Wednesday, October 31, 2012

Excellent Description Of What The Fed Does And Why It Is Taking Unprecedented Actions

The President of the Federal Reserve Bank of Minneapolis provides an excellent description of how the Fed operates.  He explains why the Fed has been accomodative during the worse recession in 80 years.  If anything, the risk is that Fed has not been doing enough to strengthen the economy, than too much.  Critics argue that Fed is risking inflation.  His argument is that Fed carefully monitors anticipated inflation and that is why it is less worried about inflation than it is about high and extended unemployment. 

Its important to add that he had been a critic of the Fed's policy not too long ago.  He has changed his mind after examining all of the evidence.  That is not common in today's world where many have an almost religious viewpoint on economic issues that is not dissuaded by disconfirming evidence.

Why Mitt Romney's Tax Plan Can't Work

Mitt Romney wants to cut the income tax rate 20% across the board.  He argues that he can broaden the tax base by eliminating tax deductions.  Broadening the tax base will pay for cutting the tax rate.  He does not specify which deductions he will cut to broaden the tax base.  He has good reasons for not being specific.  All of the major tax deductions are strongly supported by a variety of interest groups.  The top 10 deductions are listed in this article.  It would be difficult to eliminate any of them.

More Details On Romney's Lies About Jeep Production Moving to China

Dana Milbank provides the quote that the Romney campaign distorted in its Ohio campaign.  The Chrysler CEO has vigorously denounced the false interpretation made by the Romney campaign.  That has not stopped them from running the ad. Unfortunately, the campaign intends to win at all costs.  It would be a pity if the public elects a president who tells them lies that they want to believe.

America Has A Choice Between Going Backwards Or Only Modestly Forward

Martin Wolf, writing in the Financial Times, provides a good analysis of the US economy and the choices that it faces.  It may be a bit technical for some, but he concludes his analysis by arguing that the GOP has only one religion.  It views tax cuts, primarily for the rich, as the solution for every economic problem.  Wolf believes that Romney's plan will only exacerbate the inequality problem in the US which is a major part of its economic dilemma.  President Obama has not been sufficiently bold enough to fix the underlying structural issues in the economy, but at least he is not a step backwards.  The US economy is too big to fail.  The rest of the world depends upon what happens in the US.  It anxiously awaits the decision of the public, which has been inundated with misinformation during the election campaign.  Most of the misinformation is coming from the Romney campaign and its media outlets.

Tuesday, October 30, 2012

Romney's Social Security Plan Is Like A 2.4% Tax On $45K Worker

This article explains how Romney plans to change Social Security.  His pledge to make the plan viable without raising taxes does not work.  A person earning $45K per year would have to save $1,000 per year in order to have the same benefit that she would have under today's plan.  Since someone in this wage bracket will not be able to save that amount, which is 2.4% of her income, it is like a 2.4% tax.  A millionaire would only have to save 0.23% of her income to compensate for the cut in benefits.  The Obama administration has not taken advantage of this critical issue.

The Post Truth Era In Political Campaigning

Mitt Romney is running an ad in Toledo, Ohio claiming that Obama's rescue of the auto industry is making Chrysler move its production of the Jeep to China.  The Chrysler CEO Sergio Marchionne released a report denying that Jeep production will move to China.  The Romney campaign responded by saying that they will not allow fact checking to influence their campaign.  They assume that more people will hear the ad than number who will read newspapers that tell the truth.

Someone who wants to be president this bad should not have that job.

The Eastern Storm Exposes GOP Ideology

The hurricane which hit the densest populated area of the US has left devastation in its path.  Fortunately, the Federal Emergency Management Agency (FEMA) has been available to coordinate relief efforts and to provide funding to states and cities.  If Mitt Romney were president we would not have FEMA.  He stated that each state should take care of its own relief efforts.  It would be even better, according to Romney, if relief and emergency efforts were left to the private sector.  There cannot be a better expression of the conservative ideology that is being sold to the public than Mitt Romney's views on FEMA.  The Northeast is fortunate to have had a president in office who restored FEMA to its proper status.  It had been degraded by George Bush and populated with political hacks. We saw the results of his folly with hurricane Katrina that devastated New Orleans.

Monday, October 29, 2012

Larry Summers On The Obama And Romney Plans For Economic Recovery

The Financial Times has provided Larry Summers with a platform to frame the choice that American's will make in the 2012 election.  He faults the Romney plan for its lack of specificity since he does not provide details on how he will cut tax exemptions enough to compensate for the tax cuts that he has proposed.  He also does not understand how Romney can substantially increase the defense budget without cutting critical spending elsewhere.  He argues that Romney's strategy is simply to cut taxes and let the chips fall where he would like them to fall.

He describes some of the features of the Obama plan which he believes to be supportive of economic growth and he argues that it is a better plan than the non-plan proposed by Romney.

Are Rogue Billionaires Making Political Parties Less Relevant?

This article provides some interesting data on the advent of Political Action Committees, that are funded by billionaires, since the Citizen's United decision by the Supreme Court.  For example, American Crossroads and Crossroad GPS have spent more than the GOP congressional and senate committees on those campaigns.  Rogue billionaires also funded extremists like Newt Gingrich and Rick Santorum in the GOP presidential primaries.  This shifted the debate in the primaries toward the extremes represented by each of them.  The PAC's and Super Pac's are also very active in the presidential campaign.  Conservative PAC's outspent Democratic PAC's by $540,000 to $180,000.  This has also led to extremes like posters of Obama bowing down to an Arab leaader, as a courtesy, on his trip to the Mid East,  along with signs showing the rise in gas prices since Obama took office.

The power of the Pac's and Super Pac's are new force in American politics.  The Democratic party has never been as highly organized and centralized as the Republican party.  It has really changed the role of the Republican party as a filter in the choice of candidates.  It has opened up the party to more points of view, but it has also moved the party further to the right.  Some might debate whether the GOP needed to be open to more extreme views, but I don't know how anyone can argue that giving a greater voice to billionaires in our democratic process is a good idea for most Americans, or for the bastardized version of democracy that this represents.

Saturday, October 27, 2012

The Cost Of Inequality

Joe Stigltz wrote a book on this topic.  This article summarizes his views very well.  There is no need for me to comment on the article.  There is a reason why Stiglitz won a Nobel prize.

(Please use the bottom link to the article.  The first link does not work.)

Friday, October 26, 2012

The Financial Crisis Explained As A Bank Run On The Shadow Banking System

This article reviews a book by Yale professor Gary Gorton who observed the run on the shadow banking system from AIG's London office.  Gorton argues that we have always had greed in the banking system.  Therefore, the financial crisis cannot be explained by greed.  It may have been a contributing factor, but all banking crises are caused by runs on the bank.  That happened in the Great Depression, and we created the FDIC which insured bank deposits.  That has prevented runs on depository banks.  The shadow banking system is about as large as the depository banking system, and there is nothing to prevent a run on the shadow banking system.  We observe the failure of banks like Lehman Brothers, but most have not understood the cause.

