Krugman sort of agrees with Baker

The Financial Industry and Financial Crises by Krugman 

Yet the economy remains depressed, with recovery far from complete. My current modeling approach stresses the overhang of household debt as an explanation; it’s not about the financial system any more. 

By the way, way back when, when I was worrying about Japan, I quarreled with the common argument at the time that Japan’s problem was “zombie banks”, and that once the banks had been recapitalized all would be well. They were, and it wasn’t, and much the same has been true for us now. 

So Dean and I agree; maybe I shouldn’t use the term “financial crisis” at all, but it’s the terminology people know. 

Now, there is, I suppose, a hint of disagreement about what would have happened if we hadn’t bailed out the banks at all. Dean thinks we’d be in the same place; I think we would have had a second major round of damage, which we’d still be feeling. In other words, I think that something like the TARP was necessary — just not sufficient. 

Anyway, just to be clear: we may have had a banking problem in 2008-2009, but now we have a burst bubble problem, I’d say in the form of a household balance sheet problem. And a bank-centered view is indeed misleading.

Ever Bipartisan, Bloomberg Jabs Both Candidates
I am reading Sheil Bair's new book. She criticizes the deregulatory ideology that preceded the housing bubble.

She names Alan Greenspan as responsible. Also she names Republican John Dugan who was on the FDIC board and the Fed's Susan Bies as supporting Basel II which lowered capital requirements and made banks more vulnerable. The Europeans (the German and French) were for Basel II also.

As was New York City Mayor Bloomberg and Senator Chuck Schumer. They commissioned a study in January 2007 which surveyed financial CEOs who all said they wanted Basel II.

In 2004, the SEC had allowed investment banks to use Basel II easy capital standards which set the stage for the financial crisis.

I'm only a little of the way into the book. Has Bloomberg admitted his error?

demand management

Bubble, Bubble, Conceptual Trouble by Krugman

What Dean Baker and Neil Irwin were discussing. Rogoff and Reinhart's "This Time It's Different" is often used by the usual suspect Centrists as an excuse to be fatalistic and say nothing can be done. Which is wrong. A bigger stimulus, a back-up Plan B stimulus and more unconventional monetary policy would have helped. If we had had no stimulus and the Fed has been even more complacent, things would have been worse.

What Krugman Said, With a Not So Small Addendum by Dean Baker

Anyhow, that is the quick story on the recession. My difference with Krugman is that it is the story of a collapsed bubble, not a financial crisis. (I recall in 2009 hearing folks like Stiglitz praise the well-regulated Spanish financial system and how this had allowed Spain to avoid a financial crisis. Well, maybe that wasn't quite right.) Furthermore, deleveraging will not get us back to full employment. We will need more fiscal stimulus or a lower dollar. Alternatively, we can go the German route of using work sharing to sustain full employment even in an economy that is operating below its potential. 

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

Demand management in economics 

In economics, demand management is the art or science of controlling economic demand to avoid a recession. In natural resources management and environmental policy more generally, it refers to policies to control consumer demand for environmentally sensitive or harmful goods such as water and energy. Within manufacturing firms the term is used to describe the activities of demand forecasting, planning, and order fulfillment. 

In economics the term is also used to refer to management of the distribution of, and access to goods and services on the basis of needs. An example is social security and welfare services. Rather than increasing budgets for these things, governments may develop policies that allocate existing resources according to a hierarchy of needs. 

It is inspired by Keynesian macroeconomics, though today elements of it are part of the economic mainstream. 

The underlying idea is for the government to use tools like interest rates, taxation, and public expenditure to change key economic decisions like consumption, investment, the balance of trade, and public sector borrowing resulting in an 'evening out' of the business cycle. 

Demand management was widely adopted in the 1950s to 1970s, and was for a time successful. However, it is widely regarded as a force behind the stagflation of the 1970s, though the supply shock caused by the 1973 oil crisis could have also caused that. 

Theoretical criticisms of demand management are that it relies on a long-run Phillips Curve for which there is no evidence, and that it produces dynamic inconsistency and can therefore be non-credible. 

Today, most governments relatively limit interventions in demand management to tackling short-term crises, and rely on policies like independent central banks and fiscal policy rules to prevent long-run economic disruption. 

In the environmental context demand management is increasingly taken seriously to reduce the economy's throughput of scarce resources for which market pricing does not reflect true costs. Examples include metering of municipal water, and carbon taxes on gasoline.

 Note the uncertainty when the 1970s comes up.

IS-LM, WICKSELL-KEYNES-HICKS, AND THIS TIME REALLY DOES LOOK DIFFERENT! by DeLong

Past time to add Portes and Wren-Lewis to the links.

September’s housing figures may be a sign of a recovery by Neil Irwin

Here’s the thing, however: The overbuilding of houses during the boom years, while real, was not extraordinary by historical standards. The underbuilding of houses has been far greater than the excess housing construction during the boom relative to demographic trends. 

That means that other factors are probably major culprits in the housing weakness of the past four years: A terrible job market that has made people unwilling or unable to get a mortgage, an overhang of foreclosures that has kept the market for houses from clearing and extreme caution by banks and other lenders that has made it hard to get mortgages. 

Now each of those trends seems to be healing. Few would argue that a return to the housing bubble days of 2005 is attractive, but what if, over the coming year, housing returned to its longer-term trend? 

