"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

Friday, November 22, 2013

dsquared, DeLong & Dean Baker


Over at Crooked Timber, Daniel Davies Turns into an Internet Troll... by DeLong (repost from 2011)
Why did they do this? It wasn't because, as Daniel claims, of "the disappearance of a huge amount of household sector wealth. It did disappear. But wealth had disappeared before--remember Black Monday on the stock market in 1987, or the collapse of the dot-com boom?--without it triggering a Lesser Depression. It was because people recognized that banks that were supposed to have originated-and-distributed mortgage-backed securities had held on to them instead, that as a result a large chunk of the $500 billion in subprime losses had eaten up the capital base of highly leveraged financial institutions, and that you were running grave risks if you lent to a bank. The run on the shadow banking system that followed was the source of the crash as financing for exports and for equipment investment vanished, and then the whole thing snowballed.

No banks losing track of the risks they were running and holding on to assets that were supposed to be originate-and-distribute, no financial crisis, no credit crunch, and no Lesser Depression. The housing bubble would have deflated, unemployment would now be near 5%, exports would have boomed, and our biggest worry right now would probably be a "weak dollar".
It seems the disagreement is short-term versus long-term crisis. DeLong says it was a short-term crisis caused by a "seize up" that turned into a long-term crisis because of inadequate policies. Davies agrees their have been inadequate policies since the crisis, but wrong-headed policies before the crisis helped bring on the crisis.

Dan Davies and "secular stagnation"

If this is “secular stagnation”, I want my old job back by Dan Davies

When Thought Experiments Encounter the Unthinking by Krugman

Bonus Thursday Idiocy Department: Clive Crook Misreports Larry Summers by DeLong

Thursday, November 21, 2013

IOER and money markets

The account said that most officials were open to the idea of encouraging bank lending by reducing the interest rate on funds that banks keep on deposit with the central bank. Those reserves have ballooned with the Fed’s bond purchases, because the Fed buys bonds from the banks and then credits their reserve accounts.

The Fed currently pays annual interest of 0.25 percent on bank reserves, which sounds like a pittance but cost $199 million in 2012. Officials have described the payments as a way of keeping inflation under control, because the reserves stay at the Fed. But with inflation sagging, economists including Princeton University’s Alan Blinder have argued that the Fed should revisit its priorities.

The account the Fed released on Wednesday said the idea “could be worth considering at some stage,” though it noted the benefits were likely to be small.

Janet L. Yellen, President Obama’s nominee to lead the Fed for the next four years, said at her confirmation hearing last week that the idea “certainly is a possibility.” She added, however, that officials remain concerned that a rate cut would disrupt financial markets. Keeping the interest rate on reserves above zero, for example, has created an incentive for banks to borrow from money market funds and then deposit the money with the Fed. In the absence of those payments, the money funds might actually be forced to pay the banks to take that same money.

“We’ve worried that if we were to lower that rate to close to zero, we would begin to impair money-market function,” Ms. Yellen said at the hearing.

Wednesday, November 20, 2013

Is zero the new normal? by Simon Wren-Lewis
The solution that cannot be named by Ryan Avent

Do Negative Rates Call For a Permanent Expansion of the Government? by Mike Konczal

Social Security and Secular Stagnation by Krugman

Obamacare

But at this point there’s enough information coming in to make semi-educated guesses — and it looks to me as if this thing is probably going to stumble through to the finish line. State-run enrollments are mostly going pretty well; Medicaid expansion is going very well (and it’s expanding even in states that have rejected the expansion, because more people are learning they’re eligible.) And healthcare.gov, while still pretty bad, is starting to look as if it will be good enough in a few weeks for large numbers of people to sign up, either through the exchanges or directly with insurers.

If all this is right, by the time open enrollment ends in March, millions of previously uninsured Americans will in fact have received coverage under the law, and reform will be irreversible. Obama personally may never recover his reputation; Democratic hopes of a wave election in 2014 are probably gone, although you never know. But anyone counting on Obamacare to collapse is probably making a very bad bet.
People's memories are short. If it's fixed by the spring people will have all summer to forget. The Republicans probably won't want to change the subject to shutting down the government again.

secular stagnation and solutions

The point is that the case against austerity is as strong as it ever was.

And maybe even stronger, once you think about debt dynamics.

Right now the real interest rate on US government borrowing is about 0.5 percent on 10-year securities, negative 0.4 percent on 5-year. Meanwhile, even pessimistic estimates of US potential growth put it in the 1.5-2 percent range. So r is less than g — the real interest rate on debt is less than the normal growth rate.

This in turn means that the usual worry about a rising debt level — that it will require that we eventually run big non-interest surpluses to pay down the debt — is all wrong. As long as we run a primary (non-interest) balance, or in fact not too large a deficit, the debt/GDP ratio will tend to erode over time. What’s more, an increase in the primary deficit won’t cause a runaway debt spiral, it will lead to a gradual rise in debt to a higher level, but it will stabilize there.

Suppose, for example, that r is 0.5 and g is 1.5 — not too unrealistic. Suppose that you start with debt at 50 percent of GDP, and then begin running primary deficits of 1 percent of GDP. What will happen? Debt will rise to 100 percent of GDP, and stay there, even if nothing is done to address the deficit.

I don’t want to push this too hard, but I just want to make it clear that if we really believe in low or even negative normal real interest rates, conventional views of fiscal prudence make even less sense than people like me have been saying.