The shadow banking system is based upon a system in which investment banks use securities as collateral for short term loans.  In turn, they use these funds to invest in longer term assets that provide a return greater than the interest rate which they pay to borrow on the short term market.  Banks cannot create riskless assets. Therefore, when the assets of investment banks were perceived as risky, $1.2 trillion was withdrawn from dealer banks.  This forced the sale of assets causing the prices of those assets to plummet in value.  The government was forced to take actions to deal with the bank run but it was not entirely successful.  Therefore, government got blamed for the problems in the shadow banking system.  The real problem is that government had taken no actions to prevent a run on the shadow banking system.

Gorton argues that the system of securitizing bank assets is an essential part of the financial system. It had been working well prior to the financial crisis.  We should be taking actions that will prevent future runs on the shadow banking system instead of doing many of the things that are included in Dodd Frank. 

Romney Versus Obama On The Economy

Romney has been storming around the country telling Americans that he has plan that will restore growth and create jobs.  His plan is long on generalities, and short on details about how his plan will achieve the growth that he promises.  Economists tend to ignore plans without specifics and without numbers.  On the other hand many Americans respond well to the encouraging words of a planner without a plan.

President Obama has real plan.  It has 27 specific actions that he will take to grow the economy.  It is a small bore plan that will have most of its impact by 2020.  The plan focuses on investments in education and other things that will make the economy more competitive.  It assumes that we don't have enough skilled workers today that can fill the available jobs.  Somehow, all of the highly skilled workers that had jobs in 2007 have lost their ability to do similar work.  It says nothing about the drop in the demand for skilled workers in the US.  The president's plan may reflect political reality more than anything else.  Fiscal policy is off of the table in Congress.  At least as long a Democrat is in the White House.

Since neither Romney or the president has a plan for stimulating short term economic growth, the 2012 election is not really a choice between competing plans for creating jobs in the short term.  Instead we have one candidate who will continue the destructive policies of the Bush administration by cutting taxes, primarily for the rich, and deregulating an under-regulated economy.  The other candidate will have an opportunity to implement his healthcare bill and his tax polices will be progressive.

US GDP Grew 2% in Third Quarter

The Commerce Department released GDP data for Q3.  The economy grew 2% versus 1.3% in Q2 and 2% in Q1.  The housing sector shows signs of improving and consumer spending, which is around 70% of GDP, was up 2%.  Defense spending grew by 13%. 

On the negative side, exports declined from 5.3% growth in Q2 to 1.6% in Q3.  Exports are obviously affected by slow growth in Europe and elsewhere.  Business investment also slowed down as forward looking businesses keep an eye on the looming fiscal cliff due to dysfunction in Washington.  Unless Congress takes the proper actions, taxes will rise and government spending will drop substantially.  That could send the economy back into recession.

Thursday, October 25, 2012

The Racial Divide In 2012 Election

The president has a huge racial gap to overcome in 2012.  John McCain received 12% more of the white vote in 2008 than Obama.  The gap was even larger among white men.  McCain got 16% more of the white male vote in 2008 than Obama.  The racial gap is much wider this year.  White voters prefer Romney to Obama by 21%, and white males prefer Romney by 33%.  Not all of this gap between the president and white voters is due to his race.  George Bush got 17% more of the white vote when he ran against Kerry. 

Minorities prefer Obama by much larger margins.  They make up a smaller percentage of the voting population, however.  This explains GOP efforts in many states to discourage minority voting.

Wednesday, October 24, 2012

Federal Prosecutor Files Civil Fraud Suit For $1 Billion Against Countrywide/Bank Of America

This civil fraud suit alleges that Countrywide sold loans to Fannie Mae that did not meet the underwriting standards set by Fannie Mae.  Countrywide was aware of the fraudulent loans that it sold, and even took steps to increase the volume of the bad loans.  Fannie Mae did not sample the loans that it purchased from Countrywide for conformity to its underwriting standards.  It took Countrywide's certification for conformity at face value.  Bank of America acquired Countrywide during the financial crisis and it is responsible for payment on the civil fraud suit.

Its good to see federal prosecutor's doing their job, but no criminal charges have been made against Countrywide executives.  Countrywide's CEO was fined by the government in a prior civil suit but much of his financial penalty was paid for by his insurance and Countrywide paid his legal bills.  He is worth hundreds of millions despite his fraudulent behavior.  From a purely cost- benefit analysis he did just what he should have done in his capacity as CEO.  He maximized his financial gain with little downside risk to himself.  Countrywide creditors and shareholders, along with US taxpayers took the hit.

Nothing New About Wage Stagnation In The US

There has been a lot of political discussion about job creation during the election campaign.  Romney blames it on the policies of the Obama administration.  He claims that cutting taxes and government regulations will produce 12 million jobs.  What neither candidate talks about is wage stagnation in the US.  That has been going on since 1970 because of automation and globalization.

Men have been particularly hard hit by wage stagnation.  The median male working male between age 25 and 64 has seen his wages decline from 1970 to 2010 by 4%.

The numbers are even worse when we look at all men, including those not working, between age 25 and 64.  The median wage for men in this category has declined by 19% between 1970 and 2010.

We know that wages are related to the attainment of a college degree.  The percentage of males with a college degree has been flat since 1978.

Women have done much better than men in wage growth and in obtaining a college degree.  Median income for working age women has increased by 70% from a much smaller base in 1970.  However, it has only increased by 6% since 2000.

The growth in wages for women has been correlated with educational attainment.  The percentage of women with a college degree has increased by 38% since 1970.  There are now more women with college degrees than men.

It is pretty clear that the entry of women into the workforce, and the rapid growth in their education and wages has enabled many families to maintain a more consistent standard of living.  There would have been a devastating decline in living standards for families with a single male wage earner.

Curiously, white males have become more conservative as their wages have stagnated.  No Democratic political candidate since Lyndon Johnson has won the majority of the votes from white males.  There would be no contest in the battle for the White House if women had not voted predominantly for Democrats.  Education level may have something to do with this result.  Men seem to prefer alpha males as their leaders.  Better educated women are turned off by alpha males.

The Austerity Trap

This editorial repeats a message that we have been posting about for several years.  This time it is reinforced by data from the IMF.  It found that imposing austerity during a recession only makes the recession worse.  Unfortunately, this has made things worse in Europe, and if the GOP has its way, it will worsen the US economy.

