is incoherent. (Here’s a 2010 example from Alan Greenspan — the piece in which he declares it “regrettable” that the vigilantes haven’t yet attacked, but grudgingly concedes that low rates might persist “well into next year”, that is, into 2011. So what has he learned from the failure of his prophecy? Nothing, of course).
February 15, 2013
The best reason to worry about the deficit by Ezra Klein
The theory was correct. By the end of Clinton’s term, the interest rate on 10-year Treasurys had fallen to 5.26 percent — lower than it had been in 30 years. And the economy was, indeed, booming. “The deficit reduction increased confidence, helped bring interest rates down, and that, in turn, helped generate and sustain the economic recovery, which, in turn, reduced the deficit further,” Treasury Secretary Robert Rubin said in 1998.
February 16, 2013
Can We Cut the Crap on Robert Rubin and Deficit Reduction by Dean Baker
So we are supposed to believe that the difference between the 2.5 percent real interest rate in the high deficit pre-Clinton years and the 2.2 percent real interest rate at the end of the Clinton years is the difference between the road to hell and the path to prosperity? This is the sort of nonsense that you tell to children. It might past muster with DC pundits, but serious people need not waste their time. 
The story of the boom of the Clinton years was an unsustainable stock bubble. This led to a surge in junk investment like Pets.com. It led to an even larger surge in consumption. People spent based on their stock wealth, pushing the saving rate to a then record low of 2.0 percent (compared to an average of 8.0 percent in the pre-bubble decades). 
Robert Rubin acolytes may not like it, but the deficit reduction was a minor actor in the growth of the 1990s. The bubble was the real story. That may not be a smart thing to say if you're looking for a job in the Obama administration, but it happens to be the truth. You have to really torture the data to get a different conclusion.
February 19, 2013
CROWDING-IN AND RAPID GROWTH IN THE 1990S: DEAN BAKER GETS ONE WRONG, I THINK by DeLong
The actual inflation rate in 1991 was 5%/year, but the expected inflation rate over the next decade was more like 3%/year. We are not talking about an 0.3 percentage-point decline in real interest rates, but rather about a 2.3 percentage-point decline in real interest rates. Moreover, back in 1992 when we unwound the yield curve and projected interest rates in the future we saw nominal interest rates has highly likely to rise unless the deficit was substantially reduced. The 2000 we were looking forward at had forecast nominal interest rates of not 7.86%/year but 10%/year or so--a real interest rate of 7%/year. 
The counterfactual for 2010 is thus different not by 0.3 percentage-points but by 4.8 percentage-points. That is a much bigger deal. 
How big a deal? Enough to boost the growth rate of potential output by between 0.5 and 1.0 percentage points per year, in my estimation…
 Andy Harless comments:
Empirically I have to call this for Dean. Take the real 10-year yield at the end of the last quarter before the election, using the Philadelphia Fed Survey of Professional Forecasters 10-year expected inflation rate. In 1992, the real yield was 2.6% (6.4-3.8). In 2000, it was 3.3% (5.8-2.5). Obviously, you could choose the dates differently and get a different answer, but it's hard to imagine that there's strong evidence of declining real yields when my first cut shows them increasing. And I don't think you can use projections if those projections are based on models in which crowding out has large effects on interest rates. 

However, (1) everyone should realize that interest rates are endogenous, and I'm not sure the long run elasticity of investment demand with respect to the interest rate is very large, (2) it's obvious if you remember the late 1990's that there is dynamic, multiple equilibrium kind of stuff going on here, and I think interest rate comparisons are missing the important part of the story.
February 21, 2013
DeLong responds:
(i) At least as we saw it, much of the effect of Clinton fiscal policy was baked into the interest-rate cake by the fall of 1992, (ii) we did have a large unexpected increase in desired high-tech investment spending in the 1990s, and (iii) we at least had no doubt that without deficit reduction on a large scale Greenspan was going to push interest rates up far and fast...
My posts:

First post

Second post

Third post

Fourth post

Fifth post

Sixth post

Seventh post

I have to call this for Krugman/Baker/Harless against DeLong/Klein. I guess the counterfactual would be that if Clinton hadn't done deficit reduction on a large scale, Greenspan would have pushed interst rates up far and fast. No doubt DeLong agrees with Krugman and views Greenspan's current views on bond vigilantes as wrong. So Greenspan would have been wrong to send the economy into recession in the 90s. What would have followed?


