iCount

And the only prescription is more ukulele!

It’s obvious that even though they goof off a lot, these people are really good. Also, I defy you to watch this video the whole way through and not have the song stuck in your head for at least two days.

H/T: Gary Farber

by tgirsch on January 07, 2009 04:04 AM

Gail the Actuary on the OilDrum presents a thoughtful, well-organized piece on economic prospects for 2009. She outlines levels of debt resting on actual income. The economic outlook is not rosy. Below is her opening figure:









She points out that

It is only when the system is under stress, and shortfalls in income of the ordinary citizen start shaking the system, that these connections becomes clearer.

She notes that there are "many feedback loops" in the tower.

When things are very good, the feedback loops tend to make things look very, very good (higher wages-> higher spending -> profitable businesses -> more hiring -> rising home prices -> less need for government programs). These same feedback loops work the opposite direction when things are bad (layoffs, for example), making a bad economic scenario truly terrible. The huge tower is also expensive to maintain, and takes resources from productive uses, like building infrastructure and new factories. As more and more layers are added to the tower (like TARP), the tower becomes more and more unstable, and more and more likely to have big reactions to small events.

To drive her point home, she presents the following graph:









I would add one graph of my own:









Unless root causes, not symptoms, are addressed, then there is little hope that the future will be very bright. We move blindly from one crisis to another, trying to staunch the latest wound with another expensive band-aid.

We have become incapable of holding more than one idea at a time.

Does the lobby wheel cater only to special interests that have led us into the health care morass and other disasters as well? Will the vulture-lobbyists-politicians be there to guide the latest stimulus package? You betcha. But forget about them. We need the stimulus package.

Have banks refused to loosen up credit after being given loads of money? You betcha. But forget about them. We failed there. Let's try something else. Bring on the latest stimulus package.

Is our trade deficit and current account balance dangerous? You betcha. Forget about that. We need the stimulus package. Besides, only a handful of economists--Peter Morici among others--have complained. We should be glad we are getting cheap goods. Well, to keep its export machine going, Asia will certainly do its best to make that export machine alive. Goods will be even cheaper. Deflation is on the prowl.

Are the massive and dangerous trade imbalances a result Asian currency manipulation, export tax rebates, cheap labor--and a flood of FDI into these countries trying to cash in on the export machine to the U.S. You betcha. But forget about all that. Get the stimulus package going. We can't let their export machines collapse. Globalization, as structured, needs to be rescued.

Always the latest crisis; always the latest short-term solution. Is there any vision? Hardly. We are watching a parade of the thoughtless, the foolish, and the dangerous.

I am reminded of Eugène Ionesco's Rhinoceros where crowds of people morph into dangerous, thoughtless rhinos, blindly following each other in one rampage after another.

And where were the economists, even those we most admire?

With Nouriel Roubini at the academic helm, a year ago the World Economic Forum issued its 2008 Financial Development Report. Guess what? The U.S. was rated number 1 in financial sophistication and maturity.

Talk about squaring the circle! The link to this report has been put on this site a number of times. (I did once or twice; Movie Guy did once.) You can lead a rhino to water....

One year later, we are on the verge of the next Great Depression, so says Krugman...and I agree. Did the economists for that Financial Development report take a vote, after polling numerous well-heeled CEO's and fellow economists? Damned if I know.

But consider all the glowing predictions and all the glowing congratulations that have been made and offered in the past six years. The world is on the path to a new millennium, the hey-day of free trade as orchestrated by the WTO and the globalization zealots, who cared not a whit that global imbalances were growing ever more precarious. It will all right itself in the end, they said. Just keep the party going.

Gail sets her grim picture against resource depletion as world population increases. I depair of even thinking about that problem, along with that nameless other (global warming. Forget I even mentioned it.)

by Stormy (noreply@blogger.com) on January 06, 2009 08:54 PM

by Tom Bozzo



Live from San Francisco: The iTunes store is going DRM-free. (The record labels get variable pricing.) Good riddance.

by Tom Bozzo (noreply@blogger.com) on January 06, 2009 06:38 PM

Last night, I used the phrase “strewn about,” and it got me to wondering: WTF is the present tense of “strewn?” Strew? As it turns out, it is: To strew. But nobody ever uses it in any form other than “strewn,” at least not that I’ve ever heard.

And that got me to wondering: Are there any other verbs that are commonly used, but only in a past-tense or other non-root form?

by tgirsch on January 06, 2009 03:25 PM

Several recent events have been described as "just symbolism," which apparently is a method of dismissing uncomfortable statements of fact, such as 'Sarah Palin is the nominee for Vice President' or 'Rick Warren will give the invocation at Barack Obama's inauguration.' Apparently, these moments are supposed to have a lifespan closer to that of Britney Spears's first marriage than, say, Britney Spears' [sic] Guide to Semiconductor Physics.*



Ladies and Gentlemen, I give you Symbolism Writ Large, in a manner to shame Christo himself:

US opens world's largest foreign mission in Iraq



The $592 million, 104-acre compound that was dedicated in Baghdad's fortified Green Zone on Monday is meant to symbolize a long-term commitment to Iraq.

That's a lot of "symbolizing."



Tell me again why we need to be cautious in investing in domestic infrastructure. (Yes, I get that it's incrementally larger. So was the Federal-Aid Highway Transportation Act of 1956. Nu?)



*Since Rick Warren was the driving force behind the PEPFAR initiative, discussed by cactus here, response for tens of thousands of African illnesses and deaths, and so discredited that even popular television shows are lambasting it, the idea that he will Just Go Away on 20 January 2009 around 2:00pm is even more absurd than usual.

by Ken Houghton (noreply@blogger.com) on January 06, 2009 02:34 PM

Tom Bozzo



Around election time, the House Transportation and Infrastructure Committee had identified $45 billion in ready-to-go infrastructure projects a stimulus package. Now TrafficWorld reports that the Committee now is looking at $85 billion:

The recommendations, outlined in a Dec. 12 memo, include $30 billion for highways and bridges, $12 billion for transit, $4.9 billion for passenger rail, $5 billion for airports, $14.3 billion for environmental infrastructure, $7 billion for the U.S. Army Corps of Engineers and $10 billion for federal buildings, according to the committee.

To put this amount in perspective, under SAFETEA-LU, the highway and transit funding bill in effect through FY09, federal highway and transit expenditures run around $60 billion/year ($284 billion for FY05-FY09), so $42 billion on highways and transit is a pretty big increment.



That's not to say that $100 billion/year is necessarily a large amount of money to spend in the less-short term, especially if we want things like vastly improved transit and passenger rail systems and considering some of the things $100B/year were spent on during the Bush administration. Politically, it seems to me that it would be better to fund the medium-term projects outside the stimulus package in a FY10+ infrastructure bill to follow SAFETEA-LU, which just so happens to be due this year. If the projects are valuable — and many are or will be — then then they should not be funded only in case of economic emergency.

by Tom Bozzo (noreply@blogger.com) on January 06, 2009 01:20 PM

Robert Waldmann



I understand that traders are compensated roughly half based on mark to market profits in a given year and half on long term outcomes (the was the AIG AIG-FP deal). This implies that many people made a lot of money being wrong about the housing bubble etc. It also implies that the conditions for profitable market manipulation are much broader than they would be if market manipulators were trading their own money and the conditions for sophisticated traders to buy into bubbles are weaker.



Using his BA in philosophy Matt Yglesias gets this point. Compensation based, even in part, on short run mark to market profits is a recipe for disaster.



I see (via Yves Smith) that Financial Times' John Dizard puts it well

A once-in-10-years-comet- wiping-out-the-dinosaurs disaster is a problem for the investor, not the manager-mammal who collects his compensation annually, in cash, thank you. He has what they call a "résumé put", not a term you will find in offering memoranda, and nine years of bonuses....

A "model" after the jump.





The model is based on



J. Bradford DeLong, Andrei Shleifer, et al (1990), "Positive-Feedback Investment Strategies and Destabilizing Rational Speculation," Journal of Finance 45: 2 (June), pp. 374-397.