Tuesday, October 23, 2012

Why It Does Not Make Sense To Write A Book That Is Critical Of Wall Street Behavior

Greg Smith was a Goldman Sachs VP in Europe. He resigned and provided his reasons to the press.  He claimed that Goldman made a practice of ripping off its customers.  This violated the Goldman creed in which he believed.  He just published a book on this subject.  This article (via Manan Shukla) argues that the book has no merit because it is well known that Wall Street bankers put profit growth ahead of their customer's interests.  It suggests that it is pointless to be outraged against things that everyone already knows. Greg Smith is either writing a self-serving book or he is a sap for believing that Goldman really cares about its customers.  Personally, I can't think of anything more cynical than this form of criticism against Greg Smith.  It is easy to be lulled into complacency about behavior that is unethical when one is paid large sums of money to ignore it.  One's life style quickly becomes dependent upon maintaining the necessary funding.  In that case, life style maintenance trumps one's personal code of ethics. Wall Street critics of Greg Smith may have become inured to any conflict that might exist between their behavior and any ethical values that they hold. They don't want to be reminded of this by Greg Smith.

The Revolving Door Between Goverment And Wall Street

This article provides some data on the implications of the revolving door.  It appears to influence stock prices of the firms that participate in the revolving door game.  More importantly, it is more characteristic of emerging market countries than it is of countries that set the example for effective democracy.  That used to be the US. Some critics of US budget deficits claim that we are moving closer to states like Greece. We may be moving in that direction but it is not the result of US fiscal policy. The barriers that used to be in place to limit corruption are becoming more like those of nations like Greece that have very weak barriers to corruption.

US Trade Deficit With China And US Budget Deficits

Dean Baker has been having a debate with some of his fellow liberals about US trade policy.  Krugman and others argue that it is time to stop bashing China for our problems.  Baker is not a China basher, but he argues that we will have budget deficits as long we have a large trade deficit with China.  The only way to balance trade with China is to have the US dollar depreciate relative to the value of China's yuan.  China has been purchasing the US dollar so that it does depreciate relative the to yuan.  If China persists in that policy we will continue to have a trade deficit with China.

I posted this article, however, not to get into a debate about China bashing.  Dean Baker makes an important point about trade deficits and budget deficits that everyone should understand.  We can't balance the US budget, and have a large trade deficit, unless something unusual takes place.  Baker's logic is quite simple to follow.  It is an accounting identity that national savings in the US will be negative when we have a trade deficit.  National savings consists of three factors: government savings, business savings and household savings.  If we balance the US budget, we must have negative savings in the business or household sectors of the economy.  Non-residential business investment fluctuates widely, and there is little reason to believe that it will increase dramatically, and produce negative savings.  We can create negative savings in the household sector by encouraging a housing bubble.  The housing bubble is deflating, however, and household's are net savers as they pay down their debt and reduce consumption.  The implication of private sector savings is that negative savings must come from government.  Our budget deficits today are pretty close to our trade deficit.

I should also point out that we had a budget surplus, which represents government savings,  under Bill Clinton.  We also had a large trade deficit.  That occurred because of the boom in the US.  Business was investing heavily during this period, and contributing to large negative private savings.  The household sector also increased spending during this period of low unemployment. Therefore, private sector negative savings was sufficient to match the trade deficit. We can only balance the US budget under similar circumstances, like those that prevailed in the boom, and still have a trade deficit.

Baker also reminds us that a lot of our imports, and much of our trade deficit with China, results from the policy's of US corporations.  They can make larger profits by producing in China, at lower cost, and importing them from China to the US.  They will continue to do so as long as costs in China are much lower than costs in the US.  China's cost advantage would be reduced if its currency would be allowed to appreciate relative to the dollar. That would reduce our trade deficit with China, and it would also allow us to cut our budget deficit.

Who Won The Foreign Policy Debate?

This editorial in the NYT sums up my impression of the debate as well.  Mitt Romney had to cram a lot of material, provided by his foreign policy advisers, into the debate. That is not easy to do, and it showed.  He memorized a lot of information that he had not digested.  President Obama has been working on these issues for four years. He did come across as someone who had memorized a lot of talking points. I'm sure that Fox News and other GOP media outlets will have a different reaction to the debate.  After all, Romney recited a lot of the same talking points that they have been feeding the GOP base.  However, the preliminary polls show that Obama was more impressive on foreign policy among undecided voters by a wide margin.

Both candidates made efforts to turn the foreign policy debate back to domestic policy.  That is more important to most of the public than foreign policy.  The leading newspaper in Salt Lake City, Utah surprised many observers by coming out for the president.  Utah is one of the most reliable Republican states in the country and it is Mitt Romney's home state.  His home state paper refused to support him because he has changed his positions on almost every issue multiple times. They accused Romney as behaving like a weather vane and changing his positions in the direction that the political wind was blowing instead of sticking to a set of principles that one could use to determine his behavior if he were elected.  President Obama took every opportunity to remind the audience that we really don't know Mitt Romney's real position on most of the issues.  He asserted that it is not possible to run the country by doing what the latest focus group believes about the issues.

Monday, October 22, 2012

Central Banks Are The Only Rescue Game In Town

This article provides an overview of the unconventional approaches to monetary policy that are being employed to keep the economy afloat.  It describes the benefits as well as the risks from the unconventional policies.  Unfortunately,  electoral politics have made the use of fiscal policy irrelevant.

How To Escape From Consequences Of Private Credit Boom and Bust

Several of the worlds economies are suffering from the consequences of a private credit boom and bust.  The private sector is forced to make payments against its debt burden instead of spending on consumption and investment.  That is how balance sheet recessions lead to declining, or weak growth in aggregate demand.  In this article, Martin Wolf makes the case for government to increase its level of spending to compensate for the decline in private spending.  This increases the level of government debt, but the distribution of debt has been altered.  It has been transferred from the private sector to government.  Governments with their own currency, and the ability to borrow at low interest rates, have an option that is not available to governments without those advantages. He suggests that this is the least painful alternative for escaping from the consequences of private debt overhang.

Some have argued that recoveries from balance sheet recessions take a long time, and that recoveries can be lengthened, when government debt as a percent of GDP exceeds 90%.  Martin Wolf respects this line of historical research but he offers a defense for his policies, under the right context.  He also reminds us that the researchers who drew the debt to GDP ratio at 90%,  did not intend that it be used as an inflexible rule under all circumstances.

How To Accelerate Private Sector Debt Deleveraging

Martin Wolf argued in the prior post that balance sheet recessions are long lasting. and that there are no solutions that do not require choosing among bad alternatives.In this article he discusses alternatives for reducing private sector debt overhang.

