John F. Burns on Afghanistan:

In the summer of 2010, Kandahar, again, is at the heart of the matter. Gen. Stanley A. McChrystal, the American commander, has been signaling for months that the crucial engagement of the war, aimed at loosing the tentacles the Taliban have wound around the city and its outlying districts, would begin sometime this spring or summer. True to the form he set since taking command in Kabul last year, when he warned that the war was on its way to being lost unless radical new strategies were adopted, the general has left no room for illusion. In effect, he has said, the struggle for Kandahar may determine the outcome of the war.

U.S. troop reductions are to begin in July 2011.

A report prepared by the London School of Economics says Pakistani intelligence still exerts a great sway on Afghan Taliban almost nine years after 9/11.

Drawing on interviews with Afghan Taliban commanders and former Taliban ministers and officials, the report suggests that Pakistan’s premier intelligence service, the Inter-Services Intelligence agency, or ISI, supports the Taliban insurgency as a matter of official policy to contain the influence in Afghanistan of its rival India. Both serving and retired officials from the Pakistani intelligence agency are carrying out that policy, the report says.

Although many of the specifics of the report could not be independently verified, the bulk of its conclusions are very much in line with what Afghan officials, and some Western officials, have often alleged: that Pakistan has maintained its longstanding relationship with the Afghan Taliban to retain its influence in Afghanistan.

In other words, the Pakistanis are waiting for us to leave to continue their contest against their neighbor India in Afghanistan. So, nuclear Pakistan and nuclear India are fighting it out in Afghanistan and in Kashmir. India has a widespread Maoist insurgency. India is unable and/or unwilling to improve its infrastructure and leads the world in road fatalities.

India overtook China to top the world in road fatalities in 2006 and has continued to pull steadily ahead, despite a heavily agrarian population, fewer people than China and far fewer cars than many Western countries.

While road deaths in many other big emerging markets have declined or stabilized in recent years, even as vehicle sales jumped, in India, fatalities are skyrocketing -- up 40 percent in five years to more than 118,000 in 2008, the last figure available.

Video of India's Highway of Death. "Every day in India, 320 people are killed in traffic accidents, the highest rate in the world. What will happen as new roads are built and thousands of drivers are taking the wheel?"

Why should an international investor invest in India? Why should an international businessperson do business with India? Their cheap labor costs? I have a feeling those doing business with India will come to be sorry.

Dean Baker on David Brooks's magical thinking.

In his worst column so far this year, Brooks writes:

Some theorists will tell you that if governments shift their emphasis to deficit cutting, they risk sending the world back into recession. There are some reasons to think this is so, but events tell a more complicated story. 

A theorist named Ben Bernanke, chairman of the Federal Reserve Bank who was appointed by Bush and kept on by Obama, i.e. the most powerful man in the federal government, said yesterday that "This very moment is not the time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support."

For example, retail sales declined in May. This is just one month, but it's a weak report.
Brooks:

Alberto Alesina of Harvard has surveyed the history of debt reduction. He’s found that, in many cases, large and decisive deficit reduction policies were followed by increases in growth, not recessions. Countries that reduced debt viewed the future with more confidence. The political leaders who ordered the painful cuts were often returned to office. As Alesina put it in a recent paper, "in several episodes, spending cuts adopted to reduce deficits have been associated with economic expansions rather than recessions."

Someone should Fisk that paper. At the very beginning of his column Brooks writes "Sixteen months ago, Congress passed a stimulus package that will end up costing each average taxpayer $7,798. Economists were divided then about whether this spending was worth it, and they are just as divided now."

And then a couple of paragraphs later "Over all, most economists seem to think the stimulus was a good idea..." Were economists divided into two camps where most thought the stimulus was a good idea and a minority of ambitious, know-nothing suck-ups didn't?

Paul Krugman on Chermany.

You know the answer, don’t you? Yep: everyone is counting on the US to become the consumer of last resort, sucking in imports thanks to a weak euro and a manipulated renminbi. Oh, and while they rely on US demand to make up for their own contractionary policies, they’ll lecture us on how irresponsible we’re being, running those budget and current account deficits.

Massive Flow Of Bullshit Continues To Gush From BP Headquarters

new unemployment claims fell

A Labor Department report Thursday said new claims for unemployment fell by a less-than-forecast 3,000 to a seasonally adjusted 456,000. While that figure fell short of economists’ forecast for a drop to 448,000, investors were heartened by data showing total claims last week dropped by the largest amount in almost a year. Total unemployment benefit rolls fell by 255,000 to 4.5 million.

The drop in total claims provides some hope that laid-off workers are starting to find new jobs. It was welcome relief after the Labor Department said last week that private employers slowed their hiring in May to the lowest levels since January.

In response to a question from Representative Paul Ryan of Wisconsin, Bernanke wasn't as dire as the House Republicans' point man on the budget:

"If markets continue to stabilize, then the effects of the [European sovereign debt] crisis on economic growth in the United States seem likely to be modest," Mr. Bernanke testified. "Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages, as well as lower prices for oil and some other globally traded commodities"

Department of Overrated

I've always believed Jeffrey Sachs to be overrated. First he inflicts massive austerity on the former Soviet Union via "shock therapy" during the '90s, then he turns around and advocates for the world's poor as maybe some kind of penance. These days he's writing misguided Op-Eds calling for more austerity, which surprises Brad DeLong, who writes:

Whenever I build a model in which expansionary fiscal policy fails to reduce unemployment, it is for one of three reasons:

1. Expectations of the present and future deficits cause the price level to jump now, so that increased nominal spending does not translate into increased real demand (i.e., Mitterand ca. 1981)
2. The expansionary effect of higher deficits is offset by higher interest rates that crowd out private investment and exports, offsetting the stimulative effect of the fiscal policy (i.e., Kohl ca. 1982)
3. Households expecting higher future tax liabilities cut back on their spending and boost their savings now, thus offsetting the stimulative effect of the fiscal policy (i.e., I can't think of a historical episode).