There are 3 types of agent in the model. First necessarily there are momentum traders or trend chasers, agents who buy assets whose price just increased (say like you know houses). Second there are value investors whose demand for assets is downward sloping in current price just like a normal demand curve (call them Buffets)

super smart investors who know all about fundamental values *and* about the momentum traders (Soroses). There were two results, under extreme assumptions about mementum traders it is possible that sophisticated traders drive asset prices further from their fundamental value when there is a disturbance, that is pump up the bubble. It is also possible that, without any exogenous shock, the sophisticated investors deliberately trigger a bubble -- that is manipulate the market.



The asset in the model is finite lived. The challenge is that it gets back to its fundamental model when in matures (in period 4). This makes it hard to find cases where it is rational to buy into a bubble or manipulate the market.



With an incentive contract such that people get paid in uhm period 2 based on marked to market profits then never ever have to give that money back, I think it is enough that there be some momentum traders.



Let's say I am a manager who controls a large amount of money and I want to manipulate the market. I buy a lot of an asset. I have to pay a high price to get it from the Buffets. Suddenly momentum traders want the asset too so next period they buy (and I don't sell). Mark to market says I have made money. If other super sophisticated traders know what is going on they will cooperate with me. I think this strategy is technically illegal, but there is no way to detect it.



I think the only thing that protects us from this is the irrational arrogance of financial operators. They consider their position to be very valuable as they think they can systematically beat the market. If they knew they were mostly just lucky to be where they are, they would be more tempted to cash in by manipulating the market.



In any case, the fact that traders don't really lose when they buy into bubbles is a reason that only the very very top managers got a bad deal out of the 21st century so far.



I think the worse problem is, as Yglesias note, the contrarian looses for a while and might be out of the business irreversibly by the time the crash comes.

by Robert (noreply@blogger.com) on January 06, 2009 05:59 AM

All is not well.

I was recently the victim of a great fraud, resulting in serious bodily harm and likely permanent psychological trauma. I believed things told to me by people I respected, and relied upon advertising text promulgated by a corporate entity consumed, without my knowledge, by depraved indifference to human dignity. Misled by misrepresentations beyond my control I acquired - as a Christmas gift, no less - a device so dangerous and of such shoddy design as to constitute a willful malfeasance in and of itself, and employed, in good and unsuspecting faith, that device upon my person to woeful and grievous consequence.

Having been misinformed by positive reviews of this device, obviously written by persons concealing a deep self-loathing, and by the text prominently displayed on its box asserting “You Can’t Mess This Up!”, I took it upon myself to use the diabolical instrument in the manner prescribed, and did thereby mess it up.

I post this as a warning to all others deceived by transient dreams of efficiency and cost-savings: Do-It-Yourself Haircuts are Not a Good Idea, no matter what it says on the box.

BEFORE
AFTER

by KTK on January 05, 2009 09:44 PM

Easily the best video I’ve seen so far in this very young new year:

Via ObWi.

by tgirsch on January 05, 2009 07:51 PM

Tom Bozzo



is amazed at the reaction of leading figures in the left blogiverse to the W$J's "news" that there will be tax cuts as part of the stimulus. See Aravosis, Digby, Krugman, Marshall.



Can we cancel the circular firing squad?



As far as I can tell from the Journal's reporting, the main tax elements are largely indistinguishable from what Obama was promoting in the fall. Here, for instance, is a snippet of the third debate:

[Bob Schieffer:] Senator Obama, you proposed $60 billion in tax cuts for middle- income and lower-income people, more tax breaks to create jobs, new spending for public works projects to create jobs...



[TB Note: The $60 billion mentioned by Schieffer is an annual figure, while the $300B reported by the W$J is over two years.]



[Sen. Obama:] Number one, let's focus on jobs. I want to end the tax breaks for companies that are shipping jobs overseas and provide a tax credit for every company that's creating a job right here in America.



Number two, let's help families right away by providing them a tax cut -- a middle-class tax cut for people making less than $200,000, and let's allow them to access their IRA accounts without penalty if they're experiencing a crisis.

Now Prof. Krugman's analysis actually is pretty solid on the economics of stimulating via a combination of tax cuts and public expenditures, and he seems to detect the underlying politics. That is, use a spoonful of tax cuts that the Obama camp was going to push anyway to peel off enough Republican votes to advance a lot of stuff that the Senate Republicans' paleolithic caucus won't like (and, let's face it, can't stop, whatever Mitch McConnell might say about wanting to lend rather than grant money to the states and such). If the 'carrot' approach is followed by capitulation rather than by aggressive pressure to promote the plan a la Obama, then the political observers may have something to gripe about.



On the economics, I don't especially care for the business tax cut components, which in the absence of a general loophole-closure program I'd expect would as likely as not stimulate the tax law sector of the economy while the Tax Foundation still gets to gripe about high statutory corporate rates. And it's a matter both of Our Stupid Discourse and government accounting methods that fail to distinguish between government consumption and investment spending that tax cuts are less controversial than appropriately targeted spending. But anyone who's surprised by this part of the stimulus package wasn't paying attention during the campaign.

by Tom Bozzo (noreply@blogger.com) on January 05, 2009 04:50 PM

Did anyone else here see the Falcons-Cardinals playoff game on Saturday? The end of that game had me smiling from ear to ear.

The Cardinals went up by 13, 30-17, by recording a safety with 12:37 left in the game. Atlanta winds up getting the ball back with 7:51 remaining, down by the same score. After a nice drive, the Falcons score to get to within 6 points, 30-24, with 4:15 remaining. On the ensuing kickoff, the Cardinals get the ball out to their own 20, equivalent to a touchback, and 4:10 left on the clock, and Atlanta with all three of their timeouts.

Now, conventional coaching wisdom here says that you run the ball three times, eat as much clock as possible, punt the ball away, and leave it to your defense to save the day. And that’s what the overwhelming majority of coaches would do in that situation. But that’s not what Cardinals coach Ken Wisenhunt did. He started by calling a pass play, and not even a high-percentage one: it was a 20 yard completion over the middle from Warner to Fitzgerald. That first down took almost a minute off the clock, taking it down to 3:25. Next play, a handoff, which went for no gain (of course) because the Falcons were stacking against the run. Timeout Atlanta, 3:10 on the clock, now 2nd-and-10. Next play? A 25-yard completion down the left side from Warner to Breaston. 1st-and-10, the clock goes all the way down to 2:29, and the Cardinals are only about 10 yards out of field goal range.

Run up the middle on first down gets stuffed (of course), and the Falcons take their second timeout (of course), 2nd-and-8 with 2:21 left. Now, the only mystifying call of the series: the Cardinals try an end-around which gets stuffed for an eight yard loss, and Atlanta takes their final timeout, 3rd-and-16 at the Atlanta 46 with 2:17 left on the clock, and the Falcons have no timeouts left.

Once again, the conventional wisdom says call a high-percentage play, maybe a draw, run the clock down to the two minute warning, punt the ball, and count on your defense to stop them with under two minutes left and no timeouts. But that’s not what Wisenhunt calls. Instead, he calls a play-action fake that results in a 23-yard completion down the middle from Warner to Spach. That takes the clock down to the two minute warning, and three knees later, the Cardinals walk off the field victorious.

Now some will doubtless criticize the play calling here: if somebody for the Cardinals drops a pass, the clock stops “for free,” leaving more time for the Falcons if they get the ball back. And what if the ball is intercepted? But if you’re a playoff-caliber team, you count on your offense to win games for you, not simply to not lose them. The Cardinals stuck with what had worked all day, rather than suddenly changing their approach in the final minutes, and it suited them well. Dance with the one who brought you, as the saying goes.

Anyway, it was thrilling for me to see a coach NOT go all Mike Holmgren ultra-conservative in trying to protect a small lead.

by tgirsch on January 05, 2009 03:16 PM

by cactus

by rdan (noreply@blogger.com) on January 05, 2009 10:34 AM

rdan



(hat tip Stormy)



Market Oracle has an opinion on where the trade deficit will be headed:

Durable and capital goods



The US's manufacturing sector is concentrated in industries most vulnerable to an economic downturn, durable and capital goods. Durable goods are products that last for more than three years like SUVs, motor/sail boats, etc. These items are the first areas where consumers cut back spending, which is why the big three are in so much trouble. Capital goods are equipment/machinery used in creating other goods, and the biggest demand for these products has come from emerging markets with their growing manufacturing sectors. With emerging market manufacturing now in contraction, demand for these capital goods is set to disappear, which leaves the US in a disastrous situation:



* We make mining equipment at a time when commodity prices are crashing and mines are shutting down.