So fear not: I’m still bitterly against austerity, and even less impressed by the fiscal scolds than before. Secular stagnation just adds to the reasons to believe that we’re doing things very, very wrong.

Tuesday, November 19, 2013

Obamacare working where people can sign up

Americans Like Obamacare Where They Can Get It. by John Cassidy

QE

The Internal Contradiction of Quantitative Easing by David Glasner

Grand Bargain and fiscal policy

“It’s a lot harder than you’d think to find Republicans who’d actually want to cut entitlements, or Democrats who want to raise taxes,” said Jared Bernstein, a former economic adviser to Vice President Joseph R. Biden Jr. and now a senior fellow at the liberal Center on Budget and Policy Priorities. “The only person who seems to have consistently been interested in a grand bargain is the president, and frankly I’m not even sure about him.”
...
Mr. Obama put the proposed changes to entitlement programs in his budget, including one that would reduce annual cost-of-living benefits for Social Security, over his party’s opposition. His hope was to entice Republican leaders back to the bargaining table, or at least to expose their unwillingness to compromise. Republicans were not enticed.

“One of the big differences between budget discussions now and previous ones back to the ’80s is that I’m not sure anyone here really wants to cut a deal,” said Stan Collender, a longtime fiscal policy analyst and the national director of financial communication at Qorvis, a public relations firm.

“Do Republicans want to propose changes in entitlements?” he added. “Basically you’re talking about Medicare and Social Security, which a lot of Tea Party folks get, given their ages. Do Democrats want to propose changes in taxes for upper-income individuals? Well, given the support they’re getting from upper-income individuals, I’m not sure they want to take the lead on that.”
...
The declining deficit reflects economic growth as well as the spending cuts and tax increases that Mr. Obama and Congress previously agreed to. It is not expected to begin climbing again until about 2018, as more baby boomers draw from Medicare, Medicaid and Social Security. With the unemployment rate stuck above 7 percent, Democrats are more interested in increasing spending for programs like public works and education, and ending the sequestration cuts, which economists say are costing hundreds of thousands of jobs.

Monday, November 18, 2013

Sunday, November 17, 2013

Krugman, Summers and "secular stagnation"

A Permanent Slump? by Krugman

Paul, Larry, Secular Stagnation, Sand the Impact of Negative Real Rates by Jared Bernstein

Krugman blogged about the same themes as Summers's radical IMF presentation back in September.
 
Me Too! Blogging by Krugman

Bubbles, Regulation, and Secular Stagnation by Krugman
The trouble with this line of argument is that if monetary policy is assigned the task of discouraging people from excessive borrowing, it can’t pursue full employment and price stability, which are also worthy goals (as well as being the Fed’s legally binding mandate). Specifically, since the US economy shows no signs of having been overheated on average from 1985 to 2007, the argument that the Fed should nonetheless have set higher rates is an argument that the Fed should have kept the real economy persistently depressed, and unemployment persistently high – and also run the risk of deflation – in order to keep borrowers and lenders from making bad decisions. That’s quite a demand.
Many of us would therefore argue that the right answer isn’t tighter money but tighter regulation: higher capital ratios for banks, limits on risky lending, but also perhaps limits for borrowers too, such as maximum loan-to-value ratios on housing and restrictions on second mortgages. This would guard against bubbles and excessive leverage, while leaving monetary policy free to pursue conventional goals.

Or would it?

Our current episode of deleveraging will eventually end, which will shift the IS curve back to the right. But if we have effective financial regulation, as we should, it won’t shift all the way back to where it was before the crisis. Or to put it in plainer English, during the good old days demand was supported by an ever-growing burden of private debt, which we neither can nor should expect to resume; as a result, demand is going to be lower even once the crisis fades.
We need sustainable demand to compensate for the missing debt-fueled demand. Sequester austerity isn't helping at the fiscal level. The trade deficit isn't helping. Monetary policy can't completely compensate because of political limitations. (Abenomics may highlight the political constraints.) Supply policies like more leisure time can help as well.

DeLong on East Asian Crisis & European Feedback Cycle of Doom

DeLong seems to be partly reacting to Baker's criticism of Summers and the Clinton administration's handling of the East Asian Financial Crisis. At least it is the same subject.

The Long and Large Shadows Cast by Financial Crises: The Future of the European Periphery in the Mirror of the Asian Pacific Rim 1997-98 by DeLong
And yet that is not what happened. On the Asian Pacific Rim in 1997-8, the fact that so much of the region’s debt was denominated in dollars meant that bouncing the value of the currency and thus of domestic production down far enough raised universal and valid fears of bankruptcy, and sharply raised risk premia: the Asian Pacific Rim thus had to, to a certain extent at least, defend its currency. And in Europe’s periphery nations are tied by treaty, by the deep and close technical integration of the financial system, and by hopes for a united and peaceful European future into the euro zone. Thus when the crisis comes both regions must generate rapid adjustment of the current account: a sudden stop.

The problem is general. There are lots of reasons why the natural market’s bounce-the-value-of-the-currency-down adjustment mechanism will not work. Overwhelming reasons to maintain a fixed parity. High levels of harder-currency debt. A tight coupling of import prices to domestic inflation and a belief that the costs of accepting domestic inflation are unacceptable–cough cough, why we all today feel sorry for Raghu Rajan. In any of these cases, when the crisis comes you must generate a rapid adjustment in your current account, and the easiest and the most straightforward way to do this are via domestic investment collapse. This is the first failure of the veil of the financial system to be merely a veil–the first coupling of financial distress to destructive real economic consequences.