Jeff Sachs writes:

Time to plan for post-Keynesian era: Taking office in January 2009, President Barack Obama inherited the largest peacetime budget deficit in US history. By increasing it further, he made it his rather than his predecessor’s. He and his advisers ignored one of the key insights of modern macroeconomics: that the result of fiscal policy depends not only on current taxes and spending but also on their expected trajectories in the future. The US was not in a credible position to raise an already enormous deficit "temporarily" because the prospect for future deficit cutting was and remains extremely clouded. America has absolutely no consensus on how to restore budget balance, as it is trapped between a federal government that provides too few public investments and services and a public that is almost maniacal in its opposition to tax rises. One cannot build a credible long-term fiscal policy by starting off in the wrong direction, with larger rather than smaller deficits...

In the model in which Sachs is working--I think--the passage of the ARRA was coupled with a massive jump in U.S. long-term interest rates as financiers lost confidence in the ability of the U.S. to solve its long-run fiscal problems. The consequent appreciation of the dollar reduced exports and the steep rise in interest rates reduced investment spending so that the fact that the government was spending money didn't boost employment relative to what it would otherwise have been.

The problem, of course, is that U.S. Treasury rates did not jump at all.

(Via Krugman) Responding to DeLong's post in part, Krugman writes:

Something like that, I believe, is going on here. Calling for austerity and tight money feels courageous, tough-minded, and virtuous; it allows the economist making such calls to take the pose of a Serious Person standing firm against the easy-money guys.

Yes, I know that’s insulting. But what’s so striking is that in all three cases I’ve cited you had highly trained economists -- that is, people who have spent their whole lives arguing in terms of carefully laid out models -- making arguments that aren’t backed by any model I can see.

Krugman's cameo in the movie Get Him to the Greek.

(via DeLong)

Associated Press reports:

One sign of better economic times is when more people start finding jobs. Another is when they feel confident enough to quit them.

More people quit their jobs in the past three months than were laid off -- a sharp reversal after 15 straight months in which layoffs exceeded voluntary departures. The trend suggests the job market is finally thawing.

Some of the quitters are leaving for new jobs. Others have no firm offers. But their newfound confidence about landing work is itself evidence of more hiring and a strengthening economy.

"There is a century's worth of evidence that bears out this view that quits rise and layoffs fall as the job market improves," said Steven Davis, an economist at the University of Chicago.

Still, the number of people quitting their jobs is nowhere near what it was before the recession. Economists expect the improvement in the job market to be fitful, rather than consistent. In May, for example, private employers added only 41,000 net jobs after adding 218,000 in April.

Yet the long-term trend points to an improving job market. The economy has created a net 982,000 jobs this year after a recession that wiped out more than 8 million of them.

David Leonhardt writes on the government's failure to help support aggregate demand:

Despite all this, there is reason to think that more stimulus may finally be on the way. Last Friday’s jobs report showed little private-sector job growth in May, which was a good reminder that recoveries from financial crises are usually rocky. The report has the potential to persuade Congress to expand the jobs bill passed by the House, which is now before the Senate.

As is, the House bill would cut taxes for businesses and temporarily extend jobless benefits, among other things. By the end of the year, it would add about 170,000 jobs, Moody’s Economy.com estimates. Expanding the bill to include extra Medicaid funds for states -- which seems politically conceivable -- could add 100,000 more jobs. Expanding it to keep teachers employed -- which is unlikely -- could add 200,000 or so.

Will another half-million jobs make the economy feel strong again? No. Will the next round of stimulus be more popular than the last one? Probably not.

Is it nonetheless the right thing to do? That’s another question entirely.

Blanche Lincoln won the primary in Arkansas probably because of the Obama administration's stimulus bill and the jobs it created. How well the Democrats fair in November will be in large part determined on how well the economy creates jobs during the remainder of the year. Presumably their fund-raising efforts will be helped by tough talk on deficits, but who knows for sure?

Full Employment by Benjamin Kunkel

There are also historical reasons for supposing that the fatal flaw in postwar capitalism lay in not-full-enough employment. The interpretation of the inflationary troubles of the ’70s as a price spiral induced by high wages (along with high oil prices) is not the only one; in the late ’70s, with inflation at its postwar worst, unemployment also ran much higher than in prior decades. In the US, the Ford and Carter administrations attempted to stimulate the economy by deficit spending and tax cuts, but so long as workers were not producing a supply of goods and services commensurate with the increased monetary demand, what could the prices of existing goods and services do but rise? Another solution would have been to create new jobs, turning out new commodities, to soak up excess currency. But this could only have been achieved at the cost, unthinkable to business, of greater power for labor. 

Vampire Squid Releases Ink Cloud of Data

The Financial Crisis Inquiry Commission issued a subpoena to Goldman Sachs.

"Goldman Sachs has not, in our view, been cooperative with our requests for information, or forthcoming with respect to documents, information or interviews," Phil Angelides, the chairman of the Financial Crisis Inquiry Commission, told reporters on a conference call.

The deputy chairman, Bill Thomas, accused Goldman of stonewalling, and said, "They may have more to cover up than either we thought or than they told us"

...

 Mr. Angelides and Mr. Thomas both said that Goldman had inundated the panel with data -- about five terabytes, equivalent to several billion printed pages -- and dragged its feet on answering detailed questions about derivatives, securitization and other business activities.

Hungary is Playing Debt Games

In Hungary -- a small, open economy that traditionally depends on exports to drive growth -- there is also a view that officials invoked the specter of a Greece-style financial meltdown to talk down the value of the forint and thus make Hungarian exporters more competitive in world markets.

Mark Kirk, the Republican candidate for the open Illinois Senate seat, did not tell the truth about his military record. James Warren discusses this and other fibbings by candidates.

Yglesias says Joe Nocera is wrong about what the House and Senate FinReg bills do about the the credit agencies and he suggests Nocera may be erring on the pessimistic side in his overall analysis.

Unrelated, Senator Charles Schumer works to save free, indie-music, pool-party concerts in Williamsburg, Brooklyn.