* We make construction equipment (caterpillars, pickup trucks, etc…) at a time when global construction is grinding to a halt.

* We make civilian aircrafts at a time when global trade and travel is quickly contracting.



Cheap consumer goods



At the other end of the spectrum from durable and capital goods are the cheap consumer goods found in retailers like Wal-mart. Demand for these lower-end consumer products tends to hold through the severest of recessions, because they are absolutely essential to our modern standard of living. While some current shoppers at Wal-Mart might be forced to cut spending on these essential items, new spending from shoppers who are downgrading from higher end stores will pick up a lot of this shortfall. For example, as more American's lose their jobs, there will be a lot of consumers downgrading from designer clothes to Wal-Mart's cheaper clothing. The resiliency of Wal-Mart sale is bad news for the US, as virtually all the retailer's cheap goods are imports from Asia.



The trade deficit



A quick look at where the US's trade deficit is concentrated reveals just how grim the outlook is. We are running huge deficits in consumer goods and industrial supplies (oil), which we desperately need, and the only category with a sizable surplus is capital goods (civilian aircrafts, mining equipment, etc), for which global demand is crashing. This explains why the US trade deficit grew in October.

Spencer mentioned in an e-mail that to date he is not sure the deficit is worsening.

I'm not so sure the US trade deficit is worsening.



It did last month, but that looks like one month

of a counter trend movement.



It would be out of line with historic trends

that in recessions imports drop so much

that the US trade deficit improves.



Also note that the I/S ratio is up sharply

this fall and that implies that imports will weaken over

the next 6 months as retailers cut back

on import orders to reduce inventories.



real imports a function of:

1. lagged change in relative import/domestic prices

2. lagged change in domestic consumption

3. current change in inventories.



over an expansion no. 3 is not important,

but in recessions it plays a major role.

Rdan here: What needs to be added to this information? They address different aspects of the same picture.

by rdan (noreply@blogger.com) on January 05, 2009 10:00 AM

Krugman correctly lays out the problem: We are facing the second Great Depression. Agreed again that simple monetary policy is not enough. Agreed also that a stimulus package is certainly needed; otherwise the domino effect of shrinking businesses and increasing unemployment, together with tight credit and deflation will prove disastrous.



The point I have made repeatedly is that a stimulus package, while necessary, must be combined with programs and policies that address root problems. Otherwise, after the stimulus package runs its course, we will again be in the same boat: A wasteful and inefficient health care system now out of cost control, an energy independence policy too long neglected with costs poised to re-escalate once Americans are back to work, a trade policy that has permitted massive imbalances in the global economy, and a banking system that remains fearful and frozen.



Krugman despairs that the stimulus plan will come too late and too little. Even if Congress acts quickly--which is unlikely--, projects need time to be properly planned and organized. We may not have that time.



Of course, Congress could do revenue sharing with states and localities, as Galbraith suggested; thus passing off the actual delineation and oversight of projects, while quickening their progress and enhancing the prospects for their success.



But, as I have said repeatedly, much more is needed. Attacking the symptoms of the disease is not enough. We must simultaneously address root causes.



I outline them again, without too much comment:

• Universal health care, setting fees and schedules. Putting such in place would remove an enormous monetary burden from millions of Americans. The actual cost of doing business would be improved. Consider the Canadian, the British, or the French systems, which are far more cost effective than the American. This is one investment that will actually save money.
• Crash programs in energy independence. Nothing should be off the table. Cheap oil is a reflection of the growing crisis. What happens when the crisis is passed? Expect energy prices to rise once again.
• A sensible trade policy. At the very least, we should insist that China allow its currency to float more freely. If we cannot even do that, there is no hope. Once spending starts again, will we just return to buying Asian? Will jobs continue to flow to emerging nations? At some point, we must address the current account deficit and the net trade imbalance.
• A national bank. If private banks continue to tighten credit--and in this environment it is natural that they will--, then we should create a national bank that will lead the way.

by Stormy (noreply@blogger.com) on January 05, 2009 07:43 AM

How is Social Security holding up given the terrible employment numbers? Well not as bad as I had feared.



OAS::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost

$2.023 trillion // $2.216 trillion //$193 billion// $2.221 trillion// $198 billion



DI::Opening balance//Projected year end balance-Intermediate Cost//Y-O-Y Increase//Year end balance-Low Cost//Y-O-Y increase-Low Cost

$214.9 billion//$218.7 billion//$3.8 billion//$221.3 billion// $6.4 billion.

Per IV.A2 the opening balance for DI was $214.9 billion, projected year end under IC $218.7 billion, under LC $221.3 billion



June 30th/Mid-year: OAS $2.140 trillion// DI $220 billion



Aug 31st/Two-thirds: OAS $2.164 trillion// DI $219 billion



Sept 30th/Q3: OAS $2.177 trillion// DI $219 billion



Oct 30th/Five-sixths: OAS $2.187 trillion// DI $218 billion



Nov 30th/Eleven twelvths: OAS $2.197 trillion//DI $217.5 billion. So what does all this mean? Well nothing really. Mostly the outlook is unchanged, which is why I'll keep the brief discussion below the fold.



The DI (Disability Insurance) Trust Fund is more or less holding its own with the balance in recent months dropping by less than a billion a month. A reasonable year end estimate for this fund would be something over $216 billion which would put it below both Intermediate Costs projection of $219 billion and Low Cost's projection of $221 billion. Not great news but maybe what you would expect in the face of an extended downturn, if you had managed to stay in the regular work force during the boom but really would qualify for Disability the 2007-2008 period might be the right time to make the transition. But spin it how I will, and putting on a happy smile through gritted teeth, there is little doubt that the 2009 Report will show some degradation in the outlook for DI. And this true even though the year over year balance is still positive.



As for OAS. Well it is still running a surplus, but then a good part of that is accrued interest. And the same will be true for December, the Treasury will still be crediting interest on the existing portfolio of bonds and so we can expect some uptick, but a fair estimate is that OAS is kind of on auto-pilot right now. Still we can expect about an additional $10 billion in the TF by years end taking the total balance up to maybe S2.207 compared to Intermediate Cost projections of $2.216 trillion and Low Cost Projections of $2.221 trillion. So once again we will probably see a miniscule deterioration in outlook come the release of the new Report come March. But once again the net year over year effect is to show continued surpluses.



You have to wonder how many other multi-trillion dollar funds saw slightly less than expected but still positive returns over the last year.



Bottom line. Social Security is not immune to periods of economic crisis, how could it be. But it is buffered by being tied to real wage on the one hand and CPI on the other and calculates its health from the top down rather than the bottom up. That is a change in unemployment for 4.5% to 6.9% computes to more than a 50% increase when examined from the bottom up. And if you are out of work that may be the right metric. But from the point of view of Social Security that just means a drop from 84.5% to 73.1% of covered workers paying in, meaning that payroll tax based worker retirement can never take the hit that individual workers do in any given year.

by Bruce Webb (noreply@blogger.com) on January 05, 2009 05:49 AM

by Bruce Webb



Paul Rosenberg has started an interesting series over at Open Left that in some ways could see my post What is the Nexus? as prologue.



The first post in the series is Hegemony On Steroids--Episode 35,879: "The Neocons Couldn't A Dunnit!" It starts by stating one set of revisionist talking points eagerly being peddled by wingnuttia (and the Village) to keep from having to take responsibility for Iraq

Last week, the day before Christmas, Digby took note of an eager wanker (Frank Harvey, pimped by Kelly McParland) making the argument that if Gore had been President instead of Bush, we would have had the exact same clusterfuck, because (a) the neocons had nothing to do with it, that's just a conspiracy theory! (b) invading Iraq was inevitable and (c) Al Gore had all sorts of hawkish attitudes, towards Iraq in particular, so, case closed!

Well Digby did a through take down on points (b) and (c). Mainly in that Al Gore came out publicly against the then current Bush approach on Sept 23, 2002, i.e. before the war. (Extensive quotes and links at OL). Which allows Paul to pursue assertion (a).



