Doug Henwood on OWS demands:

Full employment is no small demand to make. The bourgeoisie hates it, because it would strengthen the bargaining power of the working class. It, plus the other planks of an expanded welfare state mentioned in the Demands draft, would give people the confidence and freedom to think about a better world. This isn’t fictional: it happened in the 1970s, as the transformation of consciousness among middle-class college students spread into the working class. Quality of work life—in a real, not a GM sense—became a central concern in organized labor, at least among the rank and file. It was one of the things that alarmed elites, leading to the crackdown of the late 1970s and early 1980s.

I liked how Nick Rowe referred to people from the "concrete steppes" here in the context of targeting NGDP levels.

Econ 24-1: First Written Assignment

Due via email to delong@econ.berkeley.edu by 5 pm on Thursday November 17:

The coming of our current Lesser Depression required four things

• A wave of increased savings hitting the United States and looking for safe assets in which to invest itself.
• A collapse of lending standards in housing finance so that investments in mortgages that were in fact highly risky were sold as--and were believed to be--safe investments.
• A failure of risk controls in high finance so that the highly-leveraged banks and shadow banks that were supposed to manage their own risks and distribute and diversify risks throughout the economy instead concentrated them--and were threatened with bankruptcy when the housing bubble collapsed.
• An inability or unwillingness by the Federal Reserve to cut off the crisis in its early stages and fix it.
• A mechanism that turned financial distress on Wall Street into a large-scale collapse in employment.

That's: "required five things…"

Suppose that you have to tell this story to somebody who is unfamiliar with any economics and with the history of the past five years. Write 400 words (i.e., between 300 and 500) explaining as best you can to this unfamiliar audience just how this all happened.

Some free associating brainstorming (TBC):

Bernanke's Global Savings Glut
Global imbalances
wealth effect
opportunistic disinflation (graph)
boom on the European periphery
Current Account Deficits
capital flows
sudden stops
capital controls
Spanish mortgages, strict regulation vanilla terms
monetary policy
bubblenomics
Glass-Steagall
historical precedents
combo monetary and fiscal policy
if policy had been better?
China's stimulus communist efficiency (ironic)
Euro decision-making inefficiency (ironic)
Hopey Changey German worksharing
trade deficits
mortgage dealers financial industry fraud for fees
rating agencies
cooptation
toxic assets
write downs
zombie banks
zombie banks Japanese version
Swedish model
banks sitting on larger reserves, not creating money Minn. Fed Pres speech
liquidity trap
zero bound
shadow banking system
repo
Gary Gorton
Internet Bubble
jobless recoveries 1992, 2001
Volcker recession - S&L crisis

Buzzkills on the right say too much debt before means austerity now. Buzzkills on the left point to the trade deficit and the fact workers wages haven't gone up in 30 years. The wealth effect replaced some of the loss of demand there, which has an element of truth. There's no reason we can't return to full employment however.

Simpson, eh?

This Burns cartoon is making the rounds. I saw the movie "Margin Call" last night and wow, talk about a timely movie. And it's good! Jeremy Irons plays a Burns-like character who heads a Lehman brothers-type firm and the film takes place during the day they experience a Minsky or Wile E. Coyote moment and realize they won't be able to meet their margin calls in the near future.

A few things struck me on first viewing. The film points out that two of the risk managers were drawn from different backgrounds, lured by higher pay. Zachary Quinto's* risk analyst has a Ph.D. in propulsion physics, literally is a rocket scientist. Stanley Tucci's veteran once built bridges as an engineer.

An irony is that Quinto's character is promoted in the end, because he and Tucci had developed a friendship or good working relationship. Tucci's character is fired at the beginning of the movie. At the time he was working on some risk analyses that were showing that the firm was in trouble. He hands it off - via a USB flash drive - to Quinto's analyst as he was leaving the building forever. Because they were sorta friends or had a mentor relationship, Quinto was walking Tucci to the door and received the mostly-completed risk analyses which he would explore further and then bring its conclusions to the attention of higher ups. So it's the guys from non-finance backgrounds who allow the company to be the first to dump its toxic assets and minimize the losses the firm will suffer before it goes under.

The film is quite dark and brutal in a David Mamet-social Darwinian manner, but there's also some laugh-out loud humor.

What I didn't quite get is that the film ended with Kevin Spacey's middle manager - who had a conscience somewhat - having sort of a breakdown. He's divorced (from the great Mary McDonnell) and unhappy although successful. Was this some sort of statement that yes these workaholics are rich but unhappy and unfulfilled?

