Matt Yglesias' Important Point by Dean Baker

Addendum:
After reading the comments, let me make the point a bit more clearly. The right has found ways to use the market to kick our asses. Progressives should find ways to use the market to kick their asses. These ways are all over the place: opening up trade in health care, making it easier for foreign doctors and lawyers to practice in the country, make the financial sector pay the same sort of taxes as every other sector, ending too big to fail in the banking industry, etc. These are mechanisms that require the government to get out of the way (in the case of financial sector taxes -- not privileging one sector over others). If Occupy Wall Street was saying these things they were not very effective in getting their message out.

Extended trailer with Brienne in the bear pit, Asha Greyjoy and Stannis Baratheon. Does this mean the Bloody Mummers and Vargo Hoat, the Goat of Qohor, will be in the new season?

Joe Scarborough Carries His Deficit Rope-a-Dope to the Next Level by Dean Baker

The piece is a cornucopia of confusion, beginning with the first sentence:

"Dick Cheney and Paul Krugman have declared from opposite sides of the ideological divide that deficits don’t matter, but they simply have it wrong."

I am not in the defense of Paul Krugman business, but surely Jeffrey Sachs knows that Paul Krugman does not argue that deficits do not matter as a general proposition. What Krugman has argued very vociferously is that deficits do not matter in an economy that is operating far below its potential, as is the case with the United States today. The Congressional Budget Office (CBO) projects that economy's output will be more than 6 percent (@ $1 trillion) below potential this year. Projected 2013 output is almost 10 percent below the real level of output that CBO had projected in 2008 before it recognized the impact of the collapse of the housing bubble.

Debt in a Time of Zero by Krugman

But leaving the debt ceiling on one side, isn’t it true that since spending can currently be financed by Fed money printing, we shouldn’t care at all about the notional debt owed to the Fed? Alas, no. 

It’s true that printing money isn’t at all inflationary under current conditions— that is, with the economy depressed and interest rates up against the zero lower bound. But eventually these conditions will end. At that point, to prevent a sharp rise in inflation the Fed will want to pull back much of the monetary base it created in response to the crisis, which means selling off the Federal debt it bought. So even though right now that debt is just a claim by one more or less governmental agency on another governmental agency, it will eventually turn into debt held by the public. 

We are living in weird economic times, where many of the usual rules don’t apply and there are big free lunches to be had. But not everything is a free lunch, even now. Sorry.

Correcting Brad DeLong on the Housing Bubble by Dean Baker

I see that Brad has a post saying that the economy was adjusting nicely to the bursting of the housing bubble until the financial crisis set in. He notes that housing construction fell by 2.5 percentage points of GDP between 2005 and 2008. This was replaced by an increase in gross exports of 2.0 pp of GDP and increase in equipment investment of 0.5 pp. Everything was moving along nicely until the financial crisis in 2008.

I see things a bit differently. First, gross exports don't create jobs, net exports do. When we move an auto assembly plant from Ohio to Mexico, we are not creating additional jobs with the car parts exported to Mexico. That's intro textbook stuff. If we look at the net export picture, the gain is only about 1 pp of GDP. Furthermore it is hard to see the improvement in the trade picture having gone very much further without a further decline in the dollar. (That was a possibility, but far from a certainty -- depends on policy decisions elsewhere.)

The rest of the gap was made up by a surge in non-residential construction (can you say bubble?), which rose by more than 33 percent as a share of GDP, or more than 1 pp of GDP. This boom led to considerable overbuilding in retail, office space and most other categories of non-residential construction. Assuming the burst of spending in non-residential construction was another bubble, then the portion of the demand gap filled through this channel was destined to be temporary. It was inevitable that this bubble would also burst and we would need something else to make up the hole in demand.

The other factor in the mix is the drop off in consumption. Savings rates had been driven to nearly zero by the wealth created by the housing bubble. It seems to me inevitable that consumption would fall in response to the disappearance of this wealth. The financial crisis gave us a Wily E. Coyote moment where everyone stopped spending at the same time, but I would argue that this just brought the decline in spending forward in time.

The savings rate remains much higher today than at the peak of the bubble, although still low by historic standards. (It's currently around 4.0 percent, the pre-bubble average was over 8.0 percent.) We have two alternative hypotheses here. I gather Brad would say that people are spending at a lower rate because they are still freaked out by the financial crisis. I would argue that they are spending at a lower rate for the same reason that homeless people don't spend, they don't have the money.