AV Club review of "In Control" from "The Americans."
In short, then, the long game The Americans is playing is about how two rival nations avoided starting World War III, when the odds were stacked against such a thing, and how that happened. At the same time, it’s about two people who have avoided seeing their marriage crumble, when the odds are stacked against such a thing. You can see where I’m going with this. 
“In Control” is the first episode of the show to play blatantly off of historical events, something that many TV period dramas try to avoid doing, particularly in the wake of Mad Men, which has mostly relegated the things we think of as “the ‘60s” off to the side. Now, since this is a show about Soviet spies and FBI agents in the ‘80s and it’s set in the Washington, D.C., area, the attempted assassination of Reagan by John Hinckley, Jr., couldn’t exactly pass by without comment. What’s fascinating to me is the way that the show erects an incredibly convincing false history around actual events (like Alexander Haig coming into possession of the nuclear football), then uses it to illuminate the marriage of Phillip and Elizabeth. I have some quibbles here, but I’m mostly just impressed with how good the plotting was.

Wednesday, February 20, 2013

early 90s exit strategy and the Fed vigilantes

Bond Vigilantes and the Power of Three by Krugman (12.24.12)
Matthew Yglesias picks up on a point I’ve tried to make at some length recently: the popular story about how an attack by bond vigilantes can cause an interest rate spike and turn America into Greece, Greece I tell you, is incoherent. (Here’s a 2010 example from Alan Greenspan — the piece in which he declares it “regrettable” that the vigilantes haven’t yet attacked, but grudgingly concedes that low rates might persist “well into next year”, that is, into 2011. So what has he learned from the failure of his prophecy? Nothing, of course). It’s not just that there have so far been no signs of the bond vigilantes; it’s that even if for some reason the vigilantes did attack, it’s very hard to see how they could cause a recession in a country that retains its own currency and doesn’t have large amounts of debt denominated in foreign currency.[Krugman points to France in the 1920 in blogpost I haven't found yet*]
I’ve been trying to think about other ways to make this point, and also to help people understand the interest rate fluctuations we have actually experienced; here’s one stab at it. 
Think of a simplified world in which there are three kinds of assets: short-term securities, long-term government bonds, and foreign assets, as shown schematically here:

Individual investors can shuffle their portfolios among these three assets; however, asset prices will rise or fall to match supply and demand for each asset. What are these asset prices? Well, there are three prices that might do the job: short-term interest rates, long-term interest rates, and the exchange rate. At any given time, however, one of these is fixed, leaving it up to the other two to do the adjusting. Which two? That depends on the monetary regime, as I’ll now explain. 
The United States has independent monetary policy and a floating exchange rate. The Fed uses its independence to set the short-term interest rate, basically at zero these days. So long-term rates and the exchange rate do the adjusting. 
Now, there have been some sizable fluctuations in long-term rates over the past few years, and every time those rates have gone up there have been press reports claiming that they are about debt fears. In reality, however, it’s quite clear that the driving force has been fluctuating optimism about the prospects for recovery, and hence for an eventual rise in short-term rates.
If you think short-term rates are heading up, then other things equal long-term bonds become less attractive; better to park your money and wait for better yields. So the desired portfolio shift looks like this:

In such a case long-term rates rise – but because this rise is driven by greater optimism about the future, it’s hard to see how it can have a contractionary effect on the economy. 
Incidentally, this seems to me to be a big problem with the story Brad DeLong tells about bond vigilantes in the very early 1990s. He argues that the wide gap between short-term and long-term rates reflected market expectations that deficits would eventually cause higher inflation, which in turn would cause the Fed to raise rates. This could be true. But why would such expectations be a drag on the economy? Yes, nominal rates would be higher than otherwise; but real rates would, if anything, be lower. It’s not at all easy to tell a coherent story in which the effect of future expected deficits on today’s interest rates is contractionary – I know, because I’ve tried. 
Now, the big fear now is that we’ll have a quite different type of vigilante attack, in which fear of default leads to a general flight from our nation’s assets, sort of like this:

How does this play out? 
Well, if you’re Greece, the exchange rate is fixed – or actually nonexistent, because you don’t have your own currency. So what happens is that both short-term and long-term interest rates rise. How can short-term rates shoot up, when there is also a relationship between the quantity of money and short-term rates (which is why central banks can peg these rates)? The answer is that as funds flee the country, the money supply plunges. Here’s what happened to Greek M1: 

Source
But that can’t happen in the United States, where the Fed retains control over the money supply and of short-term interest rates. So what would happen instead would be a plunge in the exchange rate. And this would actually have an expansionary effect on the U.S. economy. 
The point is that the analogy with Greece is just completely wrong; the difference in our monetary positions means that even if the bond vigilantes did attack, they would probably help, not hurt, our economy in the short run.
Krugman won't go as far as the MMTers and says we can mint as many trillion dollar coins as we want with little consequence.