Jane Lynch, 49, marries her partner. She stars in the TV show "Glee" and was in "Party Down", "Arrested Development," and "the L Word." She was in the films "Julie and Julia,"  "Role Models," "The Rocker," "Walk Hard," "Smiley Face," "For Your Consideration," "Talladega Nights," "The 40 Year Old Virgin," "A Mighty Wind," and "Best in Show" among others.

Flight to Treasury Bonds wasn't supposed to happen.

It is also sobering that a vast majority of economists and market strategists were forecasting a different chain of events. Treasury yields were universally expected to be rising, not falling, as the United States recovered from a deep recession. The domestic economy is, in fact, growing, and corporate profits have been rising, but the European crisis has overturned many expectations.
...
But Mr. Knapp had thought that the stock market decline would be set off by a tightening of monetary policy by the Federal Reserve, which has operated on an emergency basis since the onset of the financial crisis in the United States. The Fed hasn’t tightened. Instead, to keep the economy stable in the face of Europe’s problems, it has held short-term interest rates near zero. In addition, it reopened emergency swap lines with European central banks last month, to help maintain liquidity there.
...
Mr. Davis said that there is a very "strong correlation" between low Treasury yields and subsequent strong economic growth. And there is a weaker but still significant connection between low yields and high stock returns.

In short, at current prices, it would appear that there is some reason for long-term optimism for stock investors.

(via DeLong)

Geithner urges G-20 nations to spur domestic demand.

The United States wants countries with trade surpluses, like Germany and China, to stimulate domestic demand, fearing that tighter fiscal policy will impede growth and endanger the still-nascent recovery.

"Fiscal consolidation should be 'growth-friendly,'" Mr. Geithner told reporters, saying the "pace and composition of adjustment" should vary across countries.

Krugman responds to the G-20 communiqué:

But don’t we need to worry about government debt? Yes -- but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.

The right thing, overwhelmingly, is to do things that will reduce spending and/or raise revenue after the economy has recovered -- specifically, wait until after the economy is strong enough that monetary policy can offset the contractionary effects of fiscal austerity. But no: the deficit hawks want their cuts while unemployment rates are still at near-record highs and monetary policy is still hard up against the zero bound.

Joe Nocera is not happy with Financial Regulation Reform.

Comedian Aziz Ansari is on "Parks and Recreation" and is hosting the MTV movie awards.

What Mr. Ansari won’t do is exploit his minority status for laughs, or make it the focus of his comedy. You won’t hear him opining about his parents’ background as Tamil Muslims from India, and he said he’s tired of people’s assumptions that he encountered rampant racism growing up in the South.

He grew up in Columbia, South Carolina.

Beijing to raise minimum wage:

Minimum wage in the Chinese capital will be increased to 960 renminbi ($140) a month from 800 renminbi on July 1, the official Xinhua news agency said.

Provinces and cities throughout the country have raised their minimum wage this year as companies have reported growing labor shortages with migrant workers from the interior choosing to seek jobs in small cities closer to their homes.

A strike at a Honda Motor car parts factory that began month was resolved Wednesday after the company offered its workers a 24 percent pay raise, showing how the balance of power in the country’s factories is gradually tipping toward workers.

John Waters on NPR's Fresh Air.

Warren Buffett is dumb

Buffett's holding company Berkshire Hathaway is the largest shareholder in Moody's Investors Service, one of the ratings agencies. He and the head of Moody's testified at a hearing of the Financial Crisis Inquiry Commission.

He did say that Mr. McDaniel and Moody's were no better or worse at predicting the financial fiasco than virtually every other player on Wall Street.

"The entire American public was caught up in the belief that housing prices could not fall dramatically," Mr. Buffett said. Moody’s "made the wrong call," he said, but he counseled humility because "I was wrong on it, too." Before the catastrophe started, he called the housing bubble a "bubble-ette," he said, a term he now regrets: "It was a four-star bubble."
...
Perhaps not surprisingly, the former employees tended to be more critical than those still on the Moody's payroll. Mark Froeba, a onetime senior vice president, told the panel that the culture of Moody's was transformed after the company was spun off from Dun & Bradstreet in 2000.

Quickly, the quasi-academic atmosphere of Moody's vanished, he said. Analysts suddenly felt their first priority was to help the company maintain market share, not get the ratings right.

"Cooperative analysts got good reviews, promotions, higher pay, bigger bonuses, better grants of stock options and restricted stock," Mr. Froeba said in a prepared statement. Uncooperative analysts, he added, were often fired. 

...
The commission’s questioning of Mr. Buffett was not particularly harsh, though panel members were scornful, at times, of Moody's. Mr. Angelides said in his opening statement that 89 percent of the securities given a top triple-A rating by Moody's were later downgraded.

"The miss was huge," he said. "Ninety percent downgrade. Even the dumbest kid gets 10 percent on the exam."

Mr. McDaniel fell back on a defense that has been heard often from top executives at rating agencies: the drop in housing prices was without precedent and therefore all but impossible to predict.

"We believed our ratings were our best opinion at the time we assigned them," he said. "I'm deeply disappointed with the performance of ratings associated with the housing sector"

Mr. Buffett sounded his most sober note when asked by a panel member, Brooksley Born, the former chairwoman of the Commodity Futures Trading Commission, if the derivative market was "still a time bomb ticking away."

"I would say so," he said.

Saving Israel from Itself by Nicholas Kristof

Israel’s hard-line policies are depleting America’s international political capital as well as its own. Gen. David Petraeus noted two months ago that the perception that the United States favors Israel breeds anti-Americanism and bolsters Al Qaeda. The chief of Mossad, Meir Dagan, was quoted in the Israeli press as making the point more succinctly: "Israel is gradually turning from an asset to the United States to a burden."

Peter Boone and Simon Johnson write at The Baseline Scenario:

To be clear, Spain has a better chance of avoiding sovereign and massive bank defaults compared to Greece, which is in intensive care -- with a doubtful prognosis and a permanent resource infusion from the European Central Bank. In this regard the announcements in the last few weeks from Spain were helpful, for example when the government chose resolution authority over religious authority in taking legal control of a troubled savings bank (CajaSur) from the Catholic Church.