Homeowners are down $8 trillion in housing equity as a result of the crash. I would expect that loss of wealth to have a substantial impact on their spending. I gather Brad does not.

This is what bothers me about his graph. It leaves out the loss of the wealth effect. The popping of the stock market bubble in 2000-2001 wasn't as damaging because it didn't have the same loss of demand related to the wealth effect.

AV Club reviews "Trust Me" from "The Americans."

AV Club reviews "The Hatchet Tour" from "Justified."

This episode, though, offers plenty of examples of Raylan being more Frances-like. When he stops off at Wynn Duffy’s RV, for example, and Wynn offers his sincere condolences for Arlo’s death but insists he had nothing to do with it, Raylan pats Wynn on the leg (out of frame, but audibly), and says, “Thank you, Wynn. Whatever your other failings, I believe that’s true.” It’s a sweet moment, and typical of the way that Justified’s enemies have a “Sam and Ralph”-like ability to “clock out” when the situation isn’t requiring them to draw on each other. Similarly, when Raylan comes upon Constable Bob exchanging fire with Clover Hill assholes Paxton and Johns, he strides into the crossfire and gets everyone to lower their weapons. Then, when the Clover Hillers try to defend their treatment of Constable Bob, Raylan does what he always does, which is to ignore any crime that might be happening at the moment (“Save it. Don’t give a shit.”) so that he can get straight to what he actually wants. 

Policy wonks, pitchforks, and the contradictions of capitalism by Steve Randy Waldman

escape velocity

Bernanke on long-term interest rates by James Hamilton

Bernanke called attention to several different forecasts of where the 10-year yield might be a few years down the road, including the Blue Chip consensus, Survey of Professional 

Forecasters, CBO, and the term-structure model that was used to construct Figure 1 above. 

Source: Bernanke (2013).

I was quite surprised to see the Fed Chairman produce this graph. If it is indeed the case that the 10-year yield is going to rise from 2% to 4% relatively quickly, it would mean significant capital losses for someone who buys a 10-year bond today. If the market comes around to taking such forecasts more seriously, bond prices should fall on Monday. 

However, Bernanke also emphasized that there is considerable uncertainty associated with these forecasts, on the down side as well as the up side.

 

Source: Bernanke (2013).

Bernanke offered the following explanation for why he wanted to call attention to forecasts of future ten-year rates: 

"It is worth pausing to note that, not that long ago, central bankers would have carefully avoided this topic. However, it is now a bedrock principle of central banking that transparency about the likely path of policy, in general, and interest rates, in particular, can increase the effectiveness of policy. In the present context, I would add that transparency may mitigate risks emanating from unexpected rate movements." 

Bernanke is clearly committed to keeping short-term interest rates low for quite a while yet. But a separate question is how much more the Fed wants to allow its balance sheet to grow with additional large-scale asset purchases. I think they'll want to give ample warning in advance of actually stopping the new purchases. 

And perhaps before dropping more direct hints about ending LSAP, Bernanke would want to make a speech like this one.

(emphasis added)

Mike White on NPR's "Fresh Air" with Terry Gross.

AV Club reviews "Enlightened" season finale "Agent of Change."

A bigger-than-usual fuck-up must be the price of a huge victory, because that board-room scene is delicious, like the country club scene from “No Doubt” cranked to 11. Once again, Amy Jellicoe and Charles Szidon don’t really mess around. “I’m just a woman who’s over it. I’m tired of watching the world fall apart because of guys like you. I tried to take a little power back.” She refuses to cooperate and calmly tells him how rich he got by lying, cheating, and hurting. He resorts to the historical hysteric offense and tosses off a “cunt” or two. Amy makes us proud. She slowly looks back up and says, “Well, if caring about something other than money is dopey, I’m a fucking moron.” She gets up, walks out, and stands there almost laughing at Charles’ rage, and he’s the one who shouts obscenities through a closing elevator door this time. Enlightened is rarely so high-contrast. Amy is finally heroic, and Charles is utterly despicable. There’s that national catharsis I was looking for. 

... 

Amy watches footage of the Syrian uprising as she wonders whether she produces change or chaos (as if they’re mutually exclusive). Amy’s wake turns out to be fairly ordered, no? The ex-Cogentivans would have wound up free agents regardless, all the other main characters affirm connection at the end, and the response to Jeff’s story is characteristically corporate and lawyerly.