Hypocrisy And Government Debt Burden On Future Generations

Conservatives claim to be very worried about the impact of government debt on future generations.  They justify their austerity programs by arguing that future generations will be responsible for paying back the debt of the current generation.  If they were really concerned about the legacy that we are leaving to future generations they would also be worried about the environment that we will leave to them.  Instead they argue that the current generation would have to pay too high of a price to reduce the impact of climate change on future generations.  They would rather continue to over consume fossil fuels and avoid paying the taxes required to address the problem.  This is sheer hypocrisy.  They are less concerned about future generations than they are about funding government investments that are needed to prepare the current generation for a future that will require a highly educated and healthy workforce. Their children don't need government funded healthcare or education.  Perhaps they do not even need a better environment.  The biggest impact of global warming will be on the poor who cannot easily escape from the impact.

Sunday, October 21, 2012

Why Do Thieves Steal Famous Paintings That Cannot Be Sold?

This question has always intrigued me.  Most economists believe that we do things in order to increase our utility.  This only raises a question about our definition of utility.  Art thieves take great risks when they steal paintings from very secure museums.  The paintings are worth millions but they cannot easily be sold for anything near their market value.  Why to they do this?  This article was written by an author who has written a book on the subject.  He tells us that many of them do this to demonstrate their skill as a thief.  Apparently, a job well done is their reward.

This reminds a bit about a comment attributed to Steve Job's.  He claimed that his purpose was not to become the richest person in the graveyard.  He had nothing against earning large sums of money, but that was not what really motivated him.  Developing great products and building a great company was what pushed him to devote his life to that purpose. 

Diversionary Tactics In US Politics

The Economist looks at the way Romney and Ryan have dealt with some of the questions that have been raised during their campaign.  They point to their personal behavior to deflect attention from what they might do in office.  For example, Romney claims that he tried to recruit women to government when he was the Governor of Massachusetts.  On the other hand, he has not answered questions about legislation that he would support that would level the playing field for women.  Paul Ryan did a photo op in soup kitchen for the homeless in Ohio.  His budget proposal, however, would substantially cut government programs for those with extreme financial needs.  People who seek government office ought to tell the public how they will govern instead of pointing to their personal life.  What they do in office affects millions of people.  Their personal lives may not be a good guide to how they would use government to affect the lives of the millions who look to government for leadership.

As a personal aside, Scott Brown is running against a woman in Massachusetts for the Senate.  He has not been an advocate for women in the short time that he has held his Senate seat.  His campaign has diverted attention from his political actions by running TV ads that feature his wife and two daughters. They tell the public that Scott Brown must be good for women since he lives in household full of women.  A senator is not good for women because he has a wife and two daughters.  A senator is good for women when he supports, or proposes, legislation that benefits women.

Every nation is dependent upon the way that they select their leaders.  To the extent that election campaigns are similar to how we sell soap, the best advertising campaign will determine the outcome.  Advertising does not help us to purchase the best soap, and it is a terrible way to select leaders. 

How Much Do We Need Billionaires?

Mark Thoma, posted this article by Brad DeLong in which he attempted to answer questions regarding our dependence upon billionaires.  He wrote it before the financial crisis which has brought this question again to the fore, but DeLong's essay on the subject provides a good history lesson for all of us.  Especially for those who are too young to have been part of our recent history.  We can all benefit from his history lesson and we can learn by debating the questions that he has raised.

Citigroup:Too Big to Fail and Too Big To Succeed

The abrupt departure of Citigroup's CEO has led to a lot of speculation about its future.  It got in trouble being managed by a lawyer whose expertise was in structuring acquisitions.  They brought in a hedge fund manager to take his place who had no experience in banking, or in running an enormously complex conglomerate.   Gretchen Morgenson asks whether Citigroup is too big and complex for anyone to manage.  She also asks whether Citigroup can shed itself from dependence on government and the taxpayer for survival.  As long as government is providing implicit and explicit guarantees to Citigroup that lower its costs, it may not be fit for a competitive environment.  Moreover, it may be too complex to be effectively managed by an ordinary mortal.

Saturday, October 20, 2012

Does Growth In The East Depend Upon Consumption In The West?

This article looks at the contribution of the west and the east to economic growth during the Great Recession.  China and other eastern economies have contributed more to growth than those in the west.  This suggests less dependence of exports to the west than one might expect.  It is fairly clear, however, that the German economy has benefited from exports to the east more than the US which has been consuming output from the east.  Germany seems to be making products that it can sell to the east.  Outside of weapons, financial services and agricultural products, the US does not have much to sell to the east to pay for its imports. China buys lots of iPhone's but they are not exported from the US. They are made in China, consumed in China, and exported from China to the rest of the world. That is a big reason for US trade deficits.  We pay for our imports with borrowed money instead of by exporting.

Is The Financial Sector Worth What We Pay It?

In theory, the financial sector is responsible for allocating capital to its most productive uses.  There should be a positive relationship between the growth in financial assets and growth in the economy.  Social welfare should also be improved if resources are allocated to promote income equality and social mobility.  Financial assets grew from 81% to 137% of GDP between 1990 and 2005.  Growth in derivatives exploded between 2000 and 2005 by a factor of 3 to $285 trillion. The growth in financial assets has not produced equivalent growth in the economy, and it has not improved social welfare.  Inequality has increased and social mobility has been reduced.  Meanwhile the financial industry's share of profits, and compensation, grew substantially.  It is not apparent that social welfare has been improved by the manner in which the financial sector has allocated resources.  This conclusion holds even before we consider the damages from the global recession that was caused by the behavior of the financial industry.  The neo-liberal agenda, that included the free movement of capital across the globe, has not served those outside of the financial sector very well.

How Al Gore Destroyed Climate Change Policy

Ezra Klein does an excellent job of logic chopping through David Brooks' op-ed on the political history of climate change policy in the US.  Brooks is not a climate change denier.  In fact, he claims that he is in favor of a carbon tax.  His op-ed, however, is one of the reasons why climate change is off of this year's debate agenda.  Brooks argues that there was bi-partisan support for climate change policy before Al Gore produced his documentary on the topic.  The documentary certainly made the public more aware of the problem, and that caused both parties to advocate solutions to the problem.  Republicans, however, hate Al Gore.  Therefore, his documentary undermined bi-partisan support for climate change policy.

This is a typical David Brooks op-ed, and that is one of our big problems.  Since he favors a carbon tax and is not global warming denier, his objectivity on the subject is certified.  His objectivity is also established by blaming both parties for abandoning climate change policies.  Therefore, one should accept his conclusion that both political parties are at fault. This is another form of denial that is too common among journalists. It obscures what really happened to shift the debate away from climate change policy. Energy companies did whatever they could to undermine support for the science behind climate change. They spent millions on  advertising, and they funded "studies" which questioned the science. They even ran ads which demonstrated that they are working hard to find solutions. Of course, they also purchased the services of Republican's who quickly shifted from support to opposition.  That probably had a much bigger impact on their behavior than Al Gore's documentary.  David Brooks, however, prefers the story that he made up. That is is his job.  He rewrites history to provide objective and "bi-partisan" support for his favorite political party. Fox News and Rush Limbaugh are responsible for educating the less educated about political issues.  David Brooks belongs to the group that is responsible for misinforming the better educated class.