And in the course of that he totally demolishes the twin arguments that the Neo-Cons were not powerful enough to get everyone else to go along and that in the end everybody was sharing the same intelligence analysis. Both are simple nonsense and Paul lays out the case why that is so. Conclusion of part 1

In fact, if one looks carefully at what was going on behind the screen--and even just what was going on in plain sight--it soon becomes quite apparent that BushCo and the neocons were quite aware of how utterly flimsy their "evidence" was. They may have fooled some other folks--or at least bluffed them into playing safe and stiffling their doubts--but they knew all along their case couldn't stand the light of day.



Which is why they never laid it out for anyone else to see. They knew very well that there was no "there" there. They were eager to show us all the evidence. They just didn't have any.



In Part 2, we'll take a closer look.

Link to Part 2 and some comments below the fold



Hegemony On Steroids--"The Neocons Couldn't A Dunnit!", Part 2

After the Iraq fiasco, the key to continuing neocon power was two-fold: First, disappearing the disaster. Second disappearing the neocons themselves. The disaster was disappeared by a series of rationalizations and redefinitions, the most important of which was the replacement of the original rationale--9/11, WMDs and all that--with goal of "democratization" (which the US originally had no interest in), and the replacement of all else with the mantra, "the surge is working." Disappearing the neocons involved a rather extensive chameleon act, a key part of which was the erasure of their fingerprints all over everything in sight.

This is where we get the common bit of hegemonic narrative used to excuse the Iraq War, the claim that "everyone" believed the intelligence that Saddam had WMDs. This narrative is not just false, it's a textbook case of how hegemonic discourse makes it virtually impossible to think straight about anything. There's an old adage that if you ask the wrong questions, you can't get the right answers. Hegemonic discourse works best by making sure that nothing but wrong questions get asked.



By implicitly making the question, "did everyone believe Saddam had WMDs?"--and not even asking it, but simply asserting an answer, every question we ought to be asking is summarily swept off the table. And the chance of making a truly fundamental break with the neocon direction is substantially weakened

If some of this sounds awfully familiar it should, various commenter/war supporters here have been faithfully pushing versions of this argument for years.



In any event Paul goes on to give a detailed chronological timeline of how the intelligence was being consciously shaped around the war policy. In other words the Brits had it exactly right in the Downing Street Memo. The question of why Blair and Powell and Rice and Tenet (none of them neo-cons) and yes too many congressional democrats went along is really the theme of the rest of the piece. The whole thing is longish but certainly worth it.

by Bruce Webb (noreply@blogger.com) on January 04, 2009 07:00 PM

When Biden talked of Obama being tested, he should have noted that some of our so-called friends will test him even more. So it is with the horror that is now Gaza. American-Likud foreign policy has been cruel and disastrous. The Likud government continues to expand its settlements, cutting so-called Palestine into ever more pronounced Swiss cheese. The U.S. politely protests but continues to look the other way. Both Lukud and the U.S. have repeatedly insisted that they and they alone have the right to select the leaders of Palestine. Unhappy with Arafat? Unhappy with Hamas? Get rid of them.



Perhaps Israel should stop the charade and simply annex Palestine. Democratic elections clearly mean nothing to the to Israel...or the U.S. in this matter? Why should it when it has a world-class military force pitted against rocks and a few rockets.



After a right wing zealot assassinated Rabin and after the aborted Clinton-Barak-Arafat meeting, there has been no serious peace process. Instead, the U.S. has allowed the Likud government to dictate not only its path in the Palestinian conflict but also its Middle East policy in general. The net result has been to radicalize more and more Islamists.



I listened this morning to Ofir Gendelman of the Israeli Foreign Ministry claim that there was and has never been a humanitarian crisis in Gaza, that passage for supplies to Gaza have always been open. When told that journalists inside Gaza have been reporting just the opposite, he responded that those Hamas is clearly intimidating them. When told that the Supreme Court of Israeli has said that foreign journalists should be allowed to cover what is going on in Gaza and asked why the Israeli government would not allow such coverage, he responded that the world would then blame Israel if they got hurt or killed. But journalist cover wars all the time. And so the defense of the indefensible continues. Of course this confrontational exchange occurred on CBC television; it would never be allowed to air in the U.S. The simple explanation those in the U.S. hear is: Israel is defending itself from Hamas rockets.





The Canadian commentator then confronted Hanan Ashrawi, a Palestinian negogiator, about those rocket attacks. Her simple reply was that Hamas had maintained a six month cease fire...and still Israel maintained a siege on Gaza, one of the most densely populated places in the world.



"Is there any responsibility on the part of Hamas," the commentator asked?



"These are the people under occupation," she replied. "You would do the same." She continued that ultimately all sides will have to sit down and work this out and realize that bloodshed gets us nowhere.



The New York Times described part of the problem:

“If the war ends in a draw, as expected, and Israel refrains from re-occupying Gaza, Hamas will gain diplomatic recognition,” wrote Aluf Benn, a political analyst, in the newspaper Haaretz on Friday. “No matter what you call it,” he added, “Hamas will obtain legitimacy.”

In addition, any potential truce deal would probably include an increase in commercial traffic from Israel and Egypt into Gaza, which is Hamas’s central demand: to end the economic boycott and border closing it has been facing. To build up the Gaza economy under Hamas, Israeli leaders say, would be to build up Hamas. Yet withholding the commerce would continue to leave 1.5 million Gazans living in despair.

Implicit in Mr. Benn’s argument, however, is that the only way to stop Hamas from gaining legitimacy is for Israel to fully occupy Gaza again, more than three years after removing its soldiers and settlers. That is a prospect practically no one in Israel or abroad is advocating.

I see no end to this tragedy until America straightens out its crooked and disastrous slavish following of Likud. America's media and America's leaders have been tied to the hip of right wing, religious fanatics in Israel. These are harsh words--and meant to be.



The testing of Obama has begun.

by Stormy (noreply@blogger.com) on January 04, 2009 05:15 PM

rdan



(hat tip 2slugbaits) Krugman says here:

What I’ve illustrated here is the marginal cost and benefit of government purchases of public goods in and near a liquidity trap. The marginal benefit is presumably a downward-sloping curve. If G is low, so that monetary policy cannot achieve full employment, the marginal cost of an additional unit of G is low, because the additional government purchases don’t crowd out private spending. Once G is high enough to bring full employment, however, any further rise in government purchases will be offset by a rise in the interest rate, so that extra G does come at the expense of C, implying a jump in the marginal cost.

It's a back-of-the-envelope model explaining why monetary policy won't do the job and why we need fiscal policy to stimulate aggregate demand. ( I was going to try for more but injured my foot so am in no mood to continue...really, not the social kind involving mouth.)



Update: Notice the link opens in a separate window...one annoyance down. Thanks stormy.

by rdan (noreply@blogger.com) on January 03, 2009 08:17 PM

Robert Waldmann



While blogging here at Angry Bear, I have been almost as blunt and direct as I am ignorant, but I would like to be much more frank in this post. The question, roughly, is which innovative financial instruments and trading strategies are socially useful. This is important, because people argue against draconian regulation on the grounds that it will block financial innovation and/or interfere with the trading strategies of legitimate arbitrageurs. My honest opinion is that all recently developed instruments are harmful and that the typical activities of law abiding financial operators destroy value. I don't see any downside risk of excessive regulation basically because I think that, on balance, the allegedly undesirable side effects are desirable.



It should be possible to guess that I don't think that "market liquidity" is a good thing. I use quotes as I would define assets as liquid or illiquid and markets at thick or thin. The issue is whether one can quickly buy or sell a large amount of an asset without causing its price to shift much. I believe (without proof as usual) that assets are liquid when trading volume is high. Thus my question becomes whether high trading volume is a good or a bad thing.



A sudden decline in the liquidity of assets can create problems as firms can't unwind leveraged positions without extreme market disruption. If the assets had always been illiquid, those leveraged positions would never exist. I think that would be a good thing.