 My estimation of Laura Dern and Mike just went way up.

AV Club reviews "Clear" from "The Walking Dead."

Regulate and Backstop

The shadow banking system is still unregulated.

Simon Johnson's Latest on Bernanke and Too Big to Fail by Dean Baker

Late Night with Ben Bernanke by Binyamin Appelbaum

3. Not surprisingly, Mr. Bernanke often is asked to reflect on the financial crisis. He offered something a little different than his normal response on Friday night. 

“In many ways, in retrospect, the crisis was a normal crisis,” he said. “It’s just that the intuitional framework in which it occurred was much more complex.” 

In other words, there was a panic, and a run, and a collapse – but rather than a run on bank deposits, the run was in the money markets. Improving the stability of those markets is something regulators have yet to accomplish.*

(via Thoma)

-------------

*

Equipping the Fed for a Future Crisis by Appelbaum

5:33 p.m. | Updated to reflect alternative solutions proposed by the New York Fed chief. 

The federal government has generally responded to the financial crisis by expanding the power of regulators, most of all the Federal Reserve. But in an interesting speech this month, William C. Dudley, president of the Federal Reserve Bank of New York, argued that Congress has not gone far enough. 

Mr. Dudley’s concern is about a little-noticed piece of the 2010 Dodd-Frank Act that actually reduced the central bank’s authority in one crucial area: its ability to provide emergency funding to strapped financial firms. 

The Fed arrested the 2008 financial crisis by using this authority to create a series of unprecedented programs that offered emergency financing not just to American banks – its traditional flock – but also to foreign banks, and not just to banks but to other kinds of financial companies as well, and indeed to other kinds of companies entirely. 

Congress responded to this performance by making it difficult to repeat. Dodd-Frank imposed new restrictions on the Fed’s ability to make emergency loans, or to keep money flowing, outside the banking industry. 

One basic reason was that Congress had never really intended to give the Fed such broad power in the first place. Rather remarkably, the authority that the Fed used to save the financial system in 2008 was granted by Congress in 1991 with almost no debate or public notice, a story I first told in The Washington Post in 2009. It was quietly slipped into a broader bill by former Senator Christopher Dodd of Connecticut, at the behest of Wall Street companies including Goldman Sachs. When it was first used almost two decades later, legislators like Representative Barney Frank confessed that they didn’t know they had voted for it. 

Furthermore, everyone agreed that the 1991 law didn’t make much sense. It expanded the Fed’s safety net without expanding its regulatory authority. Banks are backstopped and, at least in theory, carefully regulated. Backstopping the rest of the financial system without regulation was an invitation to excess. There’s a reasonable argument that that contributed to the crisis. 

But rather than expanding regulation, Congress decided to pull in the net. 

This decision commanded broad support. Bailing out financial firms is not a popular spectator sport, and there is a general consensus in Washington that public policy should focus on minimizing the damage when firms fail. 

“Many – myself included – have drawn from the financial crisis the conclusion that government safety nets should be drawn tightly so that only a very few, very tightly regulated firms get as little liquidity support as possible,” Karen Shaw Petrou, a close watcher of financial regulation who drew my attention to Mr. Dudley’s speech, wrote to clients of her firm, Federal Financial Analytics. 

A more inclusive policy, she continued, “will open the safety net, wide, wide open to all sorts of actors who, smiling sweetly, will rob us blind.” 

Mr. Dudley takes the opposite view. He argued in his recent speech that it would make no sense to draw a line between banks and other kinds of financial firms if both were playing essentially the same role in the broader economy. 

Both should be regulated, and both should be backstopped. 

“If we believe that these activities provide essential credit intermediation services to the real economy that could not be easily replaced by other forms of intermediation, then the same logic that leads us to backstop commercial banking with a lender of last resort might lead us to backstop the banking activity taking place in the markets in a similar way,” he told the New York Bankers Association. 

Perhaps the most powerful argument for this view is that the absence of a broader backstop is the mechanism by which a housing crash became a financial crisis. 

The government stabilized deposit funding through the creation of the Federal Reserve, as an emergency lender to strapped banks, and the Federal Deposit Insurance Corporation, as a guarantor that depositors would get their money back. 

But banks and other financial companies increasingly draw money from sources that do not have similar backstops, including the sale of commercial paper to money market funds and complicated arrangements called “triparty repos” that basically allow financial firms to borrow money by pledging assets as collateral. 