Spain’s savings banks, often owned by local authorities, the church, and other civic groups are generally a bastion of moral hazard due to the implicit belief that no political leader would let the relevant creditors fail. The CajaSur takeover did not impose losses on creditors, but it did establish that the managers of failed banks can at least lose their jobs.  

The highly unpopular budget reforms announced by Prime Minister Zapatero further demonstrate some resolve -- and the fact they just passed a legislative hurdle is encouraging. According to optimistic forecasts, Spain’s budget deficit will fall to 5.3% of GDP next year (although the European Commission still has this projected at 9.8%). If Spain can get anywhere near this level, despite 20% unemployment, then financial markets will probably go easy on them. Spain’s high unemployment is partly the result of a more liberalized labor market that made it easier for employers not renew term contracts. This has made Spain one of the worst nations in Europe in terms of employment loss, but it also means jobs could rebound quickly.

GM posts 16.6 percent rise in May U.S. sales

Ford U.S. May sales up 23 percent

Chrysler U.S. May sales up 33 percent

(via Calculated Risk)

(Ebenezer Scrooge encounters Jacob Marley's ghost.)

The American Scrooge Epidemic

Steve Pearlstein writes about Blue Dog centrist Democrats and the deficit:

The Blue Dogs want you to believe that, unlike those other profligate politicians, they really, really care about bringing the federal budget deficit under control, even in the midst of the worst economy in 75 years.

That's why the caucus of fiscally conservative House Democrats insisted last week that their party leaders strip out nearly $30 billion in funding for health-care coverage for the poor and the unemployed from emergency legislation extending jobless benefits. It's not that we're heartless, they explained, it's just that the country can't afford it.

All of which raises the question of why the Blue Dogs couldn't muster the same fiscal discipline when it came to spending $22 billion over the next three years to guarantee that American doctors, who are far and away the best-paid in the world, don't suffer any significant declines in their incomes just because of a little thing like a recession or a government budget crisis.

Given the choice between protecting high-income docs and economically struggling patients, those courageous Blue Dogs sided with the docs.

(via Dean Baker)

Job Bill vs. Deficit by David Leonhardt

The case against the jobs bill starts with the idea that the economy is recovering. Since the recession’s nadir, in January 2009, the job market has improved at the most rapid pace since 1983. On Friday, forecasters expect the Labor Department to report that job growth continued to accelerate in May.

There is always the chance that the economy could slip back again. But the case for optimism seems stronger. Corporate executives are becoming more upbeat, surveys show. Business travel has picked up. Silicon Valley firms are doing more deals. Nissan broke ground last week on a car battery plant in Tennessee, and Chrysler is adding 1,100 jobs at a Jeep plant in Michigan.

...

Of course, even if the bill is not very expensive, it is worth passing only if it will make a difference. And economists say it will.

Last year’s big stimulus program certainly did. The Congressional Budget Office estimates that 1.4 million to 3.4 million people now working would be unemployed were it not for the stimulus. Private economists have made similar estimates.

There are two arguments for more stimulus today. The first is that, however hopeful the economic signs, the risk of a double-dip recession remains. Financial crises often bring bumpy recoveries. The recent troubles in Europe surely won’t help.

The second argument is that the economy has a terribly long way to go before it can be considered healthy. Here is a sobering way to think about the situation: If the next four years were to bring job growth as fast as the job growth during the best four years of the 1990s boom -- which isn’t likely -- the unemployment rate would still be higher in 2014 than when the recession began in late 2007.

Voters may not like deficits, but they really do not like unemployment.

Leonhardt suggests doing both the job bill and more deficit reduction. The political question is how do you do deficit reduction.

The Pain Caucus by Paul Krugman

"A Missing Macroeconomic Playbook?" by Brad DeLong

John Stuart Mill was thus explicitly refuting the older French economist Jean-Baptiste Say. Say had been well-embarked on a career in politics and government in the new French Republic of the early 1790s: special assistant to Gironde Party Secretary of the Treasury Clavier. But then Clavier fell: purged, arrested, imprisoned, and executed by Robespierre's "Mountain" faction. Somehow Say escaped the wreck with not just his life but his liberty and some property as well, and set out to pursue happiness by withdrawing from politics to write treatises on economic theory. In 1821 Say published his Letters to Mr. Malthus, in which he argued that the very idea of a "general glut" was self-contradictory, for the very fact that commodities had been produced meant that there was sufficient demand in aggregate to buy them:

(via Yglesias)

From Wikipedia:

The Mountain (French: La Montagne) refers in the context of the history of the French Revolution to a political group, whose members, called Montagnards, sat on the highest benches in the Assembly. The term, which was first used during the session of the Legislative Assembly, did not come into general use until 1793.

At the opening of the National Convention the Montagnard group comprised men of very diverse shades of opinion, and such cohesion as it subsequently acquired was due rather to the opposition of its leaders to the Girondist leaders than to any fundamental hostility between the two groups. The chief point of distinction was that the Girondists were mainly theorists and thinkers, whereas the Mountain consisted almost entirely of uncompromising men of action.

During their struggle with the Girondists, the Montagnards gained the upper hand in the Jacobin Club, and for a time "Jacobin" and "Montagnard" were synonymous terms. The Mountain was successively under the sway of such men as Marat, Danton, and Robespierre.

"Mountain" by Stereolab


"The Mountain" by the Heartless Bastards

Shorting Reform by Michael Lewis

Eugoogly

Dennis Hopper has died.

Costco Profit Rises 46% as Sales Grow 12%

After the health care reform victory, Obama is out again fund-raising for the Democratic party in anticipation of the coming mid-term elections.* Jackie Calmes writes:

But Democrats grumble that in raising money for them, as for himself, Mr. Obama prohibits donations from lobbyists and political action committees, long the fund-raising base for both parties.

"We make up for it with the large number of new donors that we brought into the process," said Dan Pfeiffer, the White House communications director. "And we have a grass-roots fund-raising capacity that is certainly unprecedented."

The grass roots have been stingier, however, than in 2008, which Democrats attribute to the economic downturn, the delays in winning changes in health care and the fact Mr. Obama is not on the ballot. But passage of the health insurance law, Mr. Pfeiffer said, "excited the grass-roots supporters the way that nothing else has."