Fed vigilantes

But then I think Paul falls into a degree of heresy and error:
[Sarah] Kliff… emphasizing in particular how MacGuineas was “fascinated” by the supposed attack of the bond vigilantes in the early 1990s – a period when there was, indeed, a sharp rise in long-term interest rates. This prompts Matt Yglesias to ask a very good question… how sure are we that there really were any vigilantes back then?… 
[O]ne way to tell what’s driving interest rates over any given period is to look at what was happening to other asset prices…. If rates have risen because investors fear default and fiscal chaos, stock prices should plunge. Did this happen during the supposed vigilante attack of the 1990s? 
Well, no. 
What really happened in 1994? The economy was starting to recover (it was actually adding 300,000 jobs a month for a while), and investors expected the Fed to tighten a lot. Clearly, they overreacted. But the events don’t bear the “signature” of an attack driven by debt fears. 
Let me make two comments. 
First, what was going on in 1994--and what those of us working in the Treasury and watching the Federal Reserve and the financial markets thought was going on--was not an attack of bond-market vigilantes terrified of rising debt and the prospect of explicit default or implicit default through rapid inflation. The Federal Reserve had undertaken a long easing from 1990 through the mid-1992 unemployment rate peak. But then, as unemployment started to decline, the Federal Reserve held off on tightening: it was expecting the passage of the deficit-reducing Clinton 1993 Reconciliation Bill--OBRA 19930--and believed that the spending cuts and tax increases in that were sufficient. In early 1994, however, the Federal Reserve concluded that it was time for monetary tightening, and began to gradually raise short-term safe interest rates by selling off some of its bonds for cash. 
We in the Treasury--and the staff at the Federal Reserve--had expected the reaction of the long-term bond market to this Fed tightening cycle to be modest. Between 1990 and 1994 the Federal Reserve had reduced short-term interest rates by 5%, and as it had done so long-term rates had fallen by 3%. We attributed 1.75% of that long-term interest rate reduction to the reduced current and expected future federal deficits as a result of Clinton's OBRA 1993 and the earlier Foley-Mitchell-Bush OBRA 1990, leaving 1.25% to be the reaction of the long-term bond market to lower short-term interest rates. Thus as the Federal Reserve raised short-term safe interest rates from 3% to 6%, we expected a quarter of that to show up as a rise in long-term rates--we expected to see them go from 6% to 6.75%. 
Instead, in 1994 long-term bond rates rose from 6% to 8%.  
In the end we attributed the excess rise in long-term bond rates in 1994 to two factors:
As interest rates rose, the duration of Mortgage Backed Securities lengthened--people weren't refinancing their houses any more. MBS thus became much longer duration securities--there was a much greater supply of long-term bonds in the market--and by supply and demand that pushed the prices of such bonds down until investment banks could figure out how to tap more risk-bearing capacity to hold those bonds. 
Nobody was sure that the Federal Reserve was going to stop raising short-term safe interest rates when they hit 6%. In the late 1980s, after all, they had not stopped until short-term interest rates hit 8%. Without effective forward guidance from the Federal Reserve, the bond market was pricing in a larger tightening than seemed likely to us. 
We were, I think, completely correct. By mid-1995 it was clear that the Federal Reserve had reached the end of its tightening cycle and more money had flowed into the long-term bond market to hold attractively-priced MBS, and the long bond rate fell back into the trading range we had anticipated--and then fell some more. 
So: 1994 was an interesting lesson on the importance of clear Federal Reserve forward guidance in avoiding excess bond-market volatility and on the consequences of endogenous duration for the short-term pricing of complex securities, but it was not an example of bond-market vigilantes fearing higher deficits and default or inflation riding over the horizon. The federal deficit was under control and rapidly shrinking in 1994 as the combination of the business-cycle recovery and Clinton's OBRA 1993 worked even better than we had anticipated. 
Second, there had been an attack--or, rather, not an attack but rather bond-market vigilantes visible on the horizon and gunshots in the air--earlier. 
Throughout 1992 there was a 4%-point gap between the 3-Month Treasury rate and the 10-Year Treasury rate. Those of us in the Clinton-administration-to-be read this as market expectations that the uncontrolled federal budget deficit would lead people to expect higher inflation and the Federal Reserve would then feel itself forced to raise short-term interest rates far and fast in order to hit the economy on the head with a brick and keep those expectations of higher inflation from coming true. The result would be a low-investment and perhaps a jobless recovery. [The Fed would be wrong as Matt says?] The right policy, we thought--and I think the evidence is pretty clear that we were 100% right--was to aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak in order to eliminate any market expectations that high deficits would lead to higher inflation, and--more importantly--to eliminate any belief on the part of the Federal Reserve that it need to raise rates rapidly and far to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral. 
That was not an attack but a horizon-sighting of bond-market vigilantes--or perhaps only the market thinking the Federal Reserve thought it was about to get a horizon-sighting of bond market vigilantes. 
I think we were right then to fear and take steps to ward off the bond-market vigilantes--or perhaps only right to fear and take steps to ward off any Federal Reserve decision that it needed to fear and take steps to deal with bond-market vigilantes. In any event, our policies were right. 
But that was then, with a 4%-point gap between 10-Yr and 3-Mo Treasury yields. 
Today we only have a 1.6%-point gap between 10-Yr and 3-Mo Treasury yields. 
1.6% < 4% 
[2 charts missing, see link]
So they did deficit reduction so that the Fed wouldn't cause a jobless recovery?