These are short-term loans that must be renewed regularly, often daily. As a result, panic among investors can almost instantly undermine financial stability, which is exactly what began to happen in 2007: Panic spread, financing disappeared, and the global financial system came perilously close to complete collapse. 

There is broad agreement that something should be done to improve the stability of money-market funds and the triparty repo market. So far, nothing much has happened, but one can’t rule out the possibility that that will change. 

Mr. Dudley favors many of these efforts, but his broader point is that they all are insufficient. There is no substitute for the role the Fed now plays in the banking system, as a lender of last resort – and not just the emergency authority granted to the Fed in 1991, but authority to serve as a permanent backstop. 

Alternatively, he noted that regulators could instead choose to restrict the use of unstable funding sources, but that is a solution many regard as impractical. 

Perry Mehrling, an economist at Barnard College, argued in a 2011 book, “The New Lombard Street,” that it had never made sense to restrict the Fed’s backstop to the traditional banking system, because banks had always been part of a broader system, all of which required the same regulation and support. 

“The practical intertwining of money markets and capital markets is the defining institutional feature of the American system, and that feature requires a similarly integrated backstop by the central bank,” Professor Mehrling wrote. 

The only choice, he argued, was between planning carefully for the next crisis, or repeating the Fed’s ad-hoc any-tools-available response in 2008. 

Mr. Dudley appears to be in complete agreement with that view. 

“The sheer size of banking functions undertaken outside commercial banking entities – even now, after the crisis – suggests that this issue must not be ignored,” he said. “Pretending the problem doesn’t exist, or dealing with it only ex post through emergency facilities, cannot be consistent with our financial stability objectives.”

If Not For That Pesky Sequester by Tim Duy

This morning's Wall Street Journal headline on the sequester included this quote:

"If they could get this fixed, the economy is poised to take off," Bank of America Corp. Chief Executive Brian Moynihan said in an interview.

I believe this is largely correct, albeit "take off" is perhaps a bit strong. The US economy looks to have shaken off some of last year's doldrums, particularly in manufacturing and the housing recovery is set to accelerate further this year. While clearly some external headwinds remain, notably the ongoingeconomic disaster that is Europe, I tend to think these will have only a second-order impact on the US economy. The immediate concern is obviously the impact of the sequester and earlier tax hikes, especially considering the evolving views of the impact of fiscal policy. That said, while I find the timing of these policy changes unfortunate and believe they place an unnecessary speedbump in the recovery process, their impact should fade as the year progresses.

(via Thoma)

The Immorality of the Interest Rate Hawks by Krugman

Economic Conditions and Conditionality by Charles Evans

AV Clubs reviews "Comint" on "The Americans."

Greed is Good

Hidden profits, hidden rents by Steve Randy Waldman

Evan Soltas has a very good post on the explosive growth of the financial industry since the end of World War II. As a share of GDP, in terms of profits, and in terms of payroll, postwar America has been truly been a golden age for bankers, brokers, and fund managers. 

In fact, it’s even better than it looks! 

...

There are lots of good reasons to reduce our dependence on the institution of debt in favor of more equity-like arrangements. Evolving towards a smaller financial industry less capable of capturing rents is another reason. Using the power of the state to stabilize the inflation rate is a bad idea, also for lots of reasons, including that the practice encourages debt finance and powerful banks.

I knew this before it was cool. Doug Henwood's "Wall Street" is good on this.

Ben Bernanke to Congress: You’re doing it wrong by Ezra Klein

Yen Depreciation and the Scope for Expenditure Switching by Menzie Chinn

With Haruhiko Kuroda ascending to head the Bank of Japan [1], it is likely that monetary policy will remain fairly expansionary. Even without direct intervention in foreign exchange markets, the yen will likely continue to weaken as expectations of inflation rise. What is the likely impact of trade flows?

a bad negotiator you say?

White House Believes G.O.P. Will Bend as Cuts Take Hold

WASHINGTON — President Obama’s team concedes that the almost certain arrival of across-the-board budget cuts on Friday will not immediately produce the politically dramatic layoffs and airport delays that the administration has been warning about for days. 

But White House strategists say they believe that a constant drip-drip-drip of bad news will slowly emerge in Congressional districts across the country in the weeks ahead, generating negative headlines and — they hope — putting Republicans on the defensive for their refusal to raise taxes. 

