"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, May 11, 2013

Emperor has no clothes

Wow what a week. This story in the New York Times by Jackie Calmes really struck me:

Economists See Deficit Emphasis as Impeding Recovery

When the emphasis has been the Deficit and government spending since 2010 thanks to Geithner, Obama, and the Tea Party. It's as if the boy yelled "The emporer has no clothes."

And DeLong on Moby Ben and Washington-Whale.

Powerful shit. About the hedge fund cranks (DeLong mentions in a comment that conservative economists like Marty Feldstein feel the same way.)

BERNANKE-HATERS AT THE SOHN CONFERENCE by DeLong
And Matthew Yglesias:
Hedge fund Bernanke hate: A lot of folks have remarked on the amazing outpouring of hatred for Ben Bernanke's allegedly inflationary monetary policies from the hedge fund set at the recent Sohn Conference, but I don't think anyone's really nailed it. Here's the thing about rich hedge fund guys. They're people. And like other people you may have met, they like money and don't like paying taxes. Where rich people are different is that they have a lot of money, so it's really tempting to say "hey lets take that money and give it to people who need the money more."
Rich people who don't like paying taxes don't like the idea of macroeconomic stabilization policy. That's because it'd convenient for them if the market economy could be not just a practical tool for allocating goods, but an moral framework imbued with deep ethical significance.
And that, in turn, is an idea that sits oddly with the concept that actually you have a bunch of bureaucrats in the Federal Reserve System making the economy plug along. So rich guys indulge fantasies of shifting back to a gold standard or something else that would restore divine right to the monetary system. But beyond that, the central banker they like best is the central banker who's most obscure. Conventional monetary policy was something economists and bond traders paid attention to, but nobody else. Alan Greenspan raising or cutting rates by 25 basis points wasn't a big spectacle. Since the easing (or tightening) was based on interest-rate targeting rather than quantitative monetary creation, you didn't get articles about "printing money". It was all just there in the background.
Ben Bernanke is as if the Wizard of Oz stepped forward from behind the curtain and turned out to be a really powerful wizard. The whole market economy turns out to be an elaborately orchestrated affair, with deep involvement by government central planners who weigh a variety of situations before determining outcomes. In that kind of world, there may still be reasons to eschew certain kinds of tax hikes. But they're practical, pragmatic reasons. They're not moral reasons, in which taxes violate the natural hierarchy of the market because there clearly is no such hierarchy.
Time magazine lists Yglesias as one of 2013's best political Twitterers along with Franke-Ruta. Zero Hedge is listed for economics! WHY Zero Hedge??? Is Time trying to be seen as edgy? So Zero Hedge criticizes the banks, so what?

http://en.wikipedia.org/wiki/Excess_reserves

"On October 3, 2008, Section 128 of the Emergency Economic Stabilization Act of 2008 allowed the Fed to begin paying interest on excess reserve balances ("IOER") as well as required reserves. They began doing so three days later.[3] Banks had already begun increasing the amount of their money on deposit with the Fed at the beginning of September, up from about $10 billion total at the end of August, 2008, to $880 billion by the end of the second week of January, 2009.[4][5] In comparison, the increase in reserve balances reached only $65 billion after September 11, 2001 before falling back to normal levels within a month. Former U.S. Treasury Secretary Henry Paulson's original bailout proposal under which the government would acquire up to $700 billion worth of mortgage-backed securities contained no provision to begin paying interest on reserve balances.[6]
The day before the change was announced, on October 7, Fed Chairman Ben Bernanke expressed some confusion about it, saying, "We're not quite sure what we have to pay in order to get the market rate, which includes some credit risk, up to the target. We're going to experiment with this and try to find what the right spread is."[7] The Fed adjusted the rate on October 22, after the initial rate they set October 6 failed to keep the benchmark U.S. overnight interest rate close to their policy target,[7][8] and again on November 5 for the same reason.[9]
The Congressional Budget Office estimated that payment of interest on reserve balances would cost the American taxpayers about one tenth of the present 0.25% interest rate on $800 billion in deposits:
Estimated Budgetary Effects[10]
Year20062007200820092010201120122013201420152016
Millions of dollars0-192-192-202-212-221-242-253-266-293-308
(Negative numbers represent expenditures; losses in revenue not included.)
0.25% simple interest on $800 billion is $2 billion, not $202 million [LOLWUT???] as shown for 2009. But those expenditures pale in comparison to the lost tax revenues worldwide resulting from decreased economic activity from damage to the short-term commercial paper and associated credit markets."