The deficit was -4 to -5 percent of GDP AND A RESULT OF THE DOWNTURN. (See today) As the recovery occured, the deficit would come down, as it did. In 2012 "The gap between government receipts and government spending — about 7 percent of economic output in the 2012 fiscal year, down from 8.7 percent in the 2011 fiscal year — has become a heated election-year political issue." It will go down when (if) the recovery occurs. The Fed would have been wrong to create a jobless recovery because Clinton didn't act on the deficit.

Commenter Gobanain writes:
I was working in the fixed income division of a leading investment bank sometimes thought of as an aquatic creature at the time. It took us a while to work out what was happening, but eventually we decided that the Fed and markets had built up a feedback loop. The Fed tightened. Bonds sold off partly as an automatic eaction but also because markets thought the Fed might know something. The Fed tightened again; markets thought the Fed must know something about inflation, so bonds sold off. Commodity prices were rising, so the Fed worried that might impact on inflation (in Europe the first central bank to hike was Sweden, and they actually cited coffee prices as the reason.) Some big hedge funds decided to go short bonds long commodities. And then the loop completed. The Fed decided that the market must know something it didn't know, so it raided rates. Markets felt the Fed must know something really bad and was intending more hikes so bonds sold off. 
Greenspan later admitted that some of the Fed hikes had not been necessary. They had been counter-productive. The Fed was raising rates because the bond market was selling off. The bond market was selling off because the Fed was raising rates. No one cared at all what was happening to the deficit.
 I often wonder if the "Fixed income" lobby is one of those groups leading the charge against inflation and activist monetary policy.

Yield Curve

3 unanswered questions



Related to this post on "turning the corner" and breaking the Republican fever, the third question is Japan and Abenomics.

Abe vs Aso: The Most Important Policy Debate in the World Is Happening in Japan by Yglesias

just around the corner

Forecasters keep thinking there’s a recovery just around the corner. They’re always wrong. by Neil Irwin

(via Thoma)
Consider, for example, the Fed’s projections in November of 2009. Sure, growth would be slow in 2010, they held. But 2011 growth, they expected, would be 3.4 to 4.5 percent, and 2012 would 3.5 to 4.8 percent growth. The actual levels of growth were 2 percent in 2011 and 1.5 percent in 2012. 
What’s amazing is that the Fed’s newest projections, released in December of 2012, look like they could have been copy and pasted from 2009, just with the years changed: They forecast sluggish growth in 2013, 2.3 to 3 percent, followed by a pickup to 3 to 3.5 percent in 2014 and 3 to 3.7 percent in 2015. 
This isn’t meant to pick on the Fed; the same is true of other forecasters both in the government and the private sector. The Economic Policy Institute captured the CBO’s proclivity for projecting growth just around the corner in the chart below, from a briefing paper released last week. Essentially, this shows how as the years have passed, the CBO just keeps pushing back the timing of a genuine recovery—the time when the U.S. economy’s output has returned to the agency’s estimate of its potential—further and further. In early 2009, the CBO thought we would be back to full employment right about now; in their outlook released earlier this month, that was more like 2016 or 2017. 
Source: Economic Policy InstituteSource: Economic Policy Institute 

The overly optimistic forecasts have rested on one crucial assumption: That if we can just get through this rough patch, the natural forces of economic regeneration will assert themselves, and growth will snap back into place....
However, Goldman Sachs's Hatzius is predicting recovery in 2013H2 and 2014. He called the housing bubble and has a model based on sectoral balances: private sector and government leveraging and deleveraging.

backstopping sans regulation

Equipping the Fed for a Future Crisis by Binyamin Appelbaum
Mr. Dudley’s concern is about a little-noticed piece of the 2010 Dodd-Frank Act that actually reduced the central bank’s authority in one crucial area: its ability to provide emergency funding to strapped financial firms. 
The Fed arrested the 2008 financial crisis by using this authority to create a series of unprecedented programs that offered emergency financing not just to American banks – its traditional flock – but also to foreign banks, and not just to banks but to other kinds of financial companies as well, and indeed to other kinds of companies entirely
Congress responded to this performance by making it difficult to repeat. Dodd-Frank imposed new restrictions on the Fed’s ability to make emergency loans, or to keep money flowing, outside the banking industry. 
One basic reason was that Congress had never really intended to give the Fed such broad power in the first place. Rather remarkably, the authority that the Fed used to save the financial system in 2008 was granted by Congress in 1991 with almost no debate or public notice, a story I first told in The Washington Post in 2009. It was quietly slipped into a broader bill by former Senator Christopher Dodd of Connecticut, at the behest of Wall Street companies including Goldman Sachs. When it was first used almost two decades later, legislators like Representative Barney Frank confessed that they didn’t know they had voted for it.
The problem was that Clinton, Rubin, Summers and Democrats like Dodd allowed the rise of an unregulated shadow banking system. Granted they were facing a Republican Congress but Senators like Dodd are creatures of the financial industry, bought and paid for.