In the most recent quarter, unlike the previous one, the Democratic National Committee outraised the Republican National Committee.

Krugman isn't happy.

Some Democrats worry that the new jobs bill is too expensive. With unemployment at 10%, that's crazy.

Republicans have been pounding Democrats on the deficit issue -- a line of attack that infuriates Democrats, who quickly note that former President George W. Bush entered office with a federal surplus and left with a substantial debt that the Obama administration inherited and then added to with its own economic recovery initiatives.

Lengthy, infuriating, thought-provoking op-ed by the a hedge fund manager who has access to the President's economic advisors:

I recently posed this question to one of the president’s senior economic advisers. He answered that the government is different from financial institutions because it can print money, and statistically the United States is not as bad off as some other countries. For an investor, these responses do not inspire confidence.

He went on to say that the government needs to focus on jobs now, because without an economic recovery, the rest does not matter. It’s a valid point, but an insufficient excuse for holding off on addressing the long-term structural deficit. If we are going to spend more now, it is imperative that we lay out a credible plan to avoid falling into a debt trap. Even using the administration’s optimistic 10-year forecast, it is clear that we will have problematic deficits for the next decade, which ends just as our commitments to baby boomers accelerate.

Not if we continue to fix the health care system and raise taxes on people like David Einhorn. At least he says that we should get rid of the official credit rating agencies and admits the financial industry is fighting change:

Congress has a rare opportunity in the current regulatory reform effort to eliminate the rating system. For now, it does not appear interested in taking sufficiently aggressive action. The big banks and bond buyers have told Congress they want to continue the current system.

Dean Baker says:

He tells readers that. "lower official inflation means higher reported real G.D.P., higher reported real income and higher reported productivity." Actually, this is not true insofar as asset prices are the cause of understated inflation. Asset prices do not affect GDP or productivity measures. It is remarkable that Einhorn apparently does not know this.

Einhorn also complains that his assessment of the understatement of inflation:

"doesn’t even take into account inflation we ignore by using a basket of goods that don’t match the real-world cost of living. (For example, health care costs are one-sixth of G.D.P. but only one-sixteenth of the price index, and rising income and payroll taxes do not count as inflation at all.)"

Actually, the government has a wide variety of inflation measures, many of which do include the full weight of health care expenditures. They all show the same thing as the consumer price index: inflation is very low and falling. In short, Mr. Einhorn either has no clue about government data, or he is deliberately trying to mislead readers.

There are signs the economy is improving but it could still easily stumble. But at least there are good signs.
------------
* Here in Illinois, the White House has sent Education Secretary Artie Duncan and Deputy Chief of Staff Jim Messina to help Giannoulias, the former banker and state treasurer of Greek ancestry. (Update: A day after this post Lynn Sweet reports in the Sun Times that David Plouffe will attend a grass roots fundraiser in Chicago on June 30th.)

Europe's fiscal crisis could hinder US recovery

Facebook unveils simplified approach to privacy after public and media outcry over recent changes

Electronics maker in China promises review after string of suicides

SHENZHEN, China -- Struggling to cope with a rash of suicides at his company’s electronics factories here, the chairman of an electronics maker that supplies Apple, Dell and Hewlett-Packard* said Wednesday that he was doing everything possible to find a solution.

... 

Foxconn, which has about 420,000 employees on two campuses in Shenzhen, is known for its military-style efficiency, the awesome scale of its production operations and for manufacturing popular products like the Apple iPhone. But this year the company has come under intense scrutiny because of a string of suicides by distressed workers between the ages of 18 and 24

------------
*nice to see Rhys Darby of Flight of the Concords Fame in those HP TV ads.

I just bought three new memoirs: Sarah Silverman's The Bedwetter: Stories of Courage, Redemption, and Pee, Pam Grier's Foxy: My Life in Three Acts and Christopher Hitchens's Hitch-22.

"Chelsea Dagger" is a song by The Fratellis and their second single. It was released on 28 August 2006. It is taken from their debut album Costello Music, which was released in the UK on 11 September 2006. It is supposed to be named after both Jon Fratelli's wife Heather, a burlesque dancer whose stage name -- Chelsea -- he borrowed for the song, and also as a play on the name of pop singer Britney Spears.

...

Characterised by its anthemic, scat chorus, it has been adopted on many football terraces as a crowd "favourite."

This song was played when Shunsuke Nakamura scored from a free-kick for Celtic Football Club in their 1-0 win over Manchester United on 21 November 2006 and was also played during Celtic's Scottish Premier League Celebrations after beating Kilmarnock 2-1. When Celtic score at home, the song's chorus is played. The Fratellis claimed on Soccer AM that this was a great honour and they hadn't known for a while, as they were too excited with the goal.

It was also played during Scotland's win over Georgia at Hampden Park in 2007 much to the delight of the Scottish fans.

It is played when Nottingham Forest, Ipswich Town, MK Dons, Rotherham United, Preston, Bristol City, Plymouth Argyle, Mansfield Town, Northampton Town, Coventry City, Brechin City and Middlesbrough score a goal (although many fans feel that the playing of this song and others detracts from the natural goal celebration). 

In ice hockey, it is played at the United Center for all Chicago Blackhawks goals and wins, and a version of the chorus is played on the organ during the listing of the game's "Three Stars". It is also played regularly at the Verizon Center for the Washington Capitals.

(Blackhawks team captain Jonathan Toews (just turned 22!)

The Blackhawks pulled ahead 2-1 in the series against the increasingly feisty Vancouver Canucks last night after a hat trick by the cheeky Dustin Byfuglien and some excellent goaltending by Antti Niemi. Strange to see the smiley actor Owen Wilson at the game (maybe Vince Vaughn gave him his tickets).

Nice passing/teamwork before Kris Versteeg's game-winner in the previous game (which turned the series around in my opinion).



Go Blackhawks! For some great hockey-blogging check out Michael Bérubé.

Roger Lowenstein writes about Fannie and Freddie.

