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