(via Thoma)

"edit war"

Fine Austrian Whines by Krugman
Andrew Leonard:
There’s a lockdown on the Wikipedia page for Austrian economics and wouldn’t you know it, one or way or another, it all seems to be Paul Krugman’s fault. 
… 
For more detail, you can go, of course, to the Wikipedia page for Austrian economics. But until at least Feb. 28, if you do so, you will find that the page “is currently protected from editing.” An “edit war” has been raging behind the scenes. Two factions were repeatedly deleting and replacing a section of text that had to do with a description of a critique of Austrian economics made by economist Paul Krugman.
Substance aside — not that substance isn’t important — Austrian economics very much has the psychology of a cult. Its devotees believe that they have access to a truth that generations of mainstream economists have somehow failed to discern; they go wild at any suggestion that maybe they’re the ones who have an intellectual blind spot. And as with all cults, the failure of prophecy — in this case, the prophecy of soaring inflation from deficits and monetary expansion — only strengthens the determination of the faithful to uphold the faith. 
It would be sort of funny if it weren’t for the fact that this cult has large influence within the GOP.

mommy-daddy wars (Malcolm and Martin) continued


It would be nice if DeLong could have "shown his work" on how they came up with the counterfactuals.

Andy Harless comments:
Empirically I have to call this for Dean. Take the real 10-year yield at the end of the last quarter before the election, using the Philadelphia Fed Survey of Professional Forecasters 10-year expected inflation rate. In 1992, the real yield was 2.6% (6.4-3.8). In 2000, it was 3.3% (5.8-2.5). Obviously, you could choose the dates differently and get a different answer, but it's hard to imagine that there's strong evidence of declining real yields when my first cut shows them increasing. And I don't think you can use projections if those projections are based on models in which crowding out has large effects on interest rates. 
However, (1) everyone should realize that interest rates are endogenous, and I'm not sure the long run elasticity of investment demand with respect to the interest rate is very large, (2) it's obvious if you remember the late 1990's that there is dynamic, multiple equilibrium kind of stuff going on here, and I think interest rate comparisons are missing the important part of the story.
and
...or rather, I should say, "I think the long run elasticity of investment demand with respect to the interest rate MAY BE quite large" (not the opposite). But "long run elasticity" is really an attempt to shoehorn my subsequent point into a simple comparative static context. You don't ultimately need to "bring down interest rates" in order to "make it easier for the private sector to invest and grow," you just need to make the resources available. The interest rate would be the signal through which this process is transmitted, but given the weird dynamics and multiple equilibria, it's not clear to me that the interest rate should end up much lower than where it started.
Really this is a discussion of the bond vigilantes who the rightwing argues will punish Obama for turning us into Greece. Or is the "confidence fairy" with the discussion of prodding the private sector to invest and grow?



Tuesday, February 19, 2013



Continuum is a pretty left-wing show or at least explores left-wing themes. By the year 2077, corporations have taken over North America, created a "Corporate Congress," and rewritten history. There are food riots as Jean-Luc Picard's communist society, one free from wants and the "need of money," has not taken shape. Instead the government runs an undemocratic, high-tech surveillance-police state. The lead role of Keira Cameron is played by Rachel Nichols, whose green alien hooked up with James T. Kirk in 2009's "Star Trek."

Last night's episode had some Occupy protests in present day Vancouver. Although it didn't portray the protesters in the best light. Some rioted after provocateurs stirred them up with breaking windows. Although some of the more peaceable hippy ones looked on in horror. The protesters rioted when free money has given out also.

One of the main characters, a cop, called them harmless hippies.

"Contiuum" has returned for a second season in Canada. (Its first season is currently being run on the SyFy channel.)