Report: China To Overtake U.S. As World's Biggest Asshole By 2020

From the G20 meeting:

Although India and Brazil this week joined calls by the United States for China to allow the value of its currency, the renminbi, to appreciate, the Group of 20 officials said the topic did not come up in their meetings.

Yoon Jeung-Hyun, the South Korean finance minister who coordinated the meetings, said "there were no specific discussions" of either the renminbi, also known as the yuan, or the euro, which has recently fallen in value.

Even as problems in Europe preoccupied the leaders, officials reported positive developments in some poorer parts of the world.

Adam Scott who played Will Ferrell's brother in Step Brothers will have a role in Parks and Recreation beginning this season and extending into the next.

AS: I play a state auditor who comes into Pawnee to cut the budget of the Parks And Recreation department and possibly fire people. I just kind of scare the shit out of everyone.

My Big Fat Greek Default
(or Damn the Gods /
Release the Kraken)

Greece waves the white flag and appeals for international aid. 

Greece was forced to make the request after investors shunned the country’s bond offerings because of concern about its runaway debt. Those worries intensified Thursday when the European statistics agency raised its estimate for Greece’s debt above the government’s most recent figures, pushing the yield on Greek bonds to nearly 9 percent.

At that point, the need for international funds seemed a certainty, and Mr. Papandreou made the request while on a visit to Kastellorizo, an island in the Aegean Sea.

The financing will come from an emergency aid package arranged two weeks ago in Brussels in which Greece’s euro zone partners pledged up to 30 billion euros ($40 billion) in loans to Greece. The International Monetary Fund is expected to provide an additional 15 billion euros.

Teasury Secretary Geithner and the IMF push for global tax on banks but G20 is split on the idea.

Mr. Lipsky’s boss, Dominique Strauss-Kahn, the top I.M.F. official, caused rumblings on Friday when he suggested that some countries were moving too quickly on reform. He said the Obama administration’s plan "comes too soon" given the need to coordinate responses across countries.  

"I read that and I thought, really?" Mr. Geithner said in response. "My sense is that it’s been 15 months -- or more than a year -- since we started this process in the United States. We’re not moving with excessive haste." 

Mr. Geithner acknowledged that one of the biggest reform elements -- forcing banks to hold more capital as a buffer against economic disruptions -- was partly beyond the scope of the legislation being debated by Congress. The Basel Committee on Banking Supervision, a global regulatory body, is coordinating discussions around capital requirements in the hope of announcing new standards by the end of this year.

A Federal District Court rules National Day of Prayer violates First Amendment.

The Freedom From Religion Foundation claims a membership of more than 14,000, the largest group in the country advocating for atheists and agnostics. It has doubled its staff to eight in the last year, publishes a newspaper 10 times a year, Freethought Today, and has a weekly radio show. The group counts among its members and vocal supporters Janeane Garofalo, Christopher Hitchens and Ron Reagan. 

... 

The group’s biggest victory to date came last week when Judge Barbara B. Crabb of Federal District Court ruled that the federal government could not enact a law in support of prayer any more than it could "encourage citizens to fast during the month of Ramadan, attend a synagogue, purify themselves in a sweat lodge or practice rune magic." The law, signed by President Harry S. Truman in 1952, calls on the president to sign a proclamation annually in observance of a National Day of Prayer.

Now's not the time to begin talking about considering interest rate hikes in the medium term.

Christine Romer, the chairwoman of the White House Council of Economic Advisers, addressed a conference at the Woodrow Wilson School of Public and International Affairs at Princeton University. She says the nation’s high unemployment rate is a result of a severe drop in demand for goods and services and is not a reflection of longer-term structural changes in the economy. We shouldn't settle, in other words. From a New York Times piece:

"It reflects the fact that we are still feeling the effects of the collapse of demand caused by the crisis," she said. "Indeed, at one point I had tentatively titled my talk, 'It’s Aggregate Demand, Stupid,’ but my chief of staff suggested that I find something a tad more dignified."

Ms. Romer said that demand remained constrained by tight credit, state and local government budget shortfalls, subdued demand by consumers and foreign markets, and the inability to lower interest rates any further.

It is highly unusual for the White House to take a stance on short-term interest rates, which are the purview of the Fed, but Ms. Romer’s remarks carry weight because she is an authority on monetary policy and the Depression.
...
Ms. Romer said that conventional estimates of G.D.P. might have underestimated the "true decline" in economic activity, helping to explain an otherwise "anomalous rise" in unemployment. She also argued that other factors -- the decline in manufacturing, rising joblessness among less-educated middle-aged men, and the shrinking of sectors like construction and finance -- were not enough to suggest that high unemployment would last.

By vigorously arguing that the current 9.7 percent unemployment rate was a matter of cyclical forces rather than structural ones, Ms. Romer was defending the Obama administration’s program of active intervention to stimulate demand. "I find it distressing that some observers talk about unemployment remaining high for an extended period with resignation, rather than with a sense of urgency to find ways to address the problem," she said, saying unemployment was not "the new normal."

She called for increasing aid to states, extending unemployment insurance benefits, stimulating small business lending and subsidizing energy-efficiency measures by homeowners.

The End of Bailouts

From an interview with Sheila Bair on Obama's financial reform legislation:

If this had been law prior to 2008, would we have seen the bailouts that took place? Would we have seen capital injections into banks?

BAIR: No. You could not do an AIG, Bear Stearns, or any of that. Those were all one-off things, capital or asset guarantee transactions. This bill would only allow system-wide liquidity support which could not be targeted at an individual firm. You can't do capital investments at all, period. It's only liquidity support. No more capital investments. That's banned under all circumstances.

You can do systemwide liquidity support. But you can't do anything on an individual basis. They would have to be generally available.

Do you see any way left for the government to bail out a financial institution?

BAIR: No, and that's the whole idea. It was too easy for institutions to come and ask for help. They aren't going to do that. This gives us a response: "Fine, we will take all these essential services and put them in a bridge bank. We will keep them running while your shareholders and debtors take all your losses. And oh, by the way, we are getting rid of your board and you, too."

The whole idea is to get market discipline back.