In the second quarter of 2012, residential investment was 2.39 percent of GDP. As a rough estimate of the longer-term trend for that number, let us use its average level for the entire decade of the 1990s: 4.07 percent. (Using the 1990s is a bit arbitrary; even using various other base lines yields similar numbers.) 

If residential investment converged to that longer-term average, it would add 1.7 percentage points to overall growth in the coming year.

(via Dean Baker)

Baker is right, this good article helped elucidate the subject for me. I was confused by DeLong's graphs which showed now recovery in the housing sector. As Irwin writes, it's because of an overhang of foreclosers and a lack of demand for new housing. So DeLong's graph isn't showing that that there's a lack of demand overall, but that the housing market isn't clearing. That's true but there is also a lack of demand overall. A Fed targeting NGPD would fix this.

Simon Johnson on Citi, too-big-to-fail banks, Sheila Bair and Fed governor Tarullo

Correlation does not imply causation

"Correlation does not imply causation" is a phrase used in science and statistics to emphasize that a correlation between two variables does not necessarily imply that one causes the other.

I'm currently reading Sheila Bair's new book* (published by Simon and Schuster) and this phrase comes to mind in connection with a couple of things. One, in the prologue she slams Vikram Pandit who resigned on 16 October, 2012. Bull by the Horns was released on Sept. 25th but it's really starting to hit now with discussion in the blogosphere (Tyler Cowen here and DeLong here). Bair asserts that Citi was the worst run big bank and that its political connections helped it enormously. She suggests the famous TARP meeting was possibly all for Citi's benefit.

Is she correct that (Two) correlation implies causation in that Citi benefited from political connections? Robert Rubin was as at Citi and helped recruit hedge fund manager Pandit. Tim Geithner was one of Rubin's proteges. Hank Paulson was at Goldman Sachs with Rubin. Geithner and Paulson were in charge of the bailouts. As Bair admits though they were in the midst of a crisis and overkill was preferable to not doing enough (if only Geithner felt that way about fiscal stimulus). 

Bair also says that "Mr. eHarmony"** Geithner (while at the NYFed) had tried to broker a sale of Wachovia to Citi under Pandit with Federal help. Pandit and Geithner were mad at her for not objecting to Wells buying Wachovia without tax payer help, which preempted their deal. At Bair's Wikipedia entry it says, "In a response to the Inspector General for the TARP program, Bair remarked, "We were told by the New York Fed that problems would occur in the global markets if Citi were to fail. We didn't have our own information to verify this statement, so I didn't want to dispute that with them."" Were these European banks?

Regarding Pandit's resignation, there is also this from Citigroup's Wikipedia entry:

On Tuesday, March 13, 2012, the Federal Reserve reported Citigroup is one of the four financial institutions, out of 19 major banks, that have failed its stress tests. The tests make sure banks have enough capital to withstand huge losses in a financial crisis like one Citigroup faced in 2008 and early 2009 when it almost collapsed. The 2012 stress tests determine whether banks could withstand a financial crisis that has unemployment at 13 percent, stock prices to be cut in half, and home prices decreased by 21 percent from current levels.^[60][61] According to Citi and the Federal Reserve stress test report, Citi failed the Fed stress tests due to Citi's high capital return plan and its international loans rated by the Fed to be at higher risk than its domestic American loans.

Also:

Over the past several decades, the United States government has engineered at least four different rescues of the institution now known as Citigroup.^[52] During the most recent tax-payer funded rescue, by November 2008, Citigroup was insolvent, despite its receipt of $25 billion in federal TARP funds, and on November 17, 2008, Citigroup announced plans for about 52,000 new job cuts, on top of 23,000 cuts already made during 2008 in a huge job cull resulting from four quarters of consecutive losses and reports that it was unlikely to be in profit again before 2010. On the same day, Wall Street responded by dropping its stock market value to $6 billion, down from $300 billion two years prior.^[53] As a result, Citigroup and Federal regulators negotiated a plan to stabilize the company and forestall a further deterioration in the company's value. The arrangement calls for the government to back about $306 billion in loans and securities and directly invest about $20 billion in the company. The assets remain on Citigroup's balance sheet; the technical term for this arrangement is ring fencing. In a New York Times op-ed, Michael Lewis and David Einhorn described the $306 billion guarantee as "an undisguised gift" without any real crisis motivating it.^[54] The plan was approved late in the evening on November 23, 2008.^[10] A joint statement by the US Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp announced: "With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

and

As a condition of the federal assistance, Citigroup's dividend payment was reduced to one cent per share. 

In September 2011, a book titled Confidence Men|Confidence Men: Wall Street, Washington and the Education of a President, written by former Wall Street reporter Ron Suskind, states that Treasury Secretary Timothy Geithner ignored a 2009 order from PresidentBarack Obama to break up Citigroup in an enormous restructuring and liquidation. According to the book, Obama wanted to consider restructuring the bank into several leaner and smaller companies while Geithner was executing stress tests of American financial institutions. Another book, A Presidency in Peril by Robert Kuttner, says that in spring 2009 Geithner and chief economic adviser Larry Summers believed that they could not seize, liquidate, and break up Citigroup because they lacked the legal authority or the tools to do so. 