Zombie Marx

MIKE BEGGS: "ON THE POINT AT ISSUE, [DELONG] WAS RIGHT": YET MORE FAMA'S FALLACY FRESHMAN MACROECONOMIC MISTAKES WEBLOGGING by DeLong
I see that today, in the Journal of Australian Political Economy, Mike Beggs has taken his 2011 Jacobin essay up to the top of the Temple of Huitzilpochtil, ripped its heart out with an obsidian knife, and left it dead on the ground. The most important paragraph--and my favorite paragraph--is missing. The paragraph reads, as Beggs evaluates my critique of David Harvey's word-salad:
[O]n the point at issue, [whether boosting government spending would boost employment, DeLong] was right – it is a question of interest rates, not of the number of bonds that can be sold. When Harvey went on to clarify his argument, it was only with some casual empiricism of his own. He noted that he was hardly the only one to be making the argument that East Asian central banks could stop collecting US Treasuries, so that “the track of long-term treasury interest rates may go the way of the housing market data in just a couple of years (if not months).” This was an argument you could read in mainstream business pages; there was nothing particularly Marxist about it. Now that we are more than a couple of years down the track, DeLong still looks right: the yields on long-term Treasury bonds are, as I write in July 2011, about the same as they were in February 2009, when the exchange took place. The limits to stimulus have been political, not financial.
On this earlier post, I guess it matters what the output gap was. Deficit spending would be worthwhile in 92-94 if there was an output gap, no?

Data from the IMF:

Output gap in percent of potential GDP
Percent of potential GDP

1991         1992         1993         1994         1995         1996         1997              
-2.160     -1.370      -1.156         0.067       -0.292       0.347        1.607 

Currency Wars

Draghi Seeks to Ease Talk of Global Currency War
Over the last few years, emerging-market countries like Brazil have openly accused slow-growing advanced countries like the United States of unfairly pushing down the value of their currencies with their aggressive monetary policies. And, for years, the United States has accused export-reliant emerging economies, in particular China, of manipulating their currencies, too. 
More recently, in Japan, stimulus programs backed by the newly elected prime minister, Shinzo Abe, have kept interest rates near zero and flooded the economy with money, which has reduced the cost of Japanese products around the world.
China has capital controls which prevent inflation and "hot money." It has a trade surplus. It intervenes in foreign exchange markets by buying U.S. Treasuries. That's manipulation. This article neglects to mention this info.

The U.S. has a trade deficit and a large output gap. It's reasonable to try to stimulate the economy after a financial crisis. A stronger U.S. economy will be able to buy more exports from countries like Brazil.

daddy-mommy (Martin & Malcolm) wars continued.

CROWDING-IN AND RAPID GROWTH IN THE 1990S: DEAN BAKER GETS ONE WRONG, I THINK by DeLong
Dean Baker writes:
Can We Cut the Crap on Robert Rubin and Deficit Reduction?: Ezra Klei… feed[s] this myth when he tells us of the great virtue of deficit reduction in the Clinton years.
"Back in the 1990s, we knew why we feared deficits. They raised interest rates and “crowded out” private borrowing. This wasn’t an abstract concern. In 1991, the interest rate on 10-year Treasurys was 7.86 percent. That meant the interest rate for private borrowing was, for the most part, much higher, choking off investment and economic growth. Enter Clintonomics. The theory was simple: Bring down deficits, and you’d bring down interest rates. Bring down interest rates, and you’d make it easier for the private sector to invest and grow. Make it easier for the private sector to invest and grow, and the economy would boom. The theory was correct. By the end of Clinton’s term, the interest rate on 10-year Treasurys had fallen to 5.26 percent — lower than it had been in 30 years. And the economy was, indeed, booming. 'The deficit reduction increased confidence, helped bring interest rates down, and that, in turn, helped generate and sustain the economic recovery, which, in turn, reduced the deficit further,' Treasury Secretary Robert Rubin said in 1998."
Okay, fans of intro economics know that it is the real interest -- the difference between the nominal interest rate and the inflation rate -- that matters for investment, not the nominal interest rate. The inflation rate in the first half of 1991 was over 5.0 percent. This means that the real interest rate -- the rate that all economists understand is relevant for growth -- around 2.5 percent… [in] the last half year of the Clinton administration (and not some cherry picked low-point) the interest rate on 10-year Treasury bonds averaged around 5.7 percent. The inflation rate for the second half of 2000 averaged around 3.5 percent. This gives us a a real interest rate of 2.2 percent (5.7 percent minus 3.5 percent equals 2.2 percent). So we are supposed to believe that the difference between the 2.5 percent real interest rate in the high deficit pre-Clinton years and the 2.2 percent real interest rate at the end of the Clinton years is the difference between the road to hell and the path to prosperity?
The actual inflation rate in 1991 was 5%/year, but the expected inflation rate over the next decade was more like 3%/year. We are not talking about an 0.3 percentage-point decline in real interest rates, but rather about a 2.3 percentage-point decline in real interest rates. Moreover, back in 1992 when we unwound the yield curve and projected interest rates in the future we saw nominal interest rates has highly likely to rise unless the deficit was substantially reduced. The 2000 we were looking forward at had forecast nominal interest rates of not 7.86%/year but 10%/year or so--a real interest rate of 7%/year. 
The counterfactual for 2010 is thus different not by 0.3 percentage-points but by 4.8 percentage-points. That is a much bigger deal. 
How big a deal? Enough to boost the growth rate of potential output by between 0.5 and 1.0 percentage points per year, in my estimation…
Baker's math: 1991 real interest rate was 2.5 % (7.86% on 10yr - 5% inflation)
                      2000 real interest rate was 2.2 % (5.7% on 10yr - 3.5% inflation)

Interest rates were lowered by .3 precent over 8 years b/c of the confidence inspired by Clinton's deficit cutting (or rather by Greenspan's monetary policy which could have been tighter if Clinton had enacted his middle class spending bill.)

