Not dead yet: Currency Management and the Need for a More Competitive Dollar by Josh Bivens
(via DeLong)


What's Really Dragging Down the U.S. Economy by Dean Baker

Wow, that isn't what the Commerce Department is telling my spreadsheet. I get that the average share of consumption (all categories together) in GDP was 67.3 percent in the years from 1985 to 2005. I get that it was 70.8 percent in the most recent quarter. This means that consumption was 3.5 percent higher than its longer period average as a share of GDP. This means that consumers are not hanging onto their wallets at all. In fact, they are spending at very ambitious rate. (Boys and girls, you can check this one for yourself by going to the National Income and Product Accounts and clicking up Table 1.1.5.) 

This is consistent with the data showing that consumption is higher than normal relative to disposable income. (The adjusted consumption line has to do with the treatment of the statistical discrepancy in the national income accounts.) This means that consumption is not holding back the economy, it is actually unusually high.

...
The other error along these lines is that imports should be expected to rise relative to GDP as the economy moves back toward its potential. If GDP were to rise by 6 percent to bring it back in line with its potential then imports would rise by roughly 20 percent as much or 1.2 percentage points of GDP. This would make it more clear that the biggest factor that is out of line with our historical experience is the trade deficit. That would be even more clear if we took a longer period as the basis of comparison that was not so distorted by asset bubbles.
Of course given the Washington Post's unabashed celebration of recent trade agreements its reporters are probably not allowed to call attention to such facts.
 

AV Club review of Cloud Atlas by Keith Phipps

It was an enjoyable movie. Better than V for Vendetta or Matrixes 2 & 3. I loved The Matrix and this is a lot like that movie. Plus I'm a fan of Keith David who has a big part in it. Some of the films he's been in: The Thing, Platoon, They Live, Road House, Marked for Death, Reality Bites, Dead Presidents, There's Something About Mary, and Pitch Black.

AV Club reviews The Walking Dead, "Walk with Me."

AV Club review of Alphas second season finale

Germany Has Outperformed the U.S. Because of Work Sharing by Dean Baker

Nov. 19 is Uranus Day

Our Debt to Stalingrad by DeLong

And so, 70 years ago this November – on November 19 to be precise – the million-soldier reserve of the Red Army was transferred to General Nikolai Vatutin’s Southwestern Front, Marshal Konstantin Rokossovsky’s Don Front, and Marshal Andrei Yeremenko’s Stalingrad Front. They went on to spring the trap of Operation Uranus, the code name for the planned encirclement and annihilation of the German Sixth Army and Fourth Panzer Army. They would fight, die, win, and thus destroy the Nazi hope of dominating Eurasia for even one more year – let alone of establishing Hitler’s 1,000-year Reich.

CommentsTogether, these 1.2 million Red Army soldiers, the workers who armed them, and the peasants who fed them turned the Battle of Stalingrad into the fight that, of any battle in human history, has made the greatest positive difference for humanity.

Wikipedia entry for Battle of Stalingrad

"The battle took place between 23 August 1942 to 2 February 1943"

Operation Uranus

Uranus

Uranus is the seventh planet from the Sun. It has the third-largest planetary radius and fourth-largest planetary mass in the Solar System. It is named after the ancient Greek deity of the sky Uranus (Ancient Greek: Οὐρανός), the father of Cronus (Saturn) and grandfather of Zeus (Jupiter). Though it is visible to the naked eye like the five classical planets, it was never recognized as a planet by ancient observers because of its dimness and slow orbit.^[16] Sir William Herschel announced its discovery on March 13, 1781, expanding the known boundaries of the Solar System for the first time in modern history. Uranus was also the first planet discovered with a telescope.

Uranus ( /ˈjʊərənəs/ or /jʊˈreɪnəs/; Ancient Greek Οὐρανός, Ouranos meaning "sky" or "heaven") was the primal Greek god personifying the sky. His equivalent in Roman mythology was Caelus. In Ancient Greek literature, Uranus or Father Sky was the son and husband of Gaia, Mother Earth. According to Hesiod's Theogony, Uranus was conceived by Gaia alone, but other sources cite Aether as his father.^[3] Uranus and Gaia were the parents of the first generation of Titans, and the ancestors of most of the Greek gods, but no cult addressed directly to Uranus survived into Classical times,^[4] and Uranus does not appear among the usual themes of Greek painted pottery. Elemental Earth, Sky and Styx might be joined, however, in a solemn invocation in Homeric epic. 