The Treasury Department denied the account in an e-mail to the media stating "This account is simply untrue. The directive given by the president in March 2009 was to develop a contingency plan for tough restructurings if the government ended up owning large shares of institutions at the conclusion of the stress tests that Secretary Geithner worked aggressively to put in place as part of the Administration's Financial Stability Plan. While Treasury began work on those contingency plans, there was fortunately never a need to put them in place."^[114][115]

So is there fire where there's smoke? What were/are Citi's international entanglements?

Also Suskind was wrong about the Romer quote that Obama said the Fed had "shot its wad." It's a phrase from shooting muskets not sexual. So since he was wrong about that he could be wrong about the Obama order to liquidate Citi.

--------------------------
* The Devil's Derivatives and The New New Deal are in the queue.
** Fictional John Mack's nickname for Geithner in HBO's "Too Big to Fail."

Johnny Depp Starts New Literary Imprint at Harper

Amy Poehler and Tina Fey to Host Golden Globe Awards

Krugman's intro to the Foundation Trilogy

Forcing frequent failures by Steve Randy Waldman

IS WOLFGANG MUNCHAU CONFUSING THE SIRENS WITH CASSANDRA? by DeLong

I was surprised by:

1. John Roberts's ruling on Obamacare
2. the reemergence of Professor Bernanke
3. the IMF's turn towards sanity

Who Was Leon Trotsky? by Daniel Little

(via Thoma)

The Self-Destruction of the 1 Percent by Chrystia Freeland

Final Thoughts on the Baker-Rowe-DeLong-Krugman Deficit Debate by Dean Baker

The burden of the (bad monetary policy) on future generations by Nick Rowe

DeLong responds

Dean Baker responds

Spoilers!

The Perks of Being a Wallflower is an enjoyable movie. Emma Watson/Hermione Granger is in it. The story centers on Charlie who's a bit of mess. He's entering his freshman year in high school, something he's dreading because for a while  - a year or two? - he hasn't spoken with anyone outside of his family. See he has a case Splashbergers syndrome, a splash of Aspergers as Larry David put it. He is shy and doesn't speak very often and yet is fairly smart and perceptive.

So maybe partly why I enjoyed it is that I can relate since I had Splashbergers growing up and I've always had a fondness for Hermione (though not in a pervish way!) 

As the movie goes on we learn Charlie has had some past traumas. Most recently a best friend shot himself head, successfully committing suicide. Lucky for Charlie though he is writer which helps him cope. Also he enrolls in an advanced English course which is taught by an awesomely kind and understanding teacher played by Paul Rudd. (suck on that Arnie Duncan!) Though what really saves him is shop class, where he meets senior Patrick, a quipping, fun homosexual. Later Charlie runs into Patrick at a fooball game. Patrick introduces him to his step-sister Hermione, another senior nearing the end of her sentence, and they invite Charlie out with them afterwords to a party. Soon, the step-siblings soon consider Charlie a cool friend. Charlie considers them life-savers and can't believe his good fortune. 

The movie is packed with drama. As Partick says, they're living in an afterschool special. Patrick is seeing a closeted jock on the sly. The movie is set in the early 90s where being gay was a little more scandalous. Also the friends are into alternative music which is becoming more popular. Hermoine reveals to Charlie that once she listened to lame mainstream pop songs until she hear this one song that changed her.

Hermoine used to be "easy" when she was a freshman but is trying to change her ways. Turns out she was molested when she was younger. As was Charlie by his favorite aunt (!). Who died in a car crash(!) And there's recreational drug use, the passing of mixed tapes, cafeteria brawls, the Rocky Horror Picture Show sing-alongs, music zines, nervous breakdowns plus much more. All in all a fun time at the show.

And the classic Tribute video:

Fiscal Cliff May Be Felt Gradually, Analysts Say by Annie Lowrey

Bernanke vs. the Borg: A Short History of the Fed's Amazing Transformation by Matt O'Brien

(via DeLong)

Global Economy: Some Bad News and Some Hope by Olivier Blanchard

The main force pulling up growth is accommodative monetary policy. Central banks continue not only to maintain very low policy rates, but also to experiment with programs aimed at decreasing rates in particular markets, at helping particular categories of borrowers, or at helping financial intermediation in general.

(Yglesias, Thoma, Krugman) 

Repo Run

What Really Happened by David Warsh

The effusion of books about the 2007-08 financial crisis has mostly run its course. Two new accounts by policy-makers who were sometimes in the room (Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street, by Neil Barofsky, who kept tabs on Treasury Department lending under the Troubled Asset Relief Program as its Special Inspector General; and Bull By the Horns: Fighting to Save Main Street from Wall Street and Wall Street from Itself 

Cutting-edge journalists, meanwhile, have moved on to the battles of Barack Obama’s first term: The New New Deal: The Hidden Story of Change in the Obama Era, by Michael Grunwald, of The Washington Post, explores the logic of the stimulus; The Price of Politics, by Bob Woodward, also of the Post, recounts the failed grand bargain negotiation of the summer of 2011; and Red Ink: Inside the High-Stakes Politics of the Federal Budget, by David Wessel, of The Wall Street Journal 

Much the best economics book on the fall calendar therefore (to be published next month) is a slender account about the circumstances that led to that near meltdown in September 2008, and an explanation of why they were not apparent until the last moment.  Misunderstanding Financial Crises: Why We Don’t See Them Coming (Oxford University Press), by Gary Gorton, of Yale University’s School of Management, mentions hardly any of the firms involved in the 2008 smash-up; it spends little time explaining the overnight repurchase agreements that were at the center of the bank funding crisis (his earlier book, Slapped By the Invisible Hand: The Panic of 2007, did that).