That's what ending "too big to fail means." It means debtors and shareholders understanding their money is at risk and especially the debtholders starting to look at the balance sheet of these big institutions and asking their own hard questions instead of relying on government support.

Will this bill really end "too big to fail"?

BAIR: I think it will go a long way.

(via Yglesias)

A Darwinian Crisis
(or Doing God's Work
or "Say it ain't so, Joe")

Books like Andrew Ross Sorkin's "Too Big to Fail," Gregory Zuckerman's "The Greatest Trade Ever," and Michael Lewis's "The Big Short" present narratives where smart, talented and virtuous bankers and financiers prevail against the mob during the recent clusterfuck. (The authors still agree common sense reforms are needed of course.)

Joe Nocera however provides an analysis of a different kind of Darwinian moment:

Remember in the months leading up to the crisis, when the Federal Reserve chairman, Ben Bernanke, and Henry Paulson Jr., then the Treasury secretary, were assuring everyone that the "subprime problem" could be contained? In truth, if the only problem had been the actual mortgage bonds themselves, they might have been right. At the peak there were well over $1 trillion in subprime and Alt-A mortgages that were securitized on Wall Street. That’s a lot, to be sure -- but it was a finite number. You could have only as much exposure as there were bonds in existence.

The introduction of synthetic C.D.O.’s changed all that. Unlike a "normal" collateralized debt obligation, which contained the bonds themselves, the synthetic version contained credit-default swaps -- derivatives that "referenced" a particular group of mortgage bonds. Once synthetic C.D.O.’s became popular, Wall Street no longer needed to feed the beast with new subprime loans. It could make an infinite number of bets on the bonds that already existed.

And why did synthetic C.D.O.’s become popular? One reason was that the subprime companies were starting to run out of risky borrowers to make bad loans to -- and hitting a brick wall. New Century, a big subprime originator, went bankrupt in early April 2007, for instance. Yet three weeks later, the Goldman synthetic C.D.O. deal, called Abacus 2007-ACI, went through, because it was betting on subprime mortgage bonds that already existed rather than bundling new ones. It didn’t even have to go to the trouble of repackaging old C.D.O. tranches into new C.D.O.’s, which was also a common practice. (Goldman has vehemently denied any allegations of wrongdoing, pointing out that it lost $90 million on the particular Abacus deal that is the subject of the S.E.C. complaint.)

The second reason, though, is that synthetic C.D.O.’s gave people like John Paulson a way to short the subprime market. Mr. Paulson’s bet against the subprime market, which famously reaped the firm billions in profits, was the subject of a recent book, "The Greatest Trade Ever." Boy, I’ll say.

Both Gregory Zuckerman, the author of that book, and Michael Lewis, who wrote the current best seller "The Big Short," make it clear that the heroes of their narratives -- the handful of people who had figured out that subprime mortgages were a looming disaster -- were pushing Wall Street hard to give them a way to short the market. Maybe synthetic C.D.O.’s would have been created even without their urging, but it seems a little unlikely. They were the driving forces. (emphasis added)

 Reminds me of some lines James Diedrick wrote about Martin Amis's novel London Fields.

This exhaustion extends right down to the low comedy of Keith's petty criminality. Consider this description of what he and his cohorts discover when they enter a house they intend to rob: "it was all burgled out. Indeed, burgling, when viewed in Darwinian terms, was clearly approaching a crisis. Burglars were finding that almost everywhere had been burgled" (248).

Nocera makes an excellent point at the end of his piece:

In its filing on Thursday, the S.E.C. charged that Goldman never told investors of Mr. Paulson’s involvement. "Credit derivative technology helped people disguise what they were doing," said Janet Tavakoli, the president of Tavakoli Structured Finance, and an early critics of many of the structures that have now come under scrutiny.

There appear to be other examples of this, as well. Last week, Pro Publica, the nonprofit investigative journalism outfit, reported how a big Chicago hedge fund, Magnetar, helped put together some synthetic C.D.O.’s -- precisely so that it could bet against them. In his book, Mr. Zuckerman seems to have stumbled onto Abacus and similar deals. One banker, he writes, "suspected that Paulson would push for combustible mortgages and debt to go into any C.D.O., making it more likely that it would go up in flames." Which is precisely what the S.E.C. is claiming. But in his quest to lionize his central character, Mr. Zuckerman rushes past what by all rights should have been the most shocking revelation in his book.

Mr. Lewis, for his part, recounts a dinner, late in the game, in which one of his heroes, Steve Eisman, is seated next to a man who is taking the long position on many of the C.D.O.’s he is shorting. They get to talking, and the man says to Mr. Eisman: "I love guys like you who short my market. Without you, I don’t have anything to buy." He adds, "The more excited that you get that you’re right, the more trades you’ll do, the more product for me."

As a reader, it is hard not to love that moment, rich as it is in irony and foreboding. The guy on the long side -- who was making investments that the housing and mortgage markets would remain strong -- is an obvious fool; Mr. Eisman, on the short side the trade, is clearly going to be vindicated. (And, by Mr. Lewis’s account, Mr. Eisman never "helped" a Wall Street firm pick the bonds for the C.D.O.’s he was shorting, the way the S.E.C. says Mr. Paulson did.)

But on second reading, the passage isn’t quite so funny. The people on the short side of those trades were truly savvy investors, who, unlike so many others, did their homework and had insights that made them a great deal of money. But the rise of synthetic C.D.O.’s that they pushed for -- and their ability to use credit-default swaps to short subprime mortgage bonds -- took an already bad situation and made it worse.

And here we are now, all of us, paying the price.

Emphasis added. How did the savvy speculators make it worse? By encouraging enormous, over-leveraged bets by people who were - by design - in the dark about the fact that the "smart money" was betting against them. The game was fixed in other words.

To Do

My stack of books to read: Liaquat Ahamed's Lords of Finance, Dean Baker's False Profits, John Cassidy's How Markets Fail, Jonathan Cohn's Sick, Barbara Ehrenreich's Bright-Sided, Brad DeLong and Stephen Cohen's The End of Influence, Simon Johnson  and James Kwak's 13 Bankers, Alyssa Katz's Our Lot, Michael Lewis's The Big Short, David Plouffe's The Audacity to Win, Andrew Ross Sorkin's Too Big to Fail, Joseph Stiglitz's Freefall, David Wessel's In Fed We Trust.