The government depositing money in the primary dealers accounts is sort of like a Government Jobs Program. Just takes a while for jobs to be created from credit loaned out from the banks.
At the end of January, 2009, excess reserve balances at the Fed stood at $793 billion[18] but less than two weeks later on February 11, total reserve balances had fallen to $603 billion. On April 1, reserve balances had again increased to $806 billion. By August 2011, they had reached $1.6 trillion.[19] 
On March 20, 2013, excess reserves stood at $1.76 trillion.[19] As the economy began to show signs of recovery in 2013, the Fed began to worry about the public relations problem that paying dozens of billions of dollars in IOER would cause when interest rates rise. St. Louis Fed president James B. Bullard said, "paying them something of the order of $50 billion [is] more than the entire profits of the largest banks." Bankers quoted in the Financial Times said the Fed could increase IOER rates more slowly than benchmark Fed funds rates, and reserves should be shifted out of the Fed and lent out by banks as the economy improves. Foreign banks have also steeply increased their excess reserves at the Fed which the Financial Times said could aggravate the Fed’s PR problem.
In effect, Reinhart and Rogoff were making the same sort of claim about debt and GDP. Let me try to explain this in a way that even an economist can understand it. 
I have often pointed out that the value of long-term debt fluctuates with the interest rate. I didn't think this is a secret, but apparently few economists have followed what happens to bond prices when interest rates change. The point is that the value of our debt will plummet if interest rates rise, as the Congressional Budget Office and other forecasters expect. This means that we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost.

Yes, this is really stupid, but if you believed the Reinhart-Rogoff 90 percent debt cliff, then you believe that we can sharply raise growth rates by buying back long-term bonds at a discount. It's logic folks, it's not a debatable point -- think it through until you understand it.
So, interest rates rise. A 30-year Treasury loses value, going from 2 percent interest to 5 percent interest, and from the price of 188 to 115. What happens when the Fed buys the debt back?

Is it an open market operation?

http://en.wikipedia.org/wiki/Open_market_operations
Since most money now exists in the form of electronic records rather than in the form of paper, open market operations are conducted simply by electronically increasing or decreasing (crediting or debiting) the amount of base money that a bank has in its reserve account at the central bank. 
...
In the United States, as of 2006, the Federal Reserve sets an interest rate target for the Federal funds (overnight bank reserves) market. When the actual Federal funds rate is higher than the target, the New York Reserve Bank will usually increase the money supply via a repo (effectively borrowing from the dealers' perspective; lending for the Reserve Bank). When the actual Federal funds rate is less than the target, the Bank will usually decrease the money supply via a reverse repo (effectively lending from the dealers' perspective; borrowing for the Reserve Bank). 
In the U.S., the Federal Reserve most commonly uses overnight repurchase agreements (repos) to temporarily create money, or reverse repos to temporarily destroy money, which offset temporary changes in the level of bank reserves.[4] The Federal Reserve also makes outright purchases and sales of securities through the System Open Market Account (SOMA) with its manager over the Trading Desk at the New York Reserve Bank. The trade of securities in the SOMA changes the balance of bank reserves, which also affects short term interest rates. The SOMA manager is responsible for trades that result in a short term interest rate near the target rate set by the Federal Open Market Committee (FOMC), or create money by the outright purchase of securities.[5] More rarely will it permanently destroy money by the outright sale of securities. These trades are made with a group of about 22 (currently 18 as an immediate aftermath of 08/09 credit crisis) banks or bond dealers that are called primary dealers
Money is created or destroyed by changing the reserve account of the bank with the Federal Reserve. The Federal Reserve has conducted open market operations in this manner since the 1920s, through the Open Market Desk at the Federal Reserve Bank of New York, under the direction of the Federal Open Market Committee. The open market operation is also a means through which inflation can be controlled because when treasury bills are sold to commercial banks these banks can no longer give out loans to the public for the period and therefore money is being reduced from circulation.
 http://en.wikipedia.org/wiki/Primary_dealers
As of October 31, 2011 according to the Federal Reserve Bank of New York the list includes:[10]
The New York Fed has a list of changes since 1999.

So they're part of the system and get free money deposited to their accounts when the Fed wants to create jobs. They get money pulled from their accounts when labor markets are "too tight" and workers are able to bid up their wages.

Employers: Never Bid Up Wages (bias in the media and with economists)

It's So Hard to Find Good Help: Businessweek Edition by Dean Baker
Businessweek tells us that homebuilders would be building more homes, if only they could find qualified construction workers. Hmmm, that must mean that wages for construction workers are soaring as the shortage causes employers to bid up wages in an effort to grab workers away from competitors or hold on to their current workforce.

That's not what the data say. According to data from the Bureau of Labor Statistics, after adjusting for inflation the average hourly wage in construction has risen by just 0.9 percent in the five years from 2007 to 2012. Note that this a total increase of 0.9 percent over these five years, not an annual increase. If there is a labor shortage, it's not showing up in wages for some reason. (Of course the unemployment rate for construction workers was reported at 13.2 percent in April, which also does not seem to indicate a labor shortage.)