Now there is a class of arguments that rational investors will take highly leveraged positions to profit from asset miss pricing and that this is socially desirable as they will drive asset prices towards their fundamental values. It is hard find these arguments convincing given the enormous increase in asset price volatility which has accompanied the enormous increase in gross long positions and gross short positions not to mention the huge increase in trading volume. My sense is that the average super smart highly trained trader is driving asset prices away from fundamentals. Thus I think honestly reported legal trading strategies are, on average, worsening the quality of the signals financial markets send to the real economy.



In particular, hedging strategies require constant trading. They are not feasible if there are significant bid ask spreads. The scale of hedged positions is limited if assets aren't perfectly liquid as the hedging trades drive prices against the hedger. So ? There is no huge amount of trading by people who don't follow hedging strategies such that a huge amount of hedged trading is required to balance it. Rather the huge volume consists of roughly equally sophisticated traders, all of whom know how to hedge, taking bets against each other. The cure is the disease.



It doesn't have to be this way. I would be possible for trading volume to be tiny compared to current volume -- the way it was in the 50s. Trading for reasons other than perceived asset misspricing would be very rare. There would be investors who save when young and dissave when old, investors who liquidate financial assets to make downpayments on houses and maybe a tiny bit of investors hedging their labor income risk (has anyone ever met anyone who ever did that ?). Now the most archaic market in which there are specialists who sell for one eighth of a cent more than they pay when they buy would be a tiny tiny problem for life cycle investors. If people aren't trying to beat the market, liquidity barely matters to them.



As noted above, if no one tries to beat the market no one gathers information on, say, firms prospects. That would imply that price earnings ratios of shares would depend on rough guesses. That wouldn't be strong form efficient. I don't think any sensible person can look at the history of asset prices and doubt that the old market in the 50s was closer to a strong form efficiency.

by Robert (noreply@blogger.com) on January 03, 2009 07:53 PM

In 1979 Peter Sellers starred in a brilliant movie about the ultimate in accidental Presidents. As the movie ends Chance the Gardiner has not actually been elevated to be Leader of the Free World but is well on his way. Because people could read meanings they wanted to hear into what he was saying. I hadn't made the connection until today but this movie tells us much about the process which left us with the Boy Chimperor Bush. When Chance admits "I don't read" this is taken as a statement that he instead acts from the gut and not by taking direction from the pointy headed among us. Which should sound painfully familiar. You want a 'Bush Legacy Project'? I suggest forwarding a copy of the DVD to his library. It will probably give a lot more insight than any number of future biographies.



The only real difference between Chance the Gardiner and George W. Chimperor is that the team that picked Chance to be the leader of the Free World didn't know where he came from. Whereas Uncurious George came with a pedigree. But the decision making process was much the same.

by Bruce Webb (noreply@blogger.com) on January 03, 2009 06:50 PM

by cactus



Kafka and Bills



Back in May, we moved out of state. Before we did, we canceled our assorted services, ranging from the newspaper subscription to gas. One of the utilities we canceled was Los Angeles Department of Water and Power. The ex-GF called, and they said they'd do a final reading and send a bill to the address we provided; a two month temporary apartment. Perhaps we should have been more pro-active about wondering about where that bill went, but what with the move out of state (actually, two moves), a new job, etc., there was a lot on our minds.



Fast forward (more than) a few months. The day before Christmas, my ex-GF gets a call from a collection agency. They had gotten her phone number from LA DWP, which was irate that we hadn't paid the final bill; issued in September one month after we had moved out of our temporary apartment. We never got that bill, or any other notices from DWP. And, apparently it never occurred to the folks at LA DWP that if they had my wife's phone number, they might try to call her themselves before paying a collections agency to do just that with the number they provided to the collections agency. Again - perhaps we should have been more diligent, but things fall through the crack when you're moving around... and we had provided contact info - a place to send the bill that might have been useful had they not taken four months to put out a new bill (if it was ever sent), and a phone number that remains valid to this day.



So my wife decides to call the LA DWP to see if she could pay them directly. She spoke to several people at LA DWP including several supervisors, and every one of them claimed not to be authorized to accept payment for this bill. She even left several messages with the collections department of LADWP and no one returned the messages. So she called back the collections agency - PMR Progressive - and perhaps because its the holiday season, nobody answered. She's called back. Nobody answers.

______________________________________

by cactus

by rdan (noreply@blogger.com) on January 03, 2009 03:36 PM

rdan



Knoxville News points to a 2003 report on options to fix the leaks:

In November 2003, a leak along the bottom of the dike forced TVA to cease depositing fly ash into the pond's dredge cells.



TVA considered at least eight options to address the leak, according to a Dec. 22, 2003, agency update. Three of the options would have provided a "global fix" to the problem, but high costs were cited as liabilities to pursuing them.



The most expensive option - converting to a dry fly ash collection system - would have cost an estimated $25 million. That's far less than the $37 million spent to clean up a 2005 Pennsylvania fly ash spill one-tenth the size of the Kingston spill.



Two other proposed global fixes were to construct a synthetic liner for the pond for $5 million and building a cutoff wall around the perimeter of the dredge pond for $2.6 million. In addition to high cost, TVA noted that using a synthetic liner would set a precedent for all other dredge cells.



TVA opted to repair the dike and install "underdrains," which in a summary of the inspection report the agency likens to residential french drains, "to relieve water pressure."



Repairs were completed in 2005, but the dike sprang another leak the next year.

Summary of 2007 budget items:

TVA is the largest single producer of power in the country.Their revenue in 07 was $9 Billion, they showed a $385 Million (non taxable) profit after paying $48 Million in bonuses.



They make a total of about $480 Million a year in "tax equivalent" payments to municipalities where they operate. I believe Roane County gets about $1 Million per year from them. That's been a great deal for them...til now.



The reason that these fixes were never done was because TVA sells securities....the fixes would have cost dollars that would have affected their security sales by moving them closer to true non profit status. Many people do not understand that TVA is a hybrid. It is a gov't agency but only sort of.....



The fly ash clean up that they just settled cost them $35 Million for a spill 1/10th the size of this one. After paying the piper here they will most likely have to some serious restructuring.

(bolding mine)



Unintended consequences is real, but rarely the complete story. At what point does one intention become unintentional somewhere else. My assumption is that not setting a precedent is a high level decision. The current CEO has a remuneration package of $3.27 million, being a competitive amount for large utilities. And who is to foot the bill for the possible unintended $350 million cleanup? And where else are there problems?

by rdan (noreply@blogger.com) on January 03, 2009 07:55 AM

She's got a broken collarbone, so we're indulging her for the moment. So after we finished reading the two age-appropriate books (e.g., Paddington at the Zoo), she said, "go back to the one you were reading me earlier."



She fell asleep to Geography and Trade.

by Ken Houghton (noreply@blogger.com) on January 03, 2009 04:23 AM

Wow...here we go!

by rdan (noreply@blogger.com) on January 02, 2009 10:00 PM

rdan



CNN has a follow up to the story and post concerning the breaking of a retaining dam and the coal ash that was released. Coal ash is full of heavy metals, and not bio-degradable.



I believe I was the only one to be concerned about the water sources for the area as part of clean up and reparations in comments. This is an area of concern that takes a steady approach and re-visiting of consequences over time...usually time periods too long to hold readers'interest.



It is worth a re-visiting from time to time.



Update: Kentucky and Indiana obtain 90% of their electricity from coal. This article in Kentucky newspaper points to some concerns. Source Watch offers more information and an interactive map for all fifty states.



Update 2: This GAO report on toxins in the Great Lakes is instructive.



Update 3:







Independent toxin screens and survey in comments hat tip reader run.



The TVA in published statements has found no contamination above safety limits except for lead, with the water intake for Kingston being a high impact test site.

by rdan (noreply@blogger.com) on January 02, 2009 08:29 PM

Economy: Enjoying the Pre-Game Show?

Sorry to be missing from the Angry Bear scene – but I have had several long and serious medical outages in 2008. Good health insurance was my best investment – picking up a six-figure tab.

So far as other investments are concerned -- in some of my 2007-2008 HALOSCANS I had mentioned that my biggest position was with Prudent Bear Funds [BEARX] which made enough to cover all losses on the long side of my portfolio and then some – and I did not need to spend my time shorting individual stocks.

Target Conservative Portfolio for 2009: 50% Canned Goods / 50% Ammo.