DeLong's math counterfactual: 1991 real interest rate was 2.5 % (7.86% on 10yr - 5% inflation)
                                              2000 real interest rate was 7 % (10% on 10yr - 3% inflation)

So they estimated they would have gotten 7 if Clinton had done his middle class spending bill. Greenspan would have raised rates to 10 percent? Really?

 7 - 2.2 = 4.8 lowering of rates over 8 years. Boost growth rate of potential output by .5 and 1.0 percent if they had not done deficit reduction?

Two questions: Is the 10 percent nominal rate with 3 percent inflation rate forecast accurate? (How is that determined? Growth would have been higher with higher deficits erasing the growth rate of potential outup. Did this factor into determining the boost in the growth rate by private sector output. Did they predict the Internet productivity growth which led Greenspan to keep rates low or the international crises which caused Greenspan to keep rates low?

Also we got the stock/tech bubble in 2000. Even if DeLong is correct, Klein's story of 10 year Treasury interest rates going from 7.86 to 5.26 isn't accurate.

This debate reminds one of how complicated macro is and why economic forescasts are usually wrong.

What if Clinton had pushed through his middle class spending bill and replaced Greenspan? Clinton should have pulled a Shinzo Abe.

Forecasting 10 percent interest rates on 10 year Treasuries with 3 percent inflation is fearing the bond vigilantes.

Monday, February 18, 2013

AV Club review of "All I Ever Wanted" from "Enlightened."

Cultural signifiers at Jeff Flender's (Dermot Mulroney) apartment: Wilco poster, "Manufacturing Consent" by Chomsky, and "A People's History of the U.S." by Howard Zinn.


 M83 | Midnight City from DIVISION on Vimeo.

Joe Weisenthal

Business Insider Names Executive Editor

Nate Silver intervied Henry Blodget  for "The Signal and the Noise."

2 unresolved questions


Helicopters can be dangerous by Gavyn Davies

(via Thoma)

Will McBride and Goldman's Hatzius be correct in their prediction that we'll see a pickup in growth in 2013H2 and 2014? Or will Waldman be correct and the Fed won't have to use an "exit strategy" for the indefinite future?

The negative view usually pans out. However after the lame recovery of 90-92, 1990s job growth was good with the stock/tech bubble and accomodative Fed policy.

After flirting with deflation in 2003, the 2000s saw $8 trillion in housing bubble wealth and low unemployment despite poor job growth. Unemployment didn't go up until 2008.

So the pattern is a shampoo economy with bubble and bust. Not unsurprising given the enactment of rightwing polices.

Question two is the fate of the Republican party. Demographics are against them. Tea Partiers are sabotaging primaries. They caved on the debt ceiling clown show. They are suffering from epistemic closure with Marco Rubio insisting that Fannie and Freddie caused the housing bubble and financial crisis. They still hold the House. They filibustered Hagel. Obamacare is law. Obama will nominate a new Fed chair next January. (Republican will filibuster.) He might get another Supreme Court judge. Will Obama break the Republican fever? History suggests they'll need a long time in the wilderness.


mommy-daddy wars continued (or Martin and Malcom)

Krugman can play the insider though. (see last post). He was for Hillary over Obama. He pushes the Clinton-years-were-awesome / Bush-years-sucked-partisan-theory-line.

The Great Dollar Decline by Krugman
What you see right away is that the dollar fluctuates a lot, so impressions of big decline depend a lot on your starting point. Think of it this way: maybe the question isn’t why the dollar fell so much during the Bush years, but rather why it was so strong during the late Clinton years. (The tech boom/bubble is an obvious answer).
Baker would say Rubin/Clinton had a strong dollar policy. Krugman knows governments can have policies regarding the strength of their currencies.
So: the euro was extraordinarily weak in the early 2000s (which I remember from a wonderful bike trip in Burgundy), reflecting teething troubles with the new currency. It recovered, and has stayed strong despite the crisis because of the refusal of the European Central Bank to match the easing of other central banks. Canada, meanwhile, saw its currency rise along with a great commodity boom.
Did Bush have a weak dollar policy?

I believe Krugman is correct regarding MMT.

Gavyn Davies provides the link. Davies fails to mention Professor Bernanke on Japan. And Waldman may be right that we'll be at the ZLB for a long time.