The more obvious explanation for the fact that construction remains depressed is thenear record vacancy rates. Presumably many of these empty homes will have to be filled before builders get more aggressive about building new ones.

Zero Hedge one of Time's best Twitter feed's? What?!?

Yglesias and Franke-Ruta were listed in Time's best political Twitter feeds!

Found these at Time's website looking for:

The Housing Mirage by Rana Faroohar
But perhaps the biggest takeaway from the current housing "boom" is that the conventional wisdom no longer holds. It has long been said that you can't have a sustainable economic recovery in the U.S. until the housing market is back. In truth, it may be the other way around. Until you have more jobs, rising wages and a middle class that can afford to take out a mortgage from a bank that will actually lend to it, you can't have a real housing recovery.
Also:

Every Every Every Generation Has Been the Me Me Me Generation by Elle Reeve


'In Praise of Econowonkery' by Mark Thoma

In the comment section, I did a link dump about the floor system safe asset paradigm shift genealogy.


The Widowmaker

MOBY BEN, OR, THE WASHINGTON SUPER-WHALE: HEDGE FUNDIES, THE FEDERAL RESERVE, AND BERNANKE-HATRED by DeLong
From my perspective, of course, the hedge fundies' analogy between the London Whale and the Washington Super-Whale is all wrong--the hedge fundies are thinking partial-equilibrium when they should be thinking general equilibrium. CDX IG 9 has a well-defined fundamental value: the payouts should each of the 125 companies go bankrupt times the chance that they will. What Bruno Iksil does does not affect that fundamental value. He can bet, and drive the price, but he cannot change the fundamental.
But the Washington Super-Whale is different.
In a healthy economy, the Ten-Year Treasury Bond does have a well-defined fundamental. When the economy is healthy enough that pricing power reverts to workers and keeping inflation from rising is job #1 for the Federal Reserve, the level of the Federal Funds rate now and in the future is pinned down by the requirement to hit the inflation target. And the fundamental of the Ten-Year Treasury Bond is then the expected value over the bond's lifetime of the future Federal Funds rate plus the appropriate ex ante duration risk premium.
But when the economy is depressed, like now? When market appetite for short-term cash at a zero interest rate is unlimited, like now? When workers have no pricing power, and so wage inflation is subdued, like now? The Federal Reserve is not J.P. Morgan Chase. It is not a highly-leveraged financial institution that must worry about holding too much duration risk. As Glenn Rudebusch once said: "Our business model here at the Fed is simple: (i) print reserve deposits that cost us 0 (OK. 0.25%/yer), (2) invest them in interest-paying bonds that we then hold to maturity, (3) PROFIT!!" And the more quantitative easing the Fed undertakes and the larger is its balance sheet the larger is the amount of money the Federal Reserve makes on its portfolio, without running any risks--as long as the economy remains depressed.
The Federal Reserve, you see, is unlike J.P. Morgan Chase: the Federal Reserve does print money.

Harpooning Ben Bernanke by Krugman
I’d riff on this a bit further. I suspect that the hedge fund guys are relying a lot on historical correlations that worked pretty well for decades: mean reversion of yields, correlations with deficits, etc., most of it pretty much model-free. The trouble is that a once-in-three-generations deleveraging shock makes such correlations useless. Cross-national analogies — i.e., Japan — would have been better, but don’t seem to have been applied. 
What you should be doing is macro analysis, using something like IS-LM — something like what I did here, almost three years ago. (The forecasts have gotten worse since, so the implied long-term rate would be even lower). 
But instead of saying that maybe this macro IS-LM stuff has a point, they’re raging against the man with the beard.

Friday, May 10, 2013


Pro-Inflation Policies Show Signs of Helping Japanese Economy
The key, economists say, lies in how much exporters will pass on their bigger profits to consumers, by raising wages or hiring new workers. Higher incomes would drive a much-needed recovery in consumption, bringing about a virtuous cycle of rising prices, profits, investment and even higher incomes. 
Mr. Abe himself has been publicly pressuring corporate executives to raise pay, declaring on television last month that companies needed to “return favorable corporate earnings to their workers,” prompting a string of companies to declare wage increases or extra bonuses in recent months.
Land of the Rising Sums by Krugman




LOLCAT SEZ: WHEN UR INFLATION BELOW AND UR UNEMPLOYMENT CONSISTENTLY ABOVE TARGET, UR DOIN IT WRONG by DeLong

Obi-Wan Bernanke waves his hand and performs a Jedi Mind Trick on the press and public, "The economic recovery has been unsatisfactory. We stand ready to do more if necessary."

"These aren't the droids you're looking for."