But first a brief detour to one year ago:

http://angrybear.blogspot.com/2007/12/edward-charles-ponzi-jr-looks-ahead.html

I continue to stand by the (very general) ideas that I put forward as themes for 2008. I do not see our current situation as a “downturn” – I see it as a COLLAPSE. A downturn – a normal part of the business cycle – does not usually include a banking-broker/dealer-insurance-derivatives meltdown that requires trillions in support to prevent insolvency of virtually all of major financial institutions.

In the long run, we would be better off without many of those institutions. My buddies on Wall St. used to tell me that they were “creating wealth” – I would correct them and tell that they were “making money” (and participating in massive mal-investment and un-economic activity). The Baily Building and Loan Assoc. (of Bedford Falls) somehow didn’t need billions in leveraged speculation, proprietary trading or derivative bets.

There seems to be a lot of talk in AB and elsewhere about this thing called “solutions”. Solutions are not my department – predictions are. Any reasonable solution is by definition politically impossible – our political process is about putting out today’s fire and leaving the water damage issue to another day.

Since our society cannot go forward carrying every currently existing debt ($50T++) – (this figure does NOT include unfunded liabilities) unwinding unwise credit expansion means insolvency or inflation. There are few true creditors in our society – being a debtor is far more universal. The Federal Government, State Governments, Wall St., Banks, homeowners, consumers, leveraged investors and many other groups would benefit (in a lesser of various evils sense) from the debt reducing power of inflation.

Inflation is on vacation at the moment – but it is the end game. Fiat money requires at least some net positive inflation and a determined Central Bank can Quant-Ease (plus Gov fiscal) some of our problems away – with many side effects to be sure – but someone has to go over the top rope – and it is going to be savers and not debtors.

At some point we will have what may be called A Recovery – but it will really turn out to be A Reflation and collapse again – just like in the late 1930s. Inflating our way out of trouble may also crash into Peak Oil – creating Check Mate and Lights Out.

Obama recently pointed out how so many “different” economists – were in lockstep about the need for massive “stimulus” – funny how a counter-cyclical idea can seem sensible – but the same people advocate pro-cyclical “stimulus” as we chase one free-lunch after another.

My long-term view is dimmer than my short-term view -- so as we enter this New Year, let’s all try and fondly recall how affluent our society once felt – as you will not see that again in your lifetime.

Regards to All !

Edward Charles Ponzi Jr.

by rdan (noreply@blogger.com) on January 02, 2009 12:14 PM

I spent most of the evening reading Underbelly posts, so this link is probably due to Buce:

On Oct. 22, 1986, President Reagan signed into law the Tax Reform Act of 1986, one of the most far-reaching reforms of the United States tax system since the adoption of the income tax. The top tax rate on individual income was lowered from 50% to 28%, the lowest it had been since 1916.

About thirteen years from 1916 to 1929. About thirteen years (plus the Clinton Administration) from 1986 to 2008.

by Ken Houghton (noreply@blogger.com) on January 02, 2009 02:42 AM

All (somewhat***) via Mark Thoma:



Thomas Frank in the WSJ tells me why I always disagree with Robert (and the Other Economists) on the role of rating agencies:

And who makes sure that Moody's and its competitors downgrade what deserves to be downgraded? In 1999 the obvious answer would have been: the market, with its fantastic self-regulating powers.

If you look at the spreads of various debt products, you can see that the market was doing that type of job even in 2007. For instance, the debt market priced ["rated"] Bear Stearns's five-year bond issue in August 2007 at 245 over: rather closer to "junk" status than its rating would have implied. If you compare the debt and stock markets, it's easy to see which is closer to "rating." Unfortunately, the area where information is more valuable* is not the one discussed and understood in the press, where BSC kept trading up for several more months.



If a market "regulates" but no one notices, does it make the WSJ?



Brad Setser finishes the destruction of Tyler Cowen's LTCM "argument" begun by Buce, while revealing its underbelly:

The big banks called to the New York Fed were the creditors of LTCM and they were in some sense “bailed-in.” To avoid taking losses on the credit that they had extended to LTCM, they had to pony up and recapitalize LTCM. [footnoted exception for BSC]



It just so happened that the market recovered and it was possible for LTCM to exit many of its positions without taking large losses, or in some cases any losses. The banks that took control of LTCM when LTCM was on the ropes were able to unwind LTCM’s portfolio in a way that didn’t result in additional losses. But the result Cowen desired — large losses for the banks and broker-dealers who provided credit to LTCM – was quite possible if LTCM’s assets weren’t sufficient to cover all its liabilities. No creditor of LTCM was able to get rid of its exposure as a result of the Fed’s actions. [emphases mine]

It used to be a standard rule that if you wanted to bury something in a newspaper, you published it on a Friday, or the day before a holiday. This seems to be what the NYT is doing with Casey Mulligan (previously discussed here here), who dropped the other shoe yesterday and was, amazingly, worse than expected. PGL at Econospeak does the read and calls out the deed:

Mulligan is essentially saying that those poor saps who have lost their jobs actually quit so they can game the mortgage system. In other words, there is no such thing as involuntary unemployment or being forced to either lose one’s home versus enter into one of these mortgage modification programs.

As noted in the WaPo two weeks ago (via Stan Collender at Capital Gains and Games),** qualifying for the "mortgage modification" program (i.e., reducing the principal on your loan to not more than 90% of the current market value) is an onerous task:

He was hoping he could qualify for the federal government's Hope for Homeowners program, which allows the Federal Housing Administration to insure a new mortgage if the lender voluntarily writes down the mortgage principal to 90 percent of the new value of the home. But when he asked his bank about that, he was told he would have to be on the brink of foreclosure or have an adjustable-rate mortgage.

So Mulligan is basically blaming (1) those whose ability to keep their home depended on keeping their job and (2) those who took Alan Greenspan's venal advice to go into ARMs just at the point at which he started raising rates. Class act.



And, finally, lest you think I'm always bashing Tyler Cowen, he notes a phenomenon in chess and suggests a reasonable conclusion:

I also see a general principle operating: the more exact a "science" the game becomes, the smaller is the value of accumulated experience relative to sheer skill.

The sheer is dicey, but the identification of the shift in proportionality may be accurate, and probably has applications in economics as well.



*The debt market is less liquid and therefore considers information more valuable. This is effectively the corollary of the DeLong, Shliefer, Summers and Waldmann papers: if you can't depend on momentum trading, you take more care not to be the "greater fool."



**Yes, I saw the Collender-bashing in my previous post. I've said before that CG&G became significantly less readable after the election, and am foolishly optimistic enough to believe that they may be returning to rationality. Besides, he happened to be correct: any given from increased military spending is definitionally no better (and likely worse) than spending the same amount on public infrastructure.



***I read PGL's piece before seeing it in the links, but they're all there.

by Ken Houghton (noreply@blogger.com) on January 01, 2009 05:14 PM

Xrlq, in comments here:

[A]n apostrophe doesn’t mean “Look out, here comes an S!”

by tgirsch on January 01, 2009 04:53 PM

by cactus



Proportionate Response

by rdan (noreply@blogger.com) on January 01, 2009 04:19 PM

Excessive Liquidity

The Economist is worried about the rapid growth in the world’s money supply over the past couple of years:

HOW loose is the world's monetary policy? One gauge is that real interest rates in America and other countries are still negative. Another is that global liquidity has been expanding at its fastest pace for at least 30 years. This deluge largely reflects the combined effects of American and Asian monetary policies.







... Central banks are supposedly the guardians of money. Yet between them they may have created the biggest liquidity bubble in history.

With the exception of the stock market crash year of 1987, the world's money supply has not grown this fast since the mid 1970s. But exactly where has all of this vast amount of liquidity gone? Since output and output prices have not been rising particularly fast, it seems that much of it has gone to fuel asset price inflation. Housing prices have probably been inflated thanks to all of this liquidity (as many people have noted), but so have bond prices. As a result, bond yields have remained unusually low for this stage in an economic expansion.



As the following chart shows, real long-term interest rates have continued to fall over the past year or two even as the economic recovery has gained strength. (I used the average inflation rate over the previous 24 months to proxy for 10-year inflation expectations, and the close correspondence with the 10 year TIPS rate suggests that this is a good first cut at gauging real long-term interest rates.)