My bet is that it will happen again because Dodd-Frank isn't strong enough and leaves too much discretion ot the regulators. 

(via Thoma)

The Silver Fox: Nate Silver has made a career out of predicting things better than other people. How? by Yglesias

Book review: ‘The Escape Artists’ by Noam Scheiber and ‘The New New Deal’ by Michael Grunwald by Simon Johnson

(via Thoma)

Raghuram G. Rajan hired by India's government

In August, Mr. Singh, who has frequently sought Mr. Rajan’s advice, called and asked him to take a leave from his job as a professor at the University of Chicago to return to India, where he was born, to help revive the country’s flagging economy. Within weeks, he was at work as the chief economic adviser in the Finance Ministry.... 

Mr. Rajan, 49, became famous in the economics profession for his prescience in warning about the growing risks in the financial system at a Federal Reserve conference in 2005, three years before the failure of Lehman Brothers. He argued that innovations and deregulation appeared to have made the global financial system riskier, rather than safer and more stable as many economists and top policy makers like Alan Greenspan then believed. 

The son of an Indian diplomat, Mr. Rajan grew up around the world and in New Delhi, earning degrees from prestigious Indian universities before studying economics at the Massachusetts Institute of Technology. His first big policy job came when he was appointed the chief economist of the International Monetary Fund. Since 2008, he has been an external adviser to Mr. Singh, who is his highest-placed champion in India and who also asked him to lead a committee to propose changes to the country’s financial system.

Scardino, Chief of Pearson, [which owns the Financial Times] to Step Down

A monetary policy pop quiz by Noah Smith

Andy Harless comments:

Problem 1. People now expect near 2% inflation. Presumably they will keep expecting this until something happens to change their mind. What might happen, and how would it change their mind? 

Most likely, I think: the adult population keeps growing (as it will for the next 15 years with near 100% probability) and eventually the rising demand for housing causes rising rents and home prices and a boom in construction, as well as consumption via mortgage equity withdrawal, along with the associated multiplier effects. Eventually the associated increase in aggregate demand uses up all easily available labor and starts to bid up prices. People notice that the Fed is not raising rates despite an increase in the inflation rate. As more and more people realize that the Fed is not going to raise rates, they come to expect a higher inflation rate, and you get Friedman-Phelps-Lucas effects. So the inflation rate just keeps rising. Eventually people realize that the Fed is never, ever going to raise rates, and you get hyperinflation.

Another possibility: Profit margins are very high right now, on average. Maybe firms will start competing aggressively and prices will fall. And since there's high unemployment, once they compete away those profits, maybe they will start cutting wages. So you get deflation. This raises the real interest rate and makes investment less attractive, which reduces demand, which accelerates the deflation, so you get a deflationary spiral. Note however, that this deflationary spiral would happen no matter what the Fed does with interest rates. Also note that it seems intuitively kind of implausible that we could have a bubble in the value of money that never pops. So if I had to choose, I think that my first possibility is much more likely -- at least it's more likely to be the eventual endgame, although you could get some temporary deflation along the way.

Problem 2. Given the Fed's current asset base, the only way it could keep the interest rate at 50% is by paying 50% interest on reserves. That would effectively suck nearly all the money out of the economy, because banks would stop lending and start bidding aggressively for deposits. But it would all be funny money, because the Fed's net worth would go ever deeper into negative territory. (It's assets are mostly longer duration assets that would lose most of their value if the 50% interest rates were expected to persist.) It's hard to say what the endgame would be. Maybe extreme deflation and increasing use of alternative means of payment. Or maybe not, maybe people would lose confidence in money -- these credits the Fed would be making without anything to back them up -- and we would get inflation instead.

I am currently reading Kristen Grind's The Lost Bank: The Story of Washington Mutual-The Biggest Bank Failure in American History.  Next in the queue are Nicholas Dunbar's
The Devil's Derivatives: The Untold Story of the Slick Traders and Hapless Regulators Who Almost Blew Up Wall Street . . . and Are Ready to Do It Again.

and Michael Grunwald's The New New Deal: The Hidden Story of Change in the Obama Era.

The Lost Bank has some interesting anecdotes. One is that the head economist for the National Association of Realtors, David Lereah, earned the nickname Baghdad Dave, which refers to Iraq's Baghdad Bob. Also, there's a scene where a farsighted executive at WaMu predicts the housing bubble in a presentation given to WaMu employees at the 2003 "State of the Group" annual event. 

...Customers, unable to make much money on the stock market, would invest in homes instead. "The consumer," Longbrake told the group, "has found that small increases in housing prices, given the substantial leverage that is much greater than ever was possible in the stock market, can lead to large gains in home equity." At the same time, refinancing a mortgage would become easier for the customer, as would taking out a home equity line of credit.

"The bubble then build through a reinforcing cycle of rising home prices and rising consumer confidence. This leads to an increase in the demand for investor properties and second homes, which, in turn, places further upward pressure on home prices."

Second homes?

An Ounce of Prevention

Thoughts that occurred to me while reading Bernanke's recent speech.