The Corrections*

Or Minsky Moments when the music in musical chairs stops.

Liquidity, bubbles/ponzis/chain letters, and money by Nick Rowe

I might as well join in the fun. Along with Steve Williamson, Noah Smith, Karl Smith, Paul Krugman, David Glasner, and Steve again. [Update: and Brad DeLong and JP Koning. And David Andolfatto.] 

Some assets are more liquid than others (they have lower transactions costs of buying and selling). More liquid assets will have a lower desired rate of return than less liquid assets (that means people will be willing to own them even if they expect to earn a lower rate of return than less liquid assets).

Money (the good that is used as a medium of exchange) will be more liquid than other assets. (If some other asset were more liquid than money, people would switch to using that other asset as a medium of exchange instead of the existing money, and that other asset would become the new money).

I wonder if anyone wrote that the environment and climate change is a bubble in that it is unsustainable.

-------------------------------------
*If anyone doesn't know, this was the title of a Jonathan Franzen novel.

Standard of Living Is in the Shadows as an Election Issue by Leonhardt

Better Ways to Deal With China by Eduardo Porter

China and Protectionism: It Ain't Quite as Simple as They Tell Us by Dean Baker

Housing Was a Huge Headwind; Now It’s a Small Tailwind by Jared Bernstein

Busted: 75% of the Biggest Home Lenders in 2006 No Longer Exist by Matt O'Brien

Bernanke not coming back

The End of China Bashing: Toward a Serious Discussion of the Trade Deficit by Dean Baker

Paul Krugman and Ezra Klein both say, following Joe Gagnon, that the time for criticizing China for "currency manipulation" has passed. This is partly true in the sense that China's currency has risen substantially in real terms against the dollar over the last few years. However this does not mean either that the relative value of the dollar and the yuan is now at a sustainable level or that China is not continuing as a matter of policy to prop up the dollar against its currency. 

Thoma and DeLong seem to agree with Krugman and Klein. Is this a reaction to Romney's China bashing during the debates as the Presidential race tightens?

You can't blame them in that this election is very important.

Who will be the next Fed Chair (Applebaum piece) or Treasury Secretary (Sorkin piece) According to Sorkin: "If Mitt Romney wins the presidency, he has already pledged he will replace Mr. Bernanke, whose term as chairman ends in January 2014, in just over 15 months. However, Mr. Bernanke has told close friends that even if Mr. Obama wins, he probably will not stand for re-election."

Or Supreme Court judge?

minutes later, however, it became clear that while the court had rejected an expansive view of the Constitution’s commerce clause (which the administration had argued gave Congress the power to make people buy health insurance), it had in fact upheld the health care law on grounds that the individual mandate fell under Congress’s broad power to levy taxes.

Good insight from Krugman.

Things That Aren't Bubbles

Is fiat money a bubble in this sense? Not at all. It’s true that green pieces of paper have no intrinsic value (except that they can be used to pay taxes, which is actually important), so that my willingness to accept green paper from you is based only on my belief that I can in turn hand that green paper over to someone else. But there’s nothing to prevent that process of monetary circulation from going on forever. 

So what is fiat money? It is, as Paul Samuelson put it in his original overlapping-generations model (pdf), a “social contrivance”. It’s a convention, which works as long as the future is like the past. Obviously, such conventions can break down — but then so can things like property rights. In fact, you could argue that almost every asset in a modern economy owes its value to social convention; green pieces of paper could become worthless, but then so could any paper claim, which is, after all, worth something only because laws say it is — and laws can be repealed. 

And once you realize that a social convention is not at all the same thing as a bubble, several related fallacies fall into place. 

Take the common claim on the right that Social Security is a Ponzi scheme because the system has few real assets. It’s true that Social Security is mainly a system in which each generation pays for the previous generation’s retirement, in the expectation that it will receive the same treatment from the next generation. But like monetary circulation, this process can go on forever; there’s nothing unsustainable about it (yes, demography, but that’s about the levels of taxes and benefits, not the fundamental nature of the scheme). So there’s nothing Ponziesque at all. 

A final thought: the notion that there must be a “fundamental” source for money’s value, although it’s a right-wing trope, bears a strong family resemblance to the Marxist labor theory of value. In each case what people are missing is that value is an emergent property, not an essence: money, and actually everything, has a market value based on the role it plays in our economy — full stop.

Conservatives assert that social contrivances are "bubbles," things like fiat money, property rights, and Social Security. Is this a category mistake?

Bubbles are "unsustainable."

 

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