Friday, October 19, 2012

Adair Turner's Speech At Mansion House On Financial Crisis And What to Do About Deflatoinary Risks

This speech by Adair Turner, who is chairman of Britain's FSA, provides an excellent summary of how the financial crisis developed, and what is being done in Britain to prevent the next crisis.  More importantly, however, he describes the deflationary headwinds that are in the way of a full recovery from the Great Recession. 

The FSA has been in existence for 12 years.  During the first eight years it was sailing in an ocean that made for good sailing.  During that period, the grounds were being laid for the production of an iceberg that was lying beneath the surface we eventually hit.  The last four years have been devoted to overcoming that disaster.  His description of causes are similar to those made by Financial Crisis Committee funded by the US Senate.  Rules were developed that enabled to financial sector to employ excessive leverage in order to achieve short term gains at the expense of longer term stability. This led to systemic risks which were not detected early enough and it produced a banking culture which took advantage on an opportunity to enrich itself, even at the expense of its customers, and eventually at the expense of the taxpayers.  He argued that banks are not like other businesses that we can afford to let fail.  They put the entire economy at risk when we allow the balance between risk and return to be distorted.

He described many of the reforms underway in the FSA and in the Bank Of England to deal with the use of excessive leverage and liquidity risks in the banking system.  He also spoke about Basal lll and the recommendations of the Vicker's Commission on the separation of retail banking from investment banking, as well as the plan to regulate compensation practices and the banking culture that developed from those practices.

He then turned to the problems of the deflationary risks which were described in the recent IMF forecast of global economic growth.  Excessive leverage by households and the private sector have led to a process of private sector deleveraging which has led to a decline in aggregate demand.  That, in turn, has shifted the use of leverage from the private sector to the public sector.  Public sector debt has increased to the point that fiscal policy is contributing to the decline in demand as austerity programs have been implemented to address the public debt burden.

Orthodox responses to deflationary risk have also become less effective since short-term interest rates are at the zero bound.  Quantitative easing has been used by replacing purchasing long term bonds from banks and replacing them with cash reserves.  Ordinarily, lower interest rates would stimulate demand, but this is difficult when banks are deleveraging and attempting to rebuild capital reserves. The private sector is also deleveraging and less interested in taking advantage of low interest rates to increase investment and consumption.

This has led the Bank of England and the FSA to develop policies that will enable banks to use liquidity buffers when needed as well as capital buffers in order to encourage credit expansion.  Britain is putting capital measures in place, to insure future stability in the financial sector, but needs to insure that they are not the stability of the graveyard in the face of deflationary headwinds to economic growth.

The deflationary headwinds that we face are the result of global deleveraging in the developed world.  Europe correctly blames the US and the UK for their contribution to the deflationary threats that we all face.
On the other hand, the UK and the rest of the world are at risk due to the economic problems in the eurozone.  Our second intellectual problem was not to foresee these problems.  They were not the result of government profligacy in Spain, Italy and Ireland.  The increase in sovereign debt in these countries was due to the overuse of leverage by the private sector.  This led to fears of insolvency in the banking sector that are related to the fear of state insolvency, since states may need to bailout their banking sector.

The eurozone needs to develop a banking union and greater fiscal integration.  If this is not politically possible it needs to find a path to dissolution that does not lead to chaos.  Banks need to be able to provide credit in order to support economic growth and austerity measures taken to reduce sovereign debt burdens have to be developed which do not impede the necessary growth in necessary to restore balance.

Should America Elect A Financier To Create Jobs?

Mitt Romney has successfully argued that he should be elected because of the business acumen that he  acquired by running Bain Capital.  This article, written by a private equity manager, explains how private equity firms operate.  In the first place, private equity firms are really financial businesses, they raise money from investors, which they use to purchase assets that they hope to sell later at a higher price. When that happens, the investors and Bain Capital share in the profits.  Bain Capital also makes makes money by charging the firms that they acquire fees for a variety of services.  The investors do not benefit from the fees paid to Bain Capital.  In fact, there is an adverse relationship between the fees that Bain collects, and the interests of the investors.  The fees paid by acquired firm may make the firm less profitable.

Private equity firms have no interest in creating jobs.  They are primarily driven to increase cash flow.  This is done by cutting costs.  Since most of the cost of running a business is the cost of labor, private equity firms engage in a number activities to reduce the cost of labor.  That may involve the outsourcing of jobs to low wage locations or other ways to reduce costs.  It is also done by using a variety of methods to reduce taxes.  That is one of the reasons why the acquired firms borrow a lot of money.  The interest paid on the loans is deductible from their income. However, the borrowed money is not always used to invest in productive capital.  Sometimes it is used to pay dividends to the private equity firm.  The dividends paid enable the private equity firm to get a faster return on its investment than they would otherwise achieve.  On the other hand, the increased cost of debt service may make the acquired firm more vulnerable to adverse changes in their business model. 

Private equity firms have become very popular with investors because they may provide a higher yield on their investments than more traditional investments in stocks and bonds.  Pension funds, including government pension funds, are one of the majors sources of funding for private equity firms.  Many of them need higher yields in order to provide pensioners with the payments that they have committed to them.  Private equity firms have benefited from government pension funds who need to take greater risks in order to get a greater return on their investments.

The question raised in this article is whether a successful financier, who has been good at cutting jobs to reduce the cost of labor, is the person that we need to create jobs. Financiers are not necessarily evil.  They are just doing their job when they cut costs to increase their return on investment.

Thursday, October 18, 2012

Washington Post Fact Checker Disputes Romney's 12 Million Jobs Claim

This fact checker report in the Washington Post raises several questions about Romney's job creating plan.  Perhaps the easiest question comes from economic forecasting groups.  They forecast similar growth over that period no matter who is elected as president.  The rest of the article raises questions about the studies that Romney's campaign cites to support its claims.

The problem with US election campaigns is that Romney's claims are advertised heavily.  Few will be aware of the problems with his claims.  Lying is the best way to run an election in the US.