Two thing. One: if interest rates at the zero bound are a bad thing, because for instance central banks in that position have to resort to unconventional monetary policy (see Japan and the U.S.) what can countries do to prevent the need to lower interest rates to the zero bound? Lower interest rates are designed to stimulate the economy. Are there other means of stimulating economy. See Michael Grunwald's the New New Deal. 

Two, if Rogoff and Reinhart are right and historically financial crises take a long time to recover from, should there be an emphasis on preventing them. What caused the recent financial crisis? Isn't it the case that it takes a long time to recover from a financial crises because of policy errors and Zombie Ideas like expansionary austerity?

demand management (monetary and fiscal policy)

Five Questions about the Federal Reserve and Monetary Policy by Bernanke

Ben Bernanke's Best Speech Yet, Promises Low Rates "For a Considerable Time After the Economy Strengthens" by Yglesias

What on Earth Is Stephen Roach Talking About? by Ygleisas

If QE Causes Commodity Price Inflation... by Tim Duy

Oceania, Eurasia and Eastasia

Euro Counterfactuals (Wonkish) by Krugman

Via The Irish Economy, a new paper (pdf) from the IMF looks at how, exactly, massive current imbalances emerged within Europe, with Germany running huge surpluses and the GIPSIs running huge deficits. 

The paper shows that there were indeed huge capital flows from the European core to the periphery, in Spain largely taking the form of lending to banks, presumably by other banks:

[chart]

The surprising result in the paper is that much of the rise in imbalances within the euro area involved trade with non-euro nations. Germany sharply increased exports to Asia and Eastern Europe, which had strong demand for German durable manufactures.  Meanwhile, southern Europe saw a sharp increase in imports from low-wage countries.

Emphasis added. So basically the U.S. dollar is undervalued relative to China which has a trade surplus. Germany in turn has a trade surplus with Asia (right?). Southern Europe increased its imports from low-wage countries (China?).

Is the Euro undervalued versus the dollar? Why is Germany and not the U.S. supplying Asia with durable manufactures?

Drama

Also Simon Johnson and Tim Duy have been playing up the budget troubles of Japan. Krugman and Yglesias  have been highlighting the problems with Europe and the Greeks and Spainairds revolt against austerity.

Attacks on 6 Banks Frustrate Customers

Obamanomics: A Counterhistory by David Leonhardt

The Problem is a Collapsed Housing Bubble, Not a Financial Crisis #4306 by Dean Baker

However, contrary to what is widely asserted, for example by David Leonhardt in hiscolumn today, consumption remains high, not low. The saving rate averaged more than 8.0 percent of disposable income in the years prior to the rise of the stock bubble in the 90s. Currently, it is between 4 and 5 percent of disposable income. If anything, we should be asking why consumption is so high, not why it is low. 

It would be to absurd to expect bubble levels of consumption in the absence of the bubble. However this is what proponents of the financial crisis theory seem to be arguing. In short, the collapse of the bubble led to a gap of more than $1 trillion in lost demand due to the plunge in construction and the falloff in consumption. What if any part of this requires a story about the financial crisis?

This is a bit tricky for me. One way to think of the issue is to imagine an alternate timeline where there had not been a housing bubble.

Could there have been a bubble without the shenanigans in the financial industry?

NGDP (or short run versus long run)

The Short Run Is Short by Eli Duardo

The bottleneck by Ryan Avent

Oh NGDP, is there anything you can't do? by Angus

NGDP in the Long Run and Economic Plasticity by Karl Smith

The NGDP Dilemma Is a Good Dilemma by Yglesias

Economy, Heal Thyself by David Glasner

PARTISAN ASYMMETRY AND AMERICAN GOVERNANCE: SOMEHOW I DON'T THINK WE ARE IN WALES ANYMORE, DANIEL... WEBLOGGING by DeLong

What did Clinton do? Welfare reform? NAFTA? Financial deregulation? Greenspan? 

Bush gave us massive tax cuts, Bernanke, John Roberts.

Obama did the stimulus, ARRA, decent health care reform, and the Consumer Financial Protection Bureau.

Tim Cook Apologizes for Apple's Maps

A Political Football in the Classroom by A.O. Scott (review of "Won't Back Down")

YES, JIM MEDOFF MOVED THE NEEDLE by DeLong

Andy Harless: [T]he Medoff-Abraham paper… said was that there was not nearly as much “stag” in the stagflation as we thought. The labor market, it suggested, had been booming during much of the 1970’s despite the appearance of high unemployment. The implication was that the unemployment of the 1970’s was largely “structural”… once you realized that, the accompanying inflation shouldn’t surprise you.

Charles Lane Is Unhappy That the Fed Is Taking Steps to Create Jobs by Dean Baker

Work Sharing: The Hiddden Secret of Germany's Economic Success by Dean Baker

EconoTrolls: An Illustrated Bestiary by Noah Smith

THE KOCHERLAKOTA SHIFT AT THE FED IS A BIG DEAL... by DeLong

He reposts a tweet from Mike Konczal:

Last August Kocherlakota said that NAIRU was 8.7%, using "uncertainty" and DMP. Still proud of my feral counter-post:

 http://rortybomb.wordpress.com/2011/08/11/the-fed-dissenters-or-examining-narayana-kocherlakotas-gut/

Konczal also tweeted:

WTF !!! Evans Rule endorsement rt @Noahpinion Kocherlakota flips from the Hard-Money Axis to the Pro-Easing Alliance!!