In the "Your Decision" music video - embedding disabled by request - the invitation at the beginning reads "1023 Corinthians Drive." Corinthians 10:23 from the King James Bible reads:

All things are lawful for me, but all things are not expedient: all things are lawful for me, but all things edify not.

And from the Bible in Basic English:

We are free to do all things, but there are things which it is not wise to do. We are free to do all things, but not all things are for the common good.

A nice touch in the video is at 2:16 where a man is heading upstairs but is turned away from the VIP area and expresses frustration.

(John Paul Jones Memorial in DC)

During his engagement with Serapis, Jones uttered, according to the later recollection of his First Lieutenant, the legendary reply to a quip about surrender from the British captain: "I have not yet begun to fight!"

Justice John Paul Stevens recently announced his retirement from the US Supreme Court. Dawn Johnsen withdrew her nomination to the Office of Legal Counsel yesterday after facing a filibuster threat from Senate Republicans and Democrats Ben Nelson and Arlen Specter. Republican Senator Lugar from Indiana supported Johnsen's nomination.

Once obscure, the office [of Legal Counsel] became controversial in the administration of President George W. Bush when its political appointees, citing sweeping theories of presidential power, secretly signed off on interrogation and surveillance policies that bypassed statutory and treaty restraints. Ms. Johnsen was an outspoken critic of those claims after they came to light.

An Indiana University law professor, Ms. Johnsen had also served as acting head of the Office of Legal Counsel during the Clinton administration. During the Bush administration, she helped lead a coalition of Clinton-era alumni of the office in proposing changes to restore its reputation and independence.

In a 2008 essay titled "Restoring Our Nation’s Honor," Ms. Johnsen wrote: "We must avoid any temptation simply to move on. We must instead be honest with ourselves and the world as we condemn our nation’s past transgressions and reject Bush’s corruption of our American ideals. Our constitutional democracy cannot survive with a government shrouded in secrecy, nor can our nation’s honor be restored without full disclosure"

 
Obviously Obama should nominate her as Stevens's replacement.

I have tickets to see Them Crooked Vultures and John Paul Jones of Led Zeppelin fame at the Scaragon Brawlroom next month.

Republicans, Leukemia Team Up to Repeal Health Care Law

"Leukemia has always been a disease that veers to the right," said Newsweek columnist Ezra Klein, adding that Republicans have also sought out the support of high-profile illnesses such as sickle-cell anemia, type 1 diabetes, and sepsis. "And at the end of the day, you can't ignore the fact that this deadly blood disorder has a lot to lose if the bill succeeds."

After the Gold Rush

The New Republic now has a photo up of senior editor Michelle Cottle. I once shared a fiction writing class with her in college. From what I remember she had a very beautiful southern accent, although she rarely spoke in class. (I believe she came from a small town in western North Carolina.) My attempts to engage her in conversation after class always failed. I would heap praise on a story she recently shared with the class and she would respond with a polite thank you and excuse herself. Maybe it was my Yankee/Chicago accent and off-putting manner. Maybe it was her religiosity. Probably she just wasn't interested in the slightest and thought my stories were crap.

There were two Senior level fiction classes of 15 students (I'm pretty sure you had to be an English major). Students applied to the class by submitting a story, and luckily I was deamed worthy. The professor who taught the class and judged the stories was an elderly Southern gentleman who reminded me of the actor John Neville. Aloof but courteous. 

I labored on my story all summer and don't remember much about it except it involved a typewriter repair man who hitchiked even though hitchiking was unheard of in the story's universe because of a high crime rate and general distrust of strangers. I dropped proper names like Theodore Dreiser (An American Tradgedy), Norman Mailer (The Executioner's Song) and Neil Young.  

Not long ago, I was thinking about Neil Young and the cover to his album After the Gold Rush which I always found striking and memorable. Recently it dawned on me that the album cover reminded me of Bruegel's Landscape with the Fall of Icarus, which W.H. Auden discusses in his poem Musée des Beaux Arts.

About suffering they were never wrong,
The Old Masters; how well, they understood
Its human position; how it takes place
While someone else is eating or opening a window or just walking dully along;
How, when the aged are reverently, passionately waiting
For the miraculous birth, there always must be
Children who did not specially want it to happen, skating
On a pond at the edge of the wood:
They never forgot
That even the dreadful martyrdom must run its course
Anyhow in a corner, some untidy spot
Where the dogs go on with their doggy life and the torturer's horse
Scratches its innocent behind on a tree.
In Breughel's Icarus, for instance: how everything turns away
Quite leisurely from the disaster; the ploughman may
Have heard the splash, the forsaken cry,
But for him it was not an important failure; the sun shone
As it had to on the white legs disappearing into the green
Water; and the expensive delicate ship that must have seen
Something amazing, a boy falling out of the sky,
had somewhere to get to and sailed calmly on.

Damn the Gods
(or Release the Kraken)

New Godzilla Haikus every day.

James Carville once famously said,

I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.

In today's column, Tom Friedman prostrates himself rhetorically once again in front of the bond market:

If you step back far enough, you could argue that George W. Bush brought the Reagan Revolution — with its emphasis on tax cuts, deregulation and government-as-the-problem-not-the-solution — to its logical conclusion and then some. But with a soaring deficit and a banking crisis caused by an excess of deregulation, Reaganism has met its limit. Meanwhile, President Obama’s passage of health care reform has brought the New Deal-Franklin Roosevelt Revolution to its logical conclusion. There will be no more major entitlements for Americans. The bond market will make sure of that. (emphasis added)

At least he writes

"Obama is at least trying to push an agenda for pursuing the American dream in these new circumstances. I don’t agree with every policy — I’d like to see a lot more emphasis on innovation and small business start-ups — but he’s clearly trying. I do not get that impression from the Republicans, and especially those being led around by the Tea Partiers."

The New Pornographers - The Laws Have Changed

(via Salon)