Harvard Business Review Raises Questions Regarding Mission Of Corporate Boards

Enron had an ideal Board according to current models of governance.  It was filled with outside directors and few insiders were on important committees.  This article was written in a response to recent criticisms of Goldman Sachs Board which is loaded with insiders. The Goldman Board is an anomaly according to the current model of the ideal Board. It should be loaded with outside directors. This raises a question regarding the role of Boards in corporate governance.  One view is that the Board represents the principals who are the shareholders. Managers are regarded as agents. Board governance is supposed to resolve the agency conflict by insuring that managers maximize shareholder value.  That view became dominant after an article by Jensen and Meckling in 1976.

Legally, corporate Boards are responsible for the long term survival of the corporation.  Shareholders are free to sell their shares if they are unhappy with corporate performance.  In fact most shareholders are actually renters and not owners.  The percent of long term shareholders of corporate shares has dropped dramatically in recent years.  Perhaps it would be better if Boards were more familiar with the corporation that they govern, or at least in the industry in which the corporation competes.  The Goldman Board may be the best model for firms in the financial industry. Goldman survived while many of its industry peers did not.  Moreover, creditors supplied most of the funding on Goldman's balance sheet. Perhaps they are the true principals rather than shareholders. Shareholder friendly Boards on other banks may have been a problem by providing financial incentives that were not in the best interest of shareholders, or the long-term survival of the corporation.

In any case, there is no simple answer to questions regarding the best organization of corporate Boards.  The worse case scenario, that we observe in corporations like HP, is that Boards do not agree on the corporate mission and they become dysfunctional.  They also provide little governance when they are a rubber stamp for management.

New Housing Starts Up 12% Last Month Thanks To Fed Policy

The WSJ reports that housing starts hit a four year high last month.  Many attribute the increase the quantitative easing done by the Fed.  The Fed has put $3T of mortgage backed securities (MBS) on its balance sheet.  A Bank of America spokesperson expects that the Fed will purchase an additional $2T MBS for its balance sheet over the next two years.  With the absence of fiscal policy in the US, the Fed has used monetary policy to spur the recent recovery in jobs. It would be better if fiscal policy and monetary were better coordinated but electoral politics have made that impossible.  The Fed, left to its own devices, has selected the proper tool for stimulating growth.  Housing has been the problem for the decline and the Fed may turn it into the path for recovery.

Income Inequality and Housing Prices

It used to be the case that both high and low income workers were better off living in rich states.  This article summarizes research which indicates that this is no longer true.  Housing prices in rich states have increased faster than housing prices in poorer states.  Low income workers cannot afford to migrate to richer states.  They have been forced to migrate to poorer states where wages for similar work in rich states are higher.  This is not entirely due to market forces.  Restrictions on housing development are more prevalent in rich states than in poorer states. Those restrictions have contributed to higher housing costs in rich states.

The Politicalization Of Economics

John Taylor is a prominent economist who is an adviser to the Romney campaign.  He claimed that the recovery from the Great Recession, under Obama, is much worse than recoveries from other recessions that included a financial crisis.  In particular he argued that we had a very sharp recovery from the 1981 recession under Ronald Reagan.  Romney used that point in the last debate by arguing that Republican presidents are a better choice than Democrats for ending recessions.

The 1981 recession, however, was nothing like the Great Recession.  The Fed triggered the recession by raising interest rates.  They did so to end a period of double digit inflation.  They successfully disinflated the economy.  They then lowered interest rates and the economy recovered.  We should also remember that Reagan cut taxes dramatically and he increased military spending substantially.  These are Keynesian approaches that resulted in very large budget deficits.  Republicans during the Obama administration have campaigned against the use of Keynesian approaches to stimulating the economy.  They focused their attention on rising budget deficits, and argued that austerity was the best method for ending the Great Recession.

Taylor also included  the 1973 recession, that was primarily induced by the rapid increase in oil prices due to the OPEC oil embargo as an example of a quick recovery from a recession with a financial crisis.  This was not a recession that was triggered by anything like the 2008 financial crisis that triggered a global recession that is still underway.

Reinhart and Rogoff, who wrote the book on recovery from recessions associated with financial crises, were also critical of Taylor's method.  In particular, they argued that the recovery from the Great Depression was not a sharper recovery than our recovery from the Great Recession.  Taylor measured the recovery from the Great Depression from the trough of the depression to the end of the first year.  Reinhart and Rogoff measure recoveries from the peak prior to recession to the peak of the recovery.  As we know, the recovery from the Great Depression took a long time and we entered into a second recession during the recovery in 1937.  It makes no sense to argue that the recovery from the Great Recession under Obama was worse than our recovery from the Great Depression.  In fact, Reinhart and Rogoff argue our recovery from the Great Recession is better than our recovery from the Great Depression.

John Taylor received his PhD from Stanford where he is currently a professor.  He has risen through the ranks to become a prominent economist partially because he is able and productive.  He is best known for developing the Taylor rule which argues for inflation to be held at 2%.  The Fed uses the Taylor rule in its efforts to battle the twin perils of inflation and recession.  Its current policies are built around maintaining the Taylor rule plus or minus one.  Taylor has also built his career around support for conservative causes.  This is also true of Glenn Hubbard, the dean of the business school at NYU. and Greg Mankiw, the Chairman of the economics department at Harvard.  They have all had appointments and/or roles in Republican administrations.  It is unlikely that they would have similar roles in Democratic administrations.  This suggests that the economics profession, and economics itself, is more closely associated with politics than it is claimed. Certainly, many economists have risen up the ranks, in part, because of their association with a particular brand of politics. The research of Reinhart and Rogoff, of course, serves as a counter example.  Rogoff claims that he voted for John McCain in the last elections.  His research, however, seems not to be colored by his political affiliation.  I'm sure that is true for many economists.  Much of the economic research that takes place is not closely connected to politics.  On the other hand, the sponsorship of research grants, is more easily connected to monied and political interests. There is no clear separation of economics research, and the paradigms that attain prominence, from economic or political interest groups.

Government Aid For Higher Education Under Obama And Romney

The costs of higher education are rising faster than inflation.  This has made higher education less affordable for many students during a period in which a college degree is becoming more important for access to jobs. Many students have taken out loans in order to pay for higher education.  The average student debt burden is now over $26,000.  This article outlines the efforts of the Obama administration to enable more students to receive a higher education.  Education experts say that he has done more than any other president to provide access to higher education.  He has eliminated banks as intermediaries between students seeking loans and the government. This has saved a lot of money for students.  Pell Grants have also more than doubled under Obama.  Some say that even these efforts are not enough to prepare students for the 21st century job market. 

Conservatives have argued that the availability of student loans has increased the pool of students seeking higher education.  They claim that this has reduced the incentive for colleges to become more efficient and to lower prices.  Shrinking demand would deal with the problem of price inflation.  Mitt Romney, as usual has conflicting versions of his policies for higher education.  He favors market solutions over more government intervention.  For example, he would return banks into the process as intermediaries.  Competition between banks for serving the student market would drive down the cost of loans for student according to Romney.  That is similar to his approach to Medicare which depends upon competition between insurance companies for government provided vouchers to lower the cost of healthcare.  He has also criticized the rising cost of Pell Grants.  On the other hand, on the campaign trail he has changed his tune and now claims that he will do nothing to reduce government support for higher education.  Voters will have to determine which Romney is the real Romney.