Bullard Defends the Indefensible by David Glasner

(via Thoma)

A New Consensus by Ryan Avent

Defections

Narayana Kocherlakota Defects to Team Doves by Yglesias

Tim Pawlenty leaves his position as a Romney campaign co-chair to be the banks' head lobbyist.

The Enterprise's Two Greatest Captains Discuss the Problem of Utility Monopolies by Yglesias

1. John Roberts upholding Obamacare
2. Bernanke demonstrating some "Rooseveltian resolve" and adopting a Woodford/Krugman/Evans monetary policy approach (while the Republican Party goes all in on hard money-liquidationism)
3. Republicans nominating a Mormon vulture capitalist who enacted Obamacare and who dismisses 47 percent of Americans as welfare state dead-enders

and 2B. courtesy of DeLong:

WELL THIS IS A HUGE SWITCH!: FED HAWK MOLTS WEBLOGGING

When I consider what Kocherlakota was saying last spring to people…

Kocherlakota today embraced a proposal by Chicago Fed President Charles Evans to calibrate monetary policy based on specific economic goals. Evans advocates holding to near-zero rates until the jobless rate falls below 7 percent or inflation reaches 3 percent. 

THE DISAPPEARED: How the fatwa changed a writer’s life. BY SALMAN RUSHDIE

Charlie Rose interviews:

Rushdie

Martin Amis

Perspectives on Current Economic Issues by Charles Evans

(via Thoma)

The Age of Niallism (emphasis added):

...The damage from the Great Recession was substantial; and to date, the recovery has been disappointing. The real value of goods and services produced in the U.S. today is probably more than 5 percent below what economists call potential — that is, the economy’s ability to produce goods and services without generating inflationary pressures. The unemployment rate has been stuck at around 8 percent for nearly a year — well above the 5 percent to 6 percent level we would see if all of our resources were fully engaged. In the absence of further monetary stimulus or fiscal repair, the outlook would be for more of the same: moderate growth that is not strong enough to generate substantial improvement in the labor market; an unemployment rate that is likely to remain above its long-run level for a long time to come; and an economy that would be vulnerable to shocks at home and abroad.

Now, I am an optimist. I think we can do better than this gloomy outlook. That is why action is important. A great deal of state-of-the-art analysis — done both inside and outside of the Fed — indicates that the severe downturn in 2008–09 was mainly the result of a large drop in aggregate demand which left the economy operating below its potential. Research also shows that better and more accommodative policies have the power to reverse these setbacks and raise employment, output and incomes.[2] In other words, more accommodative policy can deliver a stronger economy and the resiliency we are seeking. Furthermore, appropriate policy can deliver these better outcomes without generating inflation that is significantly higher than the Fed’s long-run goal of 2 percent.

There are many who believe otherwise. In their view, our current low output and high unemployment are the hallmarks of an economy that has lost its competitiveness — an economy that experienced permanent disruptions in its infrastructure, the skills base of its work force and its technological capability. In such a dismal view of the economy, monetary policy is powerless and cannot generate a stronger, more robust expansion. Any attempt to increase aggregate demand through more accommodative monetary policy would simply lead to higher inflation rather than better resource allocation.

I see little evidence to support such a pessimistic view of the world. And I refuse to be so nihilistic in the absence of strong evidence of permanent disruptions. It is very hard to believe that millions of people who were working productively just a few years ago have suddenly become unemployable. And while many of the pessimists have been predicting higher inflation for several years, it hasn’t materialized. Indeed, core inflation has been under 2 percent since the end of 2008; and except for some near-term transitory movements in food and energy prices, most forecasters do not see any major change in inflation over the next few years.

Rahmbo caves

Why Wait a Year For It To Show Up in the New York Times? by Doug Henwood

Chicago Teachers Largely Prevail In Strike—Now How Will The City Pay? by Ygelsias

We should do international comparisons and look at the success stories of other countries as we do with health care systems and monetary/fiscal policy or demand management.

Catherine Rampell and Doug Henwood (above) had good pieces on this subject. Countries that perform well like Finland have strong unions and higher pay.

We Voted for Obama and Got Rahmney

Rahm is suing to end the Chicago teachers’ strike. Does he have a case? by Dylan Matthews

Rahm’s case, then, is anything but a slam dunk. And even if he wins in court, that won’t change the fact that a huge majority of Chicago public school teachers voted to strike, and presumably won’t stop making trouble for him after they return to work.

(via Henwood)

As Chicago Strike Goes On, the Mayor Digs In by Monica Davey

Emanuel pushed legislation through the Illinois legislature that hiked the percentage of votes teachers in the Chicago district need to call a strike to 75 percent. And the CTU got 90 percent to call for a work stoppage. Why would any Chicago unions back Ramney?

A Future with Swords not IPhones by Alessandra Stanley

Along with George Will, Robert Samuelson is a founding member of my Rogues Gallery.

Robert Samuelson Is Tired of Stimulus by Dean Baker

Commenters at various blogs - Dan Kervick, etc. - have been echoing conservative Samuelson about monetary policy for years now. Do they have some relatively prominent blogger who shares their views or no? Naked Capitalism?

Bernanke has said unconventional monetary policy has helped create (or save?) 2 million jobs. That's not nothing. It's better than tax cuts for the rich. Where is Samuelson's evidence that this is wrong?