Spacey could get an Oscar for this. He helped produce The Social Network so now he's had back-to-back projects that really, really resonate with the times and are good movies.

Paul Bettany should get an award for his portrayal as one of the firm's knowledgable sergeants.  (The rest of the cast is great too.) He gives a pungent, rationalizing speech explaining to a junior colleague that yes they'll be vilified but they're just doing what people want, providing a service, turning their money into more money, like old-timey alchemy. That's why they get paid so much.

-----------------------
*Quinto played Spock in J.J. Abrams' Star Trek and recently came out of the closet. That explains why Spock was giving hunky Kirk those longing looks.

The End of Cheap Chinese Goods by Floyd Norris

Sudden Stops

Highlights of recent NBER forum on research on the global financial crisis

RT @davidwessel, via DeLong Twitterstorm

The last panel looks interesting:

Reducing Country Vulnerability: Capital Controls, Reserves, the IMF, or Something New?

Jeffrey Frankel introduced the final panel. Over the past few decades, countries have relied more heavily on large emergency lending packages to stabilize economies during crises. As the size of the packages increases and contagion has become more virulent, this approach is becoming increasing costly. This panel explored options to reduce country vulnerability. Dominguez, Hashimoto, and Ito show that having measured reserves after appropriately adjusting for exchange rate movements and emergency assistance packages, they served as an important counter-cyclical policy tool for a number of emerging markets during the crisis. Chamon, Ghosh, Ostry, and Qureshi find that certain types of prudential regulations and capital controls can help to strengthen a country's liability structures and to restrain overall credit booms. They show that this helped to stabilize output declines during the crisis. Barkbu, Eichengreen and Mody argue that more innovative approaches need to be considered and they focused in particular on "sovereign cocos": contingent debt securities that automatically reduce payment obligations in the event of debt-sustainability problems.

Zanny Minton-Beddoes chaired the final discussion in which Erdem Basci stressed the importance of exchange rate flexibility, moving towards the greater use of equity-like contracts to share risks, and reducing currency exposure, to stabilize countries during a crisis. He also discussed the measures undertaken by Turkey to manage capital flows, highlighting the innovative use of volatile interest rates, and argued that because of its successful policy management, Turkey did not need to use capital controls. Olivier Blanchard reminded us of the challenges of large capital inflows-from bubbles and overheating to "sudden stops". He suggested that value of more borrowing in domestic currency and macro-prudential measures in response to these inflows-which would include a continuum of measures ranging from domestic macro-prudential measures to broad capital controls aimed directly at foreigners. He questioned the effectiveness of reserve accumulation. Kathryn Dominguez discussed the challenges in measuring reserve accumulation and the need to distinguish between passive valuation changes and active management of the assets. She showed that many countries depleted their reserves during the crisis and that this active management helped economies recover.
...

Sudden Stops

Krugman on Iceland

Part of the story, of course, is that Iceland refused to take responsibility for the debts run up by runaway bankers. But the other part of the story, surely, involves the exchange rate. The others were either on the euro or insisted on remaining pegged to it; Iceland allowed a big depreciation of the krona.

Basically, what all of these countries experienced was a “sudden stop” — huge inflows of capital came to a screeching halt. What has to happen if a country is going to adjust to such a sudden stop is a sharp fall in the relative price of its goods and labor, because it needs to export much more and/or import much less. If you’re not going to get this via a currency depreciation, you have to have an “internal devaluation” — a fall in money wages and prices.

And nominal wages are downwardly rigid. That’s simply a fact, true always and everywhere.

How to Target Nominal GDP by Yglesias

The Fed Is Laying the Groundwork for Further Easing by Mark Thoma

The Fed is very sensitive to and very fearful of deflation, and the fall in inflation expectations evident in the graph was one of the reasons the Fed decided to implement QE1. And as you can see from the graph, this (along with the other steps the Fed took at that time) turned the expectations around, at least for awhile. However, just before the dotted vertical line on the graph, expectations began falling again. What is the vertical line? It shows the point in time when QE2 was announced by Ben Bernanke (August 27 of 2010 at Jackson Hole, Wyoming), and once again inflation expectations turned around.

However, notice that recently the trend has turned downward again and if this continues the Fed is likely to intervene once again.

In fact, the Fed is beginning to lay the groundwork for this. As the WSJ reports:

Federal Reserve officials are starting to build a case for a new program of buying mortgage-backed securities to boost the ailing economy, though they appear unlikely to move swiftly.