Yet by accepting the inevitability of an extended Washington stalemate, the president is risking the possibility that Americans will eventually blame him — not members of Congress — for job losses, smaller paychecks, longer lines at airports, a reduction in government services and a less well-equipped military. 

He could also ultimately emerge as a kind of president-who-cried-wolf if Americans just shrug at the slow-rolling budget cuts and think the crisis atmosphere that Mr. Obama created was more hype than reality. On Tuesday, the president began admitting that the impact of the cuts “won’t be felt overnight.” 

Even so, he has aggressively used the White House political machinery to ratchet up public anxiety about the budget cuts, called sequestration. The goal, officials said, is to prepare Americans for layoffs, shrinking benefits and reduced services — and to ensure that Republicans get blamed. 

“It will be like a rolling ball,” Janet Napolitano, the secretary of homeland security, said this week, describing the impact of the budget cuts on her sprawling agency. “It will keep growing.” 

White House officials said on Wednesday that Mr. Obama had invited the Congressional leadership to a meeting on Friday, after the cuts have gone into effect — a stark indication that the administration does not expect any progress before then. 

The wait-it-out political strategy in the White House is different from the one Mr. Obama pursued in previous tax and spending standoffs with Republican lawmakers. In those clashes, the president urgently sought to reach last-minute deals with Republicans to avoid the dire fiscal and economic consequences of an impasse. 

Republicans are trying to make the case to the American public that the president and his staff are trying to frighten people by overstating how difficult it will be for government agencies to trim their spending. 

In an interview Tuesday evening, the House speaker, John A. Boehner, said the White House was trying to “play games with the American people, scare the American people,” adding, “This is not leadership.” 

Officially, White House officials say the president remains hopeful that something might happen in the next 48 hours to delay the automatic cuts, which he and the Republicans agreed to in the summer of 2011 as a way to prod agreement on how to cut the nation’s soaring deficit. 

In reality, there appear to be no attempts at last-minute negotiations. The president’s top aides said they expected Mr. Obama to have discussions with lawmakers this week, but they have repeatedly said that they do not have any planned meetings or phone calls to announce before Friday. 

“The president has been engaged and will continue to be engaged with Congressional leaders of both parties on the issue of the sequester,” Jay Carney, the president’s press secretary, told reporters aboard Air Force One on Tuesday. 

White House officials do not expect Mr. Boehner or Senator Mitch McConnell of Kentucky, the Republican leader, to suddenly agree to tax increases in the next two days. And the president has no intention of backing away from his demands for what he calls “balanced” deficit cutting that includes tax increases and spending cuts. 

As a result, the next several weeks could look very much like the present, with Mr. Obama flying to communities around the country to highlight the impact of the budget cuts. 

House Republicans, meanwhile, remain confident that their members will not give in to the president’s demands for tax increases no matter what happens after the cuts take effect. 

Strategists for Mr. Boehner believe that Republicans have been successful in branding the automatic cuts as Mr. Obama’s idea. For weeks, the speaker and others have pointed to news reports from 2011 suggesting that sequestration was initially proposed by the president’s top aides. 

Top Republicans say that their members previously made concessions to Mr. Obama only when inaction would have automatically led to a payroll tax increase or an income tax increase on all Americans. This time, they say, their inaction will lead to spending cuts, something they say Americans support. 

Mr. McConnell said in a statement on Wednesday that the meeting with the president on Friday was a chance to affirm the Republican commitment to spending cuts. 

“With a $16.6 trillion national debt, and a promise to the American people to address it, one thing is perfectly clear: we will cut Washington spending,” Mr. McConnell said. “We can either secure those reductions more intelligently, or we can do it the president’s way with across-the board cuts. But one thing Americans simply will not accept is another tax increase to replace spending reductions we already agreed to.”

Republicans didn't care about the payroll tax increase, which happened anyway. Americans don't support spending cuts as the Republicans will find out. The Teabaggers miscalculated again just as they assumed the debt ceiling clown show was feasible until their leadership explained it to them.

It takes a village

 M83 | Midnight City from DIVISION on Vimeo.

"Village of the Damned" has been running on cable lately. I didn't realize that John Carpenter, one of my favorites, had directed it. VotD is good but kind of cheesy in a mid-90s way. M83 is a French band and it's amusing to imagine intelligent French musicians watching cheesy American pop cultural products.

Stereolab has a great song titled "Exploding Head Movie" which must be named after "Scanners."

AV Club review of "Outlaw' on Justified.

I could see Shelby turn out to be Drew Peterson.