Recently Bernanke has made a qualitative change in policy in response to the weakness of the labor market. We'll see if it works. I'd like to think he changed his mind in part due to the tireless efforts of the community of bloggers and economists - like Krugman and Mr. Baker! - who discuss the issues day in and day out. No thanks to the naysayers like Robert Samuelson or various commenters who believe fiscal stimulus is somehow going to arrive one day flying on the back of a unicorn all rainbows and sunshine.

I'm tired of Samuelson. We should place David Brooks, George Will and Samuelson in a rocket ship and launch them into space. 

Romney Will Solve the Crisis with the Exact Same GOP Plan of 2008, 2006, 2004... by Mike Konczal

Konczal gets a nice shout-out in today's Krugman column:

Hating on Ben Bernanke 

Professor Bernanke Reemerges

When the Fed Chair is an Academic by Kash Mansori

The big economic news of the week was, in fact, big economic news: the Fed's announcement of significant changes from past practice in the the quantity of its next round of large scale asset purchases ("unlimited"), and in the timing of any future reversal of this expansionary policy ("a considerable time after the economic recovery strengthens").

I view this as a pretty fundamental shift in how the Fed hopes to affect the economy.  Rather than trying to push economic activity one way or the other through its management of interest rates (which can alter economic activity through its portfolio-rebalancing and wealth effects, for example), the Fed is now quite explicitly trying to affect economic activity by altering interest rate and inflation expectations.  As Krugman has put it, the crux of the matter here is that this is pretty close to a "credible promise to be irresponsible".

(via Thoma)

Can the Chicago Teachers’ Strike Fix Democratic Education Reform? by Richard D.Kahlenberg

If Labor Dies, What's Next? by Harold Meyerson

Bernanke's sudden turn towards Woodfordian open-ended policy was genuinely surprising, just as John Roberts ruling on Obamacare was.

Rahm Emanuel seems to have caved as I hear reports that the Chicago teachers strike will end with the teachers feeling victorious.

Yglesias writes about poverty.

This post to DeLong seems to be response to Binyamin Appelbaum's piece today in the New York Times - which I liked to below - where apparently he says that the Fed's focus on unemployment is somehow new.

THE OBJECTIVES OF THE FEDERAL RESERVE: MEMORANDUM FROM GOVERNOR MARRINER ECCLES TO SENATORS GLASS, FLETCHER, AND BULKLEY ON JUNE 6, 1935 by DeLong

Woodford on Optimal Monetary Policy Rules by Mark Thoma

Baltimore Ravens linebacker Brendon Ayanbadejo

Standing Up at an Early Age by Adam Himmelsbach

Charles Evans could be the one who laid the groundwork and created the space for Bernanke's change of direction towards open-ended commitments. I know he mentioned Woodford in a recent speech (this year?) and will look it up.

Reserve Bank Presidents' Speeches, 2007-2012

Evans's August 27th speech

The Inflation that Concerns the Fed Does Not First Affect Food and Energy Prices by Dean Baker

Fed Responds to a Grim Reality by Binyamin Appelbaum

... Under the leadership of Mr. Bernanke - with considerable prodding and support from a board almost entirely appointed by President Obama - the central bank has gradually concluded that it has a responsibility to act more forcefully, and, equally important, that it has the ability to spur job creation directly.  

Mitt Romney, Liquidationist by Krugman

How times have changed. Back in 2004, Greg Mankiw declared, in the Economic Report of the President, that

Aggressive monetary policy can reduce the depth of a recession.

But now, after the Fed has finally moved a bit in the direction of doing something about the Lesser Depression, Mitt Romney – supposedly advised by Mankiw among others – is outraged:

[T]he American economy doesn’t need more artificial and ineffective measures. We should be creating wealth, not printing dollars.

That word “artificial” caught my eye, because it’s the same word liquidationists used to denounce any efforts to fight the Great Depression with monetary policy. Schumpeter declared that

Any revival which is merely due to artificial stimulus leaves part of the work of depressions undone

Hayek similarly decried any recovery led by the “creation of artificial demand”.
Milton Friedman – who thought he had liberated conservatism from this kind of nonsense –must be spinning in his grave. 

The Romney/liquidationist view only makes sense if you believe that the problem with our economy lies on the supply side – that workers lack the incentive to work, or are stuck with the wrong skills, or something. And that’s just not what the evidence says; instead, it points overwhelmingly to an insufficient overall level of demand.*

When dealing with ordinary, garden-variety recessions, we deal with inadequate demand through conventional monetary policy, namely by cutting short-term interest rates. Until recently even Republicans were OK with this. 

Now we face a more severe slump, probably driven by deleveraging, in which even a zero rate isn’t low enough, so monetary policy has to work in unconventional ways – in particular, by changing expectations about future inflation, so as to reduce real interest rates. This is no more “artificial” than conventional monetary policy – harder, yes, but it’s still about trying to get the market rate aligned with the “natural” rate consistent with full employment. 

So where are Romney and his party coming from? Basically, they’ve thrown out 80 years of economic analysis and evidence because it doesn’t fit their ideological preconceptions, and they’re resorting to dubious metaphors – “sugar high” and all that – as a substitute for clear thinking. 