The failure of long-term interest rates to rise recently as the Fed has pushed up short term rates has been puzzling to many observers recently, and troubling to some. But I think that the explanation is simply that long-term bonds are one of the only places left for all of this liquidity to go. As we know, much of this newly-created money has ended up in the hands of a few Asian central banks, and they are not in the habit of putting their liquidity into purchases of goods and services, or stocks, or real estate.



This creates what I think is a surprising paradox: the unusually low long-term interest rates that the US is currently enjoying may in fact be the direct result of the US's financial imbalances, since that is exactly what has put so much of the world's liquidity into the hands of those Asian central banks. And those financial imbalances are in turn the result of the US's poor savings. So in a bizarre twist, we may be experiencing a situation where the US's lack of saving is what is actually keeping interest rates low...



Kash

by rdan (noreply@blogger.com) on January 01, 2009 04:11 PM

Happy New Year from the Bears!



Readers make this the best blog site in the world!

by rdan (noreply@blogger.com) on January 01, 2009 05:19 AM

Greg Mankiw presents Yet Another Reason to regret skipping the AEA this year, though somehow the word "intentional" was left out of the description.



Stan Collender, of all people, does the job I wished someone would do on Martin Feldstein's WSJ op-ed. I may have beaten him by a day in calling it out, but there's nothing so perfect as Collender's conclusion:

Finally, something that's not in the Feldstein piece: dollar for dollar, military spending doesn't provide as much an economic return as domestic spending. Building an extra tank or missle that then sits idle because it's not needed provides a one-time boost to the economy. But building a road, bridge, tunnel, sewer, or information superhighway that is needed continues to provide benefits as people, goods, and information travel faster, less expensively, and far more productively than would have otherwise been the case.



That means that starting with the headline, Feldstein was seriously mistaken.

Differences between now and 1992, positive version: In 1992, Dave Barry made a legendary appearance at the National Press Club. At some point during the Q&A, he declared that he was going to end all of his answers with the phrase "failed Clinton Administration." (There may have been cheering.)



UPDATE: I was trying to think of a nice way to be rude about Tyler Cowen's NYT piece on how "the seeds of the crisis" were planted by the resolution of the LTCM crisis.* () But Buce at Underbelly saves the day with a two-point takedown (not the three-pointer of Collender, but still aces) called Long-Term Confusion:

Tyler Cowan has an amazingly confused piece in this morning's NYT arguing tht we owe our current plight in large part to the "bailout" (I use the term advisedly) ten years ago of Long-Term Capital Mangement (link). But the point of LTCM, as Tyler's own piece acknowledges (but Tyler ignores) is precisely that LTCM was not a bailout, except perhaps in the sense that the Feds provided lunch.** Okay, and a little bit of arm-twisting. But I should think that would be on the approved list for even the most hairy-chested libertarian. The message was: look, we love ya, and we will work with ya, but we will not put skin in the game. [italics mine, but they could have been his]

In 2008, the NPC appearance of note is by Paul Krugman (h/t EconLib, again of all places), whose six part presentation and q&a session is available on YouTube and therefore easier to watch for the Internet-impaired than his Nobel Lecture.***



McMegan Wuz Robbed! Then again, that's nothing compared to the abomination of this voting, where something that's already remainder and long-forgotten appears to be winning.



And, finally, proof that it's really TOUGH to live in Hoboken.

Happy New Year!







*If Robert Samuelson had published the same piece, Brad DeLong would not have been nice. As it is, we can just assume DeLong hasn't read it yet amidst his globetrotting.



**Meaning in this case literally the food for the sixteen conversants, fifteen of whom anted up.



***Yes, I assume anyone who accesses YouTube from a non-networked machine has a downloading program. Also, am I the only one who just realised that YouTube is maintained on a Linux-based server?

by Ken Houghton (noreply@blogger.com) on January 01, 2009 01:19 AM

The Wall Street Journal has yet more bright ideas for solving the auto industry’s problems. For the good of the workers, of course.

In the continuing battle over Detroit, UAW chief Ron Gettelfinger doesn’t seem to get the picture. Let’s help him.

Uh-oh. If the WSJ editorial page were a movie, there’d be banjo music playing right now. Any time the Journal sets out to “help” unions, you know they just want to hear them squeal like a pig.

What, exactly, do they have in mind this time?

[T]here is an alternative that would at least take some of the pressure off wages and benefits — and that’s freeing auto makers to build cars for a profit rather than to meet regulatory mandates. . . .

Mr. Gettelfinger’s should be the loudest voice calling for an end to CAFE, an idiotic scheme that has done little to reduce gasoline demand or oil imports. . . .

Yes, at the end of the day, the 1935 Wagner Act is still to blame for the auto makers’ predicament.

Yep. That’s their plan to help out the president of the UAW:

1. Return to pure laissez-faire capitalism with profit-maximization as the only recognizable value, and completely deligitimize the idea of putting any constraints at all - worker rights, environmental protection, energy policy . . . - on the pursuit of profit.
2. Abandon fuel economy as a national policy, and encourage the Big Three to “specialize” in gas guzzlers. (Notice, too, that CAFE has the effect of increasing efficiency in gasoline usage; it cannot control total demand, let alone the source of oil used, but it has effectively increased fuel efficiency in new cars and trucks by over 50% cumulatively. In addition, the CAFE standard has reduced fuel usage, by as much as 14% in the study year, according to the National Academy of Sciences. But we don’t hold WSJ to any standard of truth, or even of comprehension of what they’re even criticizing; in their case it wouldn’t be fair to do so.)
3. Repeal the federal law guaranteeing unionization rights and collective bargaining.

Aside from their typical religious commitment to screw-the-world capitalism and contempt for environmentalism or public policy generally, the Journal has the gall to “help out” the UAW by advocating the destruction of unions entirely. I think we can rely on the UAW not to take their advice seriously, however. The rest of us can do the country a favor by doing likewise.

by KTK on December 31, 2008 05:02 PM

rdan







Some are making predictions for 2009. How about you....send or leave some for 2009.



Update: I will archive these projections. Obviously the timing of some projections is pretty hard to nail down....but then look at Ken's 2007 post below.

by rdan (noreply@blogger.com) on December 31, 2008 03:42 PM

by cactus



GW is on vacation. He's certainly had a lot of these vacations. And yeah, I understand, he still gets his briefings and the like. (I note, most white collar workers I know take work home during their vacations and weekends too.)



I realize he doesn't have a boss and he's not accountable to anyone, but does he really need another vacation when he's leaving office in less than a month? Is presidenting poorly such a tough job? (And no, I don't think the fact that he's on vacation reduces the odds of him screwing up yet another thing in the next few weeks.) Why did he take so many vacations?

___________________________________

by cactus



Update: rdan here....the Associated Press points to a coming Vanity Fair series on our President, through interviews with past staff.

by rdan (noreply@blogger.com) on December 31, 2008 03:39 PM

Robert Waldmann



ended my last post 5 minutes ago wishing for part III of the saga and here it is !

The final act for AIG by Robert O'Harrow Jr. and Brady Dennis



The collapse was, of course, quick when it came. One interesting fact is that AIG Financial Products (AIGFP) stopped writing new CDSs in 2005. Another is that, until then, they had little idea what they were doing.

In fall 2005, Eugene Park was asked to take over Alan Frost's responsibilities at Financial Products. Frost had done exceedingly well in marketing the credit-default swaps to Wall Street, and was getting a promotion. He would now report to Cassano directly on other strategic projects.



Park ...was worried about the subprime component of the CDO market. He had examined the annual report of a company involved in the subprime business. He was stunned, he told his colleagues at the time.

What a fascinating new idea -- how about examining the annual report of a firm whose securities one insures. I mean not all of them (what a bore) but just one.



From this passage it seems that AIGFP just assumed that mortgages were what they had been in the past. I mean it's not their problem. The non bank mortgage lenders were loaning all they could, because they figured they could pass on the risk (well sometimes risk sometimes certainty of default) to people making CDOs who could pass it on to people buying CDOs who could pass it on to AIGFP which doesn't seem to have wondered what they were insuring.