And Federal Reserve governor Dan Tarullo in his speech on Thursday:

I believe we should move back up toward the top of the list of options the large-scale purchase of additional mortgage-backed securities (MBS), something the FOMC first did in November 2008 and then in greater amounts beginning in March 2009…

Finally, in a meeting with members of the Senate on Thursday, Ben Bernanke stressed the need for more action to help housing markets (though he didn’t mention it specifically, further purchases of mortgage backed securities would provide more help for to these markets).

It’s not a done deal yet. Recent inflation data, which appears to be elevated by temporary factors, has some members of the Fed wary of doing anything that might further increase the risk of inflation. In addition, fears of a double-dip could diminish and bring inflation expectations back up without Fed action. But it does appear the Fed is trying to move in this direction.

Price Pressures?... I don't see it. by Jared Bernstein

The New Libya’s First Mistake: Muammar Qaddafi should not have been killed, and his surviving son should be captured. by Hitchens

Lots of stuff on OWS being written and published.

Michael Hardt and Antonio Negri in Foreign Affairs:

The political face of the Occupy Wall Street protests comes into view when we situate it alongside the other "encampments" of the past year. Together, they form an emerging cycle of struggles. In many cases, the lines of influence are explicit. Occupy Wall Street takes inspiration from the encampments of central squares in Spain, which began on May 15 and followed the occupation of Cairo's Tahrir Square earlier last spring. To this succession of demonstrations, one should add a series of parallel events, such as the extended protests at the Wisconsin statehouse, the occupation of Syntagma Square in Athens, and the Israeli tent encampments for economic justice. The context of these various protests are very different, of course, and they are not simply iterations of what happened elsewhere. Rather each of these movements has managed to translate a few common elements into their own situation.

In Tahrir Square, the political nature of the encampment and the fact that the protesters could not be represented in any sense by the current regime was obvious. The demand that "Mubarak must go" proved powerful enough to encompass all other issues. In the subsequent encampments of Madrid's Puerta del Sol and Barcelona's Plaça Catalunya, the critique of political representation was more complex. The Spanish protests brought together a wide array of social and economic complaints -- regarding debt, housing, and education, among others -- but their "indignation," which the Spanish press early on identified as their defining affect, was clearly directed at a political system incapable of addressing these issues. Against the pretense of democracy offered by the current representational system, the protesters posed as one of their central slogans, "Democracia real ya," or "Real democracy now."

Keith Gessen

"Dornish law does not apply." Tyrion had been so ensnared in his own troubles that he'd never stopped to consider the succession. "My father will crown Tommen, count on that."

"He may indeed crown Tommen, here in King's Landing. Which is not to say that my brother may not crown Myrcella, down in Sunspear. Will your father make war on your niece on behalf of your nephew? Will your sister?" [Oberyn] gave a shrug. "Perhaps I should marry Queen Cersei after all, on the condition that she support her daughter over her son. Do you think she would?"

Never, Tyrion wanted to say, but the word caught in his throat.... "I don't know how my sister would choose, between Tommen and Myrcella," he admitted. "It makes no matter. My father will never give her that choice."

"Your father," said Prince Oberyn, "may not live forever."

Something about the way he said it made the hairs on the back of Tyrion's neck bristle. Suddenly he was mindful of Elia again, and all that Oberyn had said as they crossed the field of ash. He wants the head that spoke the words, not just the hand that swung the sword. "It is not wise to speak such treasons in the Red Keep, my prince. The little birds are listening."

"Let them. Is it treason to say a man is mortal? Valar morghulis was how they said it in Valyria of old. All men must die. And the Doom came and proved it true."

George R.R. Martin -- A Storm of Swords

Atlanta Fed President Lockhart and others are saying that the incoming economic data is better than expected and yet one keeps running across stories like "Warning by States as Tax Revenues Fail to Rebound".

what if we paid off the debt? secret government report

Expectations and the Economy by Dennis Lockhart (Atlanta Fed President)

(via Mark Thoma)

CNBS's Steve Liesman tweets "Boston Fed's Rosengren tells #Cnbc Fed should target 7% unemployment, 2.5-3% inflation."

(via David W4ssel, via DeLong twitterstorm.)

Rosengren is echoing Evans, who Liesman interviewed on CNBC. Maybe Rosengren is the mysterious second member favoring stronger action in this article.

Lockhart admits the Fed's forecasts have been way off (maybe they should take out some insurance given the economy's susceptiblity to shocks?). He says recent incoming data however is better than expected so a double-dip is unlikely. Hopefully the better-than-expected data doesn't forestall action.