What you really have to wonder about is all the not-stupid economists who have aligned themselves with this guy and that crew. Probably they imagine that once the election is past sensible economics will return. But the odds are that they are wrong, and that they’re sacrificing their own credibility to put charlatans and cranks in the driver’s seat.

--------------------
* Mishmash Not

Props to Eddie Lazear; he’s a loyal Republican who’s been saying a lot of things I consider totally wrong lately, but his paper for Jackson Hole (pdf) is a professional, well-done piece that offers little aid and comfort to his political allies.

 

Bernankeapalooza

An Internet Success Story. Chicago Fed President Charles Evans should feel vindicated for all of his hard work and for sticking his neck out.

A Quick Note on the Fed by Krugman

In effect, the Fed seems to be trying to “credibly promise to be irresponsible”, which is what I advocated way back when in this kind of situation. 

3. That’s all good. However, it’s kind of vague. No clear target, whether nominal GDP or some kind of inflation/unemployment mix. Put it this way: you could imagine a future Fed chairman tightening policy in line with the same Taylor rule that seemed to describe policy before the crisis — a rule that suggests that interest rates wouldn’t start to go up until unemployment was below, say, 7 percent — and still being able to claim that he had not violated any promise Bernanke made. In other words, it’s not totally clear that we really do have a shift in future policy. And since the whole point is to move expectations, leaving this kind of wiggle room is not a good thing. 

To paraphrase an old joke: what do you get when you cross a Godfather with a central banker? Someone who makes you an offer you can’t understand. 

4. Romney is talking destructive nonsense.

The Scott Summer Rally by Yglesias

It Is What It Is by Scott Sumner

On a lighter note, yesterday was “Scott Sumner day” and yet I had to go to work.  That doesn’t seem fair!  I’d also note that Cardiff Garcia at FT Alphavillementioned David Beckworth and I (along with Woodford), in their discussion of economists who had played a role in the debate. Don’t get me wrong, I realize that Woodford’s 100 times more influential than I am.  But I also think we’ve had some impact, mostly by putting out ideas that other more famous people have discussed and/or advocated (Christy Romer, Krugman, DeLong, Jeffrey Frankel, Jan Hatzius, etc.)  So it’s a good day for market monetarism.

Why QE3 Matters by Yglesias

Federal Reserve Finally Working Expectations Channel With Open-Ended QE by Yglesias

The Fed Announces Additional Easing by Mark Thoma

Ben Bernanke rescues the US economy from the nihilism of the right by Robin Wells

Two Cheers for Ben by David Glasner

Fed Ties New Aid to Job Recovery in Forceful Move by Binyamin Appelbaum

Something new by Ryan Avent

AND QE III HAS LANDED: EXPANSIONARY MONETARY POLICY EDITION... by DeLong

Daddy, Where Do Jobs Come From? by Jared Bernstein

Other fiscal measures have more reliable job-creation chains.  Increasing unemployment benefits or food stamps helps because those folks typically spend the money.  And new infrastructure is a pretty direct way to go.  Same with state fiscal relief.  I remember during the Recovery Act, mayors cancelling planned layoffs the day they received Recovery Act funds.

The punch line is a simple one, but it’s one that seems to have been forgotten amidst our increasing love affair in America with laissez-faire economics: the more direct the policy measure—i.e., the fewer links in the chain between the policy and the job—the better it will work.

There Will Be Meglomania: "The Master," from Paul Thomas Anderson by A.O. Scott

Will is a founding member of my Rogues Gallery.

How the Fed Boosts the Economy: Lessons for George Will by Dean Baker

In his column today George Will notes the Fed's responsibility to maintain price stability and high employment and tells readers:

"Achieving the former is the best thing the Fed can do for the latter."

Apparently Will has not been following what has happened in the economy recently. While inflation has remained low and relatively stable, unemployment has soared. He also apparently does not recognize how the Fed hopes to boost economic growth through quantitative easing.

The biggest impact from lower interest rates is probably from mortgage refinancing. This both directly generates economic activity through people employed in the process (e.g. banking staff, appraisers etc.) and indirectly by reducing payments and freeing up money for other consumption.

The second biggest impact is on lowering the value of the dollar relative to other currencies, which will reduce the trade deficit. Anyone who does not want a large budget deficit and/or negative private savings (like we had at the peak of the housing bubble) must want to see the trade deficit move closer to balance. This is an accounting identity -- there is no way around it. And, there is no plausible mechanism to get the trade deficit closer to balance except by reducing the value of the dollar.

For some reason Will fails to mention either the impact of quantitative easing on mortgage refinancing or the impact on the trade deficit. There is also zero evidence of the hyper-inflation that he and other opponents of more aggressive Fed actions have been warning about for years.

Yglesias seems to be flip-flopping here. First he posted how much teachers were getting paid as if it was excessive. Now he says they should get paid. I do think the financial industry has more of problem with rent-seeking than inner city teachers. As Kristof says, in the Chicago Public Schools "86 percent of the children are black or Hispanic and 87 percent come from low-income families."

Chicago's Teachers Are Pretty Well-Paid (As They Should Be) by Yglesias

Students over Unions by Nicholas Kristof

Matt Yglesias is not one of those union-hating liberals, he swears! by Doug Henwood

The Pay of Chicago School Teachers and Selected Others by Dean Baker

The New York Times Editorial Page and Yglesias harped on Chicago school teacher's pay.

Does It Pay to Become a Teacher? by Catherine Rampbell