Liberal Wonk Blogging Could Be Your Life by Mike Konczal

Thursday, May 09, 2013

Gerwig and Marling

The other side of summer: A preview of the season’s non-blockbuster movies by the AV Club




I liked Gerwig in Greenberg and Whit Stillman's Damsels in Distress. Stillman's Barcelona is one of my favorite movies of all time.  Looking up info on Marling, I learned that was her in Redford's "The Company You Keep" which was about the Weather Underground, another radical group.

The Moral Equivalent of Space Aliens by Krugman
David Pilling , writing in the FT, suggests that it was the double shock of the 2011 tsunami and China’s overtaking of Japan as the number 2 economy by market value. These shocks, he argues, broke through the fatalism and convinced the Japanese elite that something must be done.

Economists See Deficit Emphasis as Impeding Recovery by Jackie Calmes and Jonathan Weisman

Wednesday, May 08, 2013

Surpise from Krugman

WHEN BIG DOGS GO BAD by Charles Pierce

linked to by Krugman:

The Fix the Debt Fix Is Still In

Who seemed to argue you vote Democratic and defend Clinton no matter what, sort of, in the previous blog post:

South Carolina Voters Get It

So it's good to see Krugman criticize Clinton here (who did criticize Krugman). This is why I was for Obama over Hillary. Krugman wanted Hillary.

Tuesday, May 07, 2013

Fed Watch: 14,000 by Tim Duy

Fed Watch: When Deficits Become a Problem by Tim Duy

JW Mason comments:
I'm afraid Tim Duy is wrong, Randy Wray is right, and Krugman is contradicting himself.
It is one thing to say that the **flow** of demand for current output caused by large deficits can be inflationary. It is a different thing entirely to say that the **stock** of debt is an independent constraint on policy or a factor in interest rate determination. 
Yes, if a government spends far more than it collects in taxes, this can lead to aggregate demand aggregate supply constraints, driving up prices. MMT has always said this. But what matters is the size of the output gap. The relationship between the government budget balance, the output gap and inflation is exactly the same whether the debt-GDP ratio is 20% or 200%.
I don't know what to make of this. Mason is a smart guy but I don't understand what he's saying and Duy and Krugman have been wrong before.

But I don't trust the MMTers! Intellectual snake oil salesman with dodgy rhetoric about how deficits don't matter and claims that they never said that.

What is Mason saying? That the limit is set by how much in taxes the government is able to collect?

Unexpected inflation is in effect sort of hidden surprise tax increase in that it devalues the contracts creditors hold from when they originally drew up the the debt contract.

Likewise an extremely slack labor market is in effect a tax on workers in that it weakens their bargaining power and enhance the "threat of the sack."

See Michal Kalecki.

when the far left agree with the rightwing

Atrios - Obamacare skeptic - links to Greg Sargent.

The Morning Plum: Dems shouldn’t take GOP’s bait on Obamacare implementation by Greg Sargent

Sargent is right that Obama passed health care reform and was re-elected despite the public's anxiety of it and in general. 
For one thing, as Josh Barro has noted, implementation is likely to be most keenly felt among those who currently lack insurance, who will naturally see getting insurance as a preferable outcome to nothing at all, even if proves logistically difficult.
 More people will be covered. This will make them healthier and less anxious.

The quid pro quo was that young people be forced to buy coverage. This will give money to the insurance companies who are now forced to cover everyone, even people with pre-existing conditions. Plus young people can stay on their parents' plan until they are 26.

Obama care is also a very VERY tentative step towards a single payer system, in that it sets up exchanges in states, gives subsidies to help pay for health care and enacts studies to see how cost can be held down and things can be improved.

Better branding than the "dismal science"

KEYNESIAN ECONOMICS: THE GAY SCIENCE? by DeLong

Economics 101 for WAPO: Supply and Demand in the Labor Market by Dean Baker
Economists generally like to see supply and demand determine prices. When there is a shortage of an item then the price is supposed to rise. At higher prices the supply increases and the demand falls, this eliminates the shortage.

For some reason this simple logic was altogether absent from a Washington Post article that was headlined "Germany struggles with skilled labor shortage, shrinking population." Remarkably the piece never once mentions increasing wages. Instead it talks about efforts to bring in foreign workers.

It seems like Germany might be suffering from the same problem that is often the subject of news stories in the United States: managers who don't know how to raise wages. The media have frequently reported on businesses who complain that they cannot find qualified workers.
 
Since there are very few occupations where real wages have been rising in the last five years, it seems that few people who run businesses understand how labor markets work. This suggests that there could be large gains to the economy if the government (both here and in Germany) offered remedial economic courses to business managers explaining the basics of labor markets. Then they would understand that if they want more workers they should offer higher wages. This would eliminate labor shortages and then we would no longer have to read silly pieces like this one in the Post.