Wednesday, October 17, 2012

Sheila Bair Provides Her Answer For Citigroup's CEO's Abrupt Resignation

Sheila Bair was the head of the FDIC during the bank rescue operation.  She opposed Citigroup's efforts to acquire Wahcovia when it became insolvent.  Well Fargo eventually made the acquisition and it has worked out well.  One of her reasons for opposing the Citi acquistion was that it was a poorly managed bank.  Moreover, Citi brought in someone with little banking experience to run a very complex bank.  His experience was in operating a hedge fund which he sold to Citi for $200 million.  A few months after the purchase, the hedge fund had to be shut down.  He also had experience as a trader at a large investment bank, but this is not the same as running one of the largest banks in the world.

This Time The Recovery Is Really Different: It is Better

Romney and company have been arguing that we have recovered from past recessions more quickly than we have recovered from this recession.  He and the economists that he has employed to make that claim are correct.  We have recovered more quickly from the modest recessions that we had in past than we have from this recession.  What they don't tell us that this recession is very different from the modest recessions from which we recovered more quickly.  This article, written by two economists who have written the book on recovery from recessions that have resulted from financial crises, looked at the data and have concluded that our recovery from this financial crisis and crisis has been faster and deeper than those that they have analyzed in recent history.  They are also Republicans, so it can't be argued that they are biased liberals.

Romney's Tax Reform's Will Not Spur Economic Growth

This article, written by a member of Ronald Reagan's administration, explains why Romney's tax plan, which he represents as the critical component of component of his plan to stimulate economic growth, will not work.  In the first place it is not really a plan because it is based upon eliminating deductions which broaden the tax base and enable him to cut tax rates. He does not specify the deductions that he will eliminate, so is impossible to evaluate the real consequences of the plan.  That is, who are the winners and losers from his plan.  Moreover, it is very difficult to end popular deductions.  It would be an economic disaster if tax rates were cut and not paid for by the elimination of deductions.

The second problem with Romney's plan is that changes in tax policy have had little effect on economic growth.  Ronald Reagan cut the top tax rate by 22% and it only had modest effects on economic growth.  Bush also cut the tax rate and reduced taxes on capital gains and dividends.  He also ended the estate tax.  The economy was not stimulated by his tax policies.  Instead the tax burden was shifted from owners of capital to wage earners.

Tom Friedman Nails It On Presidential Debate

Romney and Obama went into the ring and attacked each other.  Romney blamed Obama for the poor economy that was caused by the financial collapse that Obama had nothing to do with. He also argued that he had a plan for fixing the economy.  It turns out that he does not have a plan.  We have to trust him because he made a lot of money running a private equity firm.  The president pointed at the flaws in Romney's non-plan, and he raised questions about his leadership credentials as a corporate raider, and about his concern for ordinary Americans.  The bottom line is that neither of them has told Americans what our real problems are, and neither of them has outlined a plan for the future.  Obama seems to understand what we need to do better than Romney, who would make things worse, but he has not been vigorous enough in taking his plan to the public so that we can end the gridlock in Congress that is primarily a result of Republican obstructionism.  It is a party that depends upon appealing to the worse instincts of a misinformed public.  It is no longer a party that puts the interests of the public ahead of party interests and its financial supporters who represent the worst elements of corporate America.

Most of the pundits, following the debate, declared that the president performed better than he did in the Denver debate.  This is not a prize fight, however, our future depends upon selecting a president that can be transformational.  We need the president to provide the transformational leadership that he has demonstrated in the past, and sell the public on his plan. 

Tuesday, October 16, 2012

Citigroup's CEO Resigns

In a surprise move the CEO who helped to bring Citigroup back from the dead has resigned.  No reason was given for his resignation. 

Romney's Budget More Radical Than Ryan's

This analysis of the budgets proposed by Romney, Ryan and Obama shows that Ryan's budget is not that different from Obama's, and that Romney's budget is more draconian than Ryan's.  Both of the republicans would reduce the percent of federal spending in relation to GDP from its historical average.  Obama's budget would increase the percentage.  Primarily because an aging population is more expensive to care for. 

Both Romney and Ryan would increase spending on defense.  Romney's increase is greater than Ryan's which is higher than Obama's.  Romney and Ryan have backed away from changes to Social Security and Medicare spending but they propose cuts in non-defense discretionary spending.  Romney's cuts are much larger than Ryan's.  Obama proposes cuts in this area that are closer to those proposed by Ryan.  Romney's proposed cuts would dramatically reduce the ability of the federal government to invest in the future.

Cuts to Medicaid are proposed by Romney and Ryan, while Medicaid spending would by increased under Obama's Affordable Care Act.

Monday, October 15, 2012

Larry Summers Describes The Global Economic Problem And The Political Headwinds That Constrain Growth

The IMF cut its global economic growth forecast at its recent meeting in Tokyo.  It also recognized the impact of its forecast.  Slow economic growth makes it more difficult for countries with debt problems to reduce their debt burdens. Tax income falls and demand for social welfare spending increases during recessions. The IMF encouraged governments to take some steps to promote economic growth while also making structural changes that will reduce debt burdens over time.  Austerity measures in the US and Europe, are supported by economic orthodoxy, and they block the use of government programs to stimulate aggregate demand.  Larry Summers describes these issues and the difficulties that they present to governments for political resolution.  It is more difficult to reach political consensus in a highly polarized political climate.  He makes the case, however, for governments to recognize the need for increasing economic demand in order to deal with the problems of unemployment, and the need to reduce longer term debt projections.

The post below takes another look at this problem.  It attempts to explain conservative support for economic orthodoxy and austerity programs.  Conservatives believe that structural changes in the global economy are responsible for lower aggregate demand in rich countries, and that policies that might work to moderate cyclical demand problems will be ineffective.  Austerity programs are their way of enabling the wealthy to maintain a bigger slice of a smaller economic pie in rich nations.

Why Are Conservatives In Rich Nations Beating The Drums Against Social Welfare Spending?