I give you a hint. If you tell the world that you are glad to bear all of some vaguely defined kind of risk, then it will get riskier.



AIG was a major factor in the market:

Financial Products had $2.7 trillion worth of swap contracts and positions; 50,000 outstanding trades; 2,000 firms involved on the other side of those trades; and 450 employees in six offices around the world.

That's $ 6 billion in exposure per employee!



Obviously AIGFP had decided that to write CDSs on AAA rated securities was to get money for nothing. They couldn't possibly examine the securities they were insuring. Notice how Frost's role was described: "Frost had done exceedingly well in marketing the credit-default swaps to Wall Street." You can do very well at selling something if you are charging too low a price.



I guess they can blame the credit rating agencies. In fact they do, but not for rating toxic sludge AAA but for rating them AA. The final words "There was no system in place to account for the fact that the company might not be a Triple A forever."



In fact AIG hasn't paid out on CDSs, they ran $150 billion short of ready cash, because they had to post collateral: 'If additional downgrades occurred, either in AIG's credit rating or in the CDO ratings, Financial Products would have to come up with tens of billions of dollars in collateral it did not have.'



AIG was downgraded from AAA to AA when Eliot "socks on" Spitzer caught him cooking the books.

On March 14, 2005, Greenberg stepped down amid allegations about his involvement in a questionable deal and accounting practices at AIG. The next day, the Fitch Ratings service downgraded AIG's credit rating to AA. The two other major rating services, Moody's and Standard & Poor's, soon followed suit.

I guess that explains why he didn't go after anyone with a pitchfork.





Back to my usual anti CDS rant after the jump.







I'd say that was crazy. Given AIGs exposure they shouldn't have been rated AA. I ask for the nth time, what is the point of a CDS ? Why can't AIG issue AIG bonds and use the proceeds to buy assets rather than insuring them ? I think it is clear. If AIG had issued 3 trillion in debt they wouldn't be rated AA. CDSs written appear on the balance sheet at market value. This is nonsense. In the long run, the two actions (write a CDS on assets or sell debt and buy those assets) have the same impact on AIG's book equity, in the short run the only difference is that AIG can be forced to post collateral (which can be seized in full even if it is in chapter 11 and mere bond-holders have to wait and get cents on the dollar) if it writes CDSs.



I think that it is strictly better for bondholders if AIG issues debt and buys assets than if it insures those assets (I am considering the premia paid on CDSs). I think the only reason to do it with CDSs is to trick regulators and ratings agencies about AIGs liabilities.



On a basically different topic, I cut some boring stuff out of one of my posts and put it here.



Now I think it is fairly likely that, if they they had stuck to CDSs on corporate bonds, AIGFP would have done very well just as they would have done issuing AAA bonds of their own and buying AA bonds.



My guess is that, at first, the money was there to be made because of excessively prudent rules and regulations. It is also there, because prudential regulations do not consider covariances so a diversified pool of AAA bonds is treated as if it is as risky as one AAA bond. This is necessary as there was no covariance rating agency which was worthy of the trust earned by the credit rating agencies. Thus the only variable which was independently estimated with some reliability (back then in 1998) was the risk of default of a single instrument.



My current view is that this would be a reasonable approach to prudential regulation if there weren't firms like AIG financial products. The entities subject to the rules and regulations are large enough that they can diversify their portfolio at a very modest cost. They don't bear risk for the fun of it. It is safe to assume that they will diversify without being specifically required to do so ... unless there is a financial engineering industry which sets up special purpose entities with diversified portfolios and issues single securities whose ratings are high because of that diversification. This means that the diversification (by the SPE) suddenly relaxes the prudential requirement.



By pre-diversifying the financial engineers reduce the further reduction in risk available from diversification. The limiting case would be reached if all securities were put in a huge pool which was cut into tranches. At that point, the risk of default on any portfolio of, say all existing AA securities would be as high as the risk of default on a single security, because there would only be one AA security. Thus for the same prudential regulations, banks would be allowed to bear much more risk.



This is not socially useful. If prudential regulations are optimally adjusted to take into account the increased correlation of different assets, then nothing is accomplished. Otherwise the regulations are effectively changed by agents who can pocket the expected value of future public bailouts.

by Robert (noreply@blogger.com) on December 31, 2008 02:14 PM

Robert Waldmann



The second of three parts of Dennis and O'Harrow's series on the downfall of AIG introduces two new features—credit default saps and Joseph Cassano. Together the two managed to bring down AIG.



Thus far we have only read about how AIG got into the business of writing CDSs -- it seemed too good to be true -- money for nothing. My guess is that the first ones they wrote did amount to money for almost nothing. However such opportunities are few and if one considers one year's money for nothing as the minimum acceptable profits for next year you will end up getting money for a while for destroying the world's largest insurance company.







To me the interesting part is how they got into the CDS market

in early 1998: ...



... a new kind of contract known as a credit-default swap. For a fee, the firm essentially would insure a company's corporate debt in case of default. The model showed that these swaps could be a moneymaker for the decade-old firm and its parent, insurance giant AIG, with a 99.85 percent chance of never having to pay out.



The computer model was based on years of historical data about the ups and downs of corporate debt, essentially the bonds that corporations sell to finance their operations.

My guess is that the model was right and that returns on writing (less than 10 year) CDSs on corporate debt were huge while the risk was nothing that AIG couldn't handle. This profit opportunity could exist because of binding prudential regulations -- banks worried about capital requirements and managers of endowments and pension funds with rules requiring much of their assets to be AAA corporate debt or safer would be willing to pay much more than the actuarially fair premium for a CDS on, say, AA debt. Given the correlation of default on different AA bonds, writing CDS on a broad array of them is essentially money for nothing. The most likely value for payouts is zero and the expected value plus, say, 10 standard deviations would be less than the fees.



I have bolded the two factors which convince me that the model might have been reasonable when it was written. First this was corporate debt not new financial products so the ratings were based on decades of experience and not on, say, the assumption that the probability of a nationwide average house price decline is zero (an actual assumption made by Standard and Poor's really). Second, I sure hope the "years" also amounted to decades including recessions and such. The use of sample frequencies to estimate probabilities is always risky, but if the sample size is a few years during an unprecedented house price boom, it is insane.



The problem is that once one has gotten money for nothing it is very hard to convince oneself that there is no more to be had.



The aim of this article seems to be to describe Hubris* -- the pride that came before a fall. This is an old theme in drama -- the oldest. I always read about it when I read stories of financial collapses. I suspect that it might be added, because it makes a morality play out of math. I suppose it might often be relevant because of human nature. However, I also think it is particularly relevant to finance.



The efficient markets hypothesis (adjusted for inflation) says you don't find hundred dollar bills on the sidewalk. It is false. However, you don't find a hundred dollar bill on the same concrete square day after day. It is possible for financial operators to find an anomaly and make a huge profit with moderate risk. At best they can find two or three. There don't seem to be many of those who don't conclude that they are geniuses who can find such profit opportunities year after year. A shining exception is Andrew Lahde who made a killing and cashed in. However, he isn't in the business anymore.



I don't see a solution to this problem. You have to put up either with people who think they are geniuses, because they have been very successful or who have something to prove. In particular, I think the replacement of Tom Savage by Joseph Cassano may have been very costly for AIG (Savage really retired according to all accounts). The huge profits made by Savage and Sosin (his predecessor) set a standard which Cassano was determined to surpass. It is very unwise to employ someone who considers finding hundred dollar bills on the sidewalk to be barely adequate.



It is also interesting that Cassano is not a quant:

A Brooklyn College graduate, the 42-year-old Cassano was not one of the "quants" who had mastered the quantitative analysis and risk assessment on which the firm had been built. He had no expertise in the art of hedging. But he had excelled in the world of accounting and credit -- the "back office," as it is known on Wall Street.

Now quants are clearly dangerous, but at least they know the silly assumptions they made when writing their models. In particular they must understand the fact that quantitative models require parameter estimates which are definitely not reliable unless based on large amounts of data. I don't think someone who is good in the back office understands that estimates based on small samples are not just less precise but also have distributions which can't be determined at all based on available data.



Anyway, the third article in the series should be bloody.



* I'm pretentious enough to use the word but I won't spell it correctly as Brad does.