He closes with:

So, in closing, I would offer the following thought with all appropriate tentativeness and caveats. If the European situation is stabilized and put on a believable resolution path, and if the supercommittee delivers a believable fiscal plan accepted by Congress, these two developments would go a long way toward clearing the air and energizing economic activity.

???

Maybe Lockhart is one of those sarcastic types with a weird sense of humor?

Mike Konczal:

Shorter Richard Fisher, using the phrase Chernyshevsky is reputed to have come up with: “the worse the better.”  The worse it gets for people, the better the opportunities for our ideology to be put into action.  I never thought I’d have to go digging into the immediate influences of Vladimir Ilyich Lenin to get a handle on how “independent” monetary policy works in the 21st century, but here we are.

(via DeLong twitterstorm)

Caleb Crain plugs Henwood's newsletter

Valar morghulis.

Qaddafi Is Dead, Libyan Officials Say

Targeting Nominal GDP Level

Yglesias links to Krugman who links to David Beckworth who links to Joe Weinsenthal's post "The Hottest Idea In Monetary Policy:"

Over the weekend, Goldman came out with a report calling on the Fed to embrace Nominal GDP targeting: In other words, set as a goal for the economy that nominal GDP that we saw back in 2007, and then produce enough inflation so that we got there.

Now Bernanke is out with a new speech about monetary policy in the post-Great Recession era, and though he doesn't say that much substantive, he does talk more about trying to more clearly express monetary policy goals.

According to PIMCO's Bill Gross, that's code for... targeting Nominal GDP.  Meanwhile, Chicago Fed President Charles Evans has been making similar comments, about weighting the Fed's mandate much more towards the full employment/growth end of the spectrum, even if it means high inflation.

All of which means you should really be reading the work of Bentley Economist Scott Sumner, who has been writing forever about the benefits of Nominal GDP targeting, and who is sure to be the hottest economist in the world, as this takes off.

Caveats

Krugman blogs

... As I read them, the market monetarists have largely moved to an expectations view. And now that we’re almost four years into the Lesser Depression, I’m willing, out of a combination of a sense that support is building for a Fed regime shift and sheer desperation, to support the use of expectations-based monetary policy as our best hope.
...
I still believe that the chances of success will be a lot larger if we have expansionary fiscal policy too; but by all means let’s try whatever we can.

DeLong blogs

If you are--as we are right now--in a liquidity trap, with extremely interest-elastic money demand, then expansionary monetary policy that involved the Federal Reserve buying financial assets for cash:

1. will have next to no effect on the short-term safe nominal interest rate--it's already zero.
2. will decrease the long-term safe nominal interest rate to the extent that your open-market operations today change people's expectations of what your target for the short-term safe nominal interest rate in the future.
3. will decrease the long-term safe real interest rate to the extent that it decreases the short-term nominal interest rate and changes expectations today of what inflation will be in the future.
4. will decrease the long-term risky real interest rate to the extent that it decreases the long-term safe real interest rate and to the extent that the assets purchased for cash by the Federal Reserve free up the risk-bearing capacity of private investors and lead to a reduction in risk spreads.
5. will increase spending to the extent that it decreases the long-term risky real interest rate and to the extent that private spending responds positively to decreases in the long-term risky real interest rate.

Lots of steps here, some of which may well be weak.

...
To try to target nominal GDP using either only monetary policy or only fiscal policy seems hazardous. To coordinate--monetary and fiscal expansion, money printing-financed purchase of useful things--seems to be the winner.

Back on Monday I linked to a blog post by Yglesias on the film Ides of March and George Clooney's character Mike Morris. Now I've seen the movie - and liked it by the way - so I can comment.

Yglesias agrees with Dana Goldstein who blogged "There’s no reason, as the movie seems to suggest in its final scene, to feel that voting or working for him would be futile, or that either act lacks basic integrity."

I often agree with them, but in this instance I think Morris (and Clinton and Edwards) showed bad judgement because no matter the morality of the act of infidelity, it wouldn't play well with the public and hurt their cause. It demonstrated bad judgement. Interestingly candidate Morris has a sound bite about having our "heads in the sand" regarding oil and Iraq. That's the title of Yglesias's book. Maybe the screenwriter borrowed it or it was in the original play.

Anyway it was a thought-provoking movie with great acting and I highly recommend it.

2-day General Strike in Greece

Richard Fisher Wants To Make You Poor by Yglesias

Fisher's just echoing what MMTer Dan Kervick has been saying. Interestingly, he hasn't commented on the blog post.