Sunday, February 17, 2013

I want mommy and daddy to stop fighting (covers ears)

I tend to side with Baker here even though I agree with both DeLong and Baker 99 percent of the time and they are good about the data and history in my view. There's always the suspicion, which is perhaps unfair, that DeLong is biased by his time at Treasury. Then there's the counter accusation that Baker is harder on Clinton and Obama than he needs to be because, well because he's an outsider and a curmudgeon or something. (same goes for Krugman)

Can We Cut the Crap on Robert Rubin and Deficit Reduction by Dean Baker
Robert Rubin is best known as the man who pocketed more than $100 million as a top Citigroup honcho as it played a central role in pumping up the housing bubble that sank the economy. However, because of the incompetence (corruption?) of the Washington media, he is much better known as a great hero of economic policy.
Ezra Klein helps to feed this myth when he tells us of the great virtue of deficit reduction in the Clinton years.
Klein may have been influenced by this:

BACK WHEN I FEARED THE BOND-MARKET VIGILANTES: MAUNDERING OLD-TIMER REMINISCENCE WEBLOGGING by DeLong
We in the Treasury--and the staff at the Federal Reserve--had expected the reaction of the long-term bond market to this Fed tightening cycle to be modest. Between 1990 and 1994 the Federal Reserve had reduced short-term interest rates by 5%, and as it had done so long-term rates had fallen by 3%. We attributed 1.75% of that long-term interest rate reduction to the reduced current and expected future federal deficits as a result of Clinton's OBRA 1993 and the earlier Foley-Mitchell-Bush OBRA 1990, leaving 1.25% to be the reaction of the long-term bond market to lower short-term interest rates. Thus as the Federal Reserve raised short-term safe interest rates from 3% to 6%, we expected a quarter of that to show up as a rise in long-term rates--we expected to see them go from 6% to 6.75%. 
Instead, in 1994 long-term bond rates rose from 6% to 8%. 
In the end we attributed the excess rise in long-term bond rates in 1994 to two factors:
  1. As interest rates rose, the duration of Mortgage Backed Securities lengthened--people weren't refinancing their houses any more. MBS thus became much longer duration securities--there was a much greater supply of long-term bonds in the market--and by supply and demand that pushed the prices of such bonds down until investment banks could figure out how to tap more risk-bearing capacity to hold those bonds. 
  2. Nobody was sure that the Federal Reserve was going to stop raising short-term safe interest rates when they hit 6%. In the late 1980s, after all, they had not stopped until short-term interest rates hit 8%. Without effective forward guidance from the Federal Reserve, the bond market was pricing in a larger tightening than seemed likely to us. 
We were, I think, completely correct. By mid-1995 it was clear that the Federal Reserve had reached the end of its tightening cycle and more money had flowed into the long-term bond market to hold attractively-priced MBS, and the long bond rate fell back into the trading range we had anticipated--and then fell some more. 
So: 1994 was an interesting lesson on the importance of clear Federal Reserve forward guidance in avoiding excess bond-market volatility and on the consequences of endogenous duration for the short-term pricing of complex securities, but it was not an example of bond-market vigilantes fearing higher deficits and default or inflation riding over the horizon. The federal deficit was under control and rapidly shrinking in 1994 as the combination of the business-cycle recovery and Clinton's OBRA 1993 worked even better than we had anticipated. 
Second, there had been an attack--or, rather, not an attack but rather bond-market vigilantes visible on the horizon and gunshots in the air--earlier. 
Throughout 1992 there was a 4%-point gap between the 3-Month Treasury rate and the 10-Year Treasury rate. Those of us in the Clinton-administration-to-be read this as market expectations that the uncontrolled federal budget deficit would lead people to expect higher inflation and the Federal Reserve would then feel itself forced to raise short-term interest rates far and fast in order to hit the economy on the head with a brick and keep those expectations of higher inflation from coming true. The result would be a low-investment and perhaps a jobless recovery. The right policy, we thought--and I think the evidence is pretty clear that we were 100% right--was to aggressively move to reduce the budget deficit in 1993 even thought the recovery was weak in order to eliminate any market expectations that high deficits would lead to higher inflation, and--more importantly--to eliminate any belief on the part of the Federal Reserve that it need to raise rates rapidly and far to create a low-investment jobless recovery in order to guard against any possibility of a renewed inflationary spiral. 
That was not an attack but a horizon-sighting of bond-market vigilantes--or perhaps only the market thinking the Federal Reserve thought it was about to get a horizon-sighting of bond market vigilantes. 
I think we were right then to fear and take steps to ward off the bond-market vigilantes--or perhaps only right to fear and take steps to ward off any Federal Reserve decision that it needed to fear and take steps to deal with bond-market vigilantes. In any event, our policies were right.