Robert Gordon has raised several questions about the future of economic growth in the developed economies.  His arguments are presented in this article.  There are also prior posts on this blog that deal with Gordan's argument.  The claim in this article is that conservatives agree with Gordan's analysis.  They anticipate the lower rate of growth that he forecasts, and they fear the implications. The public will demand more support from governments in rich countries to counteract stagnant, or decreasing wage growth.  That is why they are promoting tax cuts for the wealthy, and using the resulting deficits as an argument against social spending.  They want to dampen the demand for social welfare before it begins to heat up.  This also explains the fervor and emotions that conservatives like Mitt Romney and Paul Ryan display on the campaign trail. The super rich want a bigger slice of shrinking pie. Progressives in rich countries may also understand what is likely to happen to economic growth. They can't make the impassioned arguments that conservatives make against social welfare programs, and they can't really tell the public that economic forces are underway which government is unable or unwilling to moderate.

Why Does Romney Claim That Nobody Dies In America Because They Have No Insurance?

Romney told a newspaper in Ohio that people don't die in the US because they are uninsured.  This echoes the claim by George Bush who made a similar argument.  He argued that people without insurance can go to hospital emergency rooms.  Paul Krugman states that Romney has an ideological blinder that does not allow him to see what happens to people without insurance coverage.  He then points out the reality of what happens to those without coverage.  This raises an interesting question about ideology.  Romney may be blinded by his ideology or he may really know what happens to those without coverage.  Romney is a smart person.  He probably does know how people are affected by the lack of health insurance.  Those people, however, are not his constituents.  His job is to sell an ideology to others so that they can blind themselves to the realities faced by those who are excluded from society because of their financial status.  The real purpose of ideologies is to commit others to a belief system that does not require one to examine facts.  The ideology is all that is necessary.  For example, people are sold on the ideology of free markets. That ideology is used to limit the role of government in the market system.  If government attempts to limit pollution,   or to insure the safety and effectiveness of drugs, businesses that are affected by those efforts will appeal to freedom from government.  On the other hand, if government attempts to open markets to more competition, businesses that benefit from the lack of competition will scream about government interference in the free market.  Moreover, if government offers tax breaks, or other forms of subsidies, to the true believers in free markets they tend to forget about the ideology of free markets.  Ideologies are primarily a way to prevent those who are sold on the ideology from examining facts.

Sunday, October 14, 2012

The Self Destruction Of The Top 1%

This article compares what is happening today in America to what has happened in other countries that have blocked social mobility.  It may be intended as a warning to the to 01% but most could care less.  They are citizens of the world and they can enjoy the good life wherever they choose to reside. It should be a warning, however, to those who do not have the luxury of place.  Some of them should be concerned about the welfare of their children and grandchildren.  Unfortunately, many believe that they will be at the top of the pile with a little luck.  They are the ones who buy lottery tickets, and who share the values of those who block their path to the top.

The Missed Opportunity In The Bank Bailout Program

This article reviews a new book by Sheila Blair who was "present at the creation" of the Wall Street bank bailout program at the onset of the financial crisis.  Blair was chairperson of the FDIC which insures the deposits at depository banks. All depository banks pay premiums to insure their deposits.  Most of them are small banks that had little to do with the financial crisis that was engineered by Wall Street investment banks that do not pay premiums to the FDIC and whose liabilities are not insured by the FDIC.

In her book she describes a meeting with the triumvirate who helped to enable the financial crisis, and who wanted to make sure that the Wall Street banks would be supported by the FDIC.  The trio included Paulson, the former CEO of Goldman Sachs who was Treasury secretary, Bernanke, the chairman of the Fed, and Geithner (via phone) who was the president of the NY Fed. They handed her a script that would have required the FDIC to guarantee all of the liabilities of the Wall Street banks.  She objected to the use of FDIC funds, that were provided by all of the small depository banks, to save the Wall Street banks which were regarded as too big to fail.  In other words, the cost of the bailout would be shifted from big banks to smaller banks and the taxpayer.  This exposed the love affair that politicians claim to have about small businesses.  They primarily serve the interests of their big business clients, while pretending to serve small businesses by protecting them from government. This helps to win their votes but it only makes it more difficult from them to compete in a market dominated by giants.

Blair had several problems with the bailout.  The management that caused the crisis was not replaced, and banks like Citigroup were allowed to pay bonuses to the failed executives, and to pay dividends while government risked taking loses on the toxic assets that it had guaranteed.  She was also critical of the Office of the Comptroller of the Currency (OCC) which reports to Treasury,  and the NY Fed. They were the main supervisors of the Wall Street banks.  They did a poor job of supervising and they claimed that Citigroup was healthy enough to pay dividends.  Smaller depository banks, that are supervised by the FDIC would have been treated much differently.

Blair also believes that government has not taken the steps necessary to prevent the the next financial crisis that is bound to have its origins on Wall Street.  They have successfully diluted bills that were intended to limit their risky behavior.  They will make risky bets to earn outsized bonuses as long as they can depend upon the next government rescue package that they will have a hand in developing.

California's Cap And Trade Program Begins January 1

This is my first post since a teaching stint at BGI in the Seattle area.  It offers an MBA with a focus on sustainability.  The article describes the cap and trade program that will begin next year in California.  It describes the hopes and dreams of the program as well as some of the issues. It would be better if it were a national program, but energy companies have lobbied successfully against any efforts by government to limit carbon emissions.  They define free markets as markets that are free from government regulation.  They make exceptions, of course, for fossil fuel markets that are subsidized by government.

Wednesday, October 10, 2012

Polls Indicate That Environmental Policy Can Win Independent Votes

This article reviews several studies which show that most Democrats and Independents are supportive of positive messages about global warming.  Republicans, of course show weak support on global warming messaging but they are no going to vote for Democrats anyway.  Several of the polls were conducted before the droughts that hit much of the US this summer.  Messaging targeted toward affected areas might swing independents in those states.  Democrats may be missing an opportunity.  There was do mention of global warming at their nomination convention.

The Tough Choice Than Must Be Made In The Eurozone

Eurozone leaders approved a new fiscal treaty that places constraints on sovereign governments.  A leader from the newly elected government in France announced that the treaty would place no constraints on public spending in France.  This article by Dani Rodrik argues that eurozone leaders much make a tough choice between economic disintegration and more extensive political union.  The eurozone may not be able to resolve its economic problems without moving forward with greater political union.  He refers to the concept of the selective delegation of democratic authority to make his point.  Democracy can be enhanced by delegating technical and non-partisan decisions to central authorities that are insulated from local politics.  He offers the delegation of monetary authority to non-elected central bankers as an example. Even though their authority is often contested, like it is today in a more partisan America, it can be effective and it is needed in the eurozone. Democracy enhancing globalization in the eurozone will only work when it is consistent with selective democratic delegation.  He concludes by arguing that the survival of the eurozone hinges on restrictions to national sovereignty through the democratic delegation of selective authority to regional entities.

Rodrik offers the selective delegation of authority to the federal government in the US an example of how it can work.  This was not easy to accomplish, however, in the US. A civil war was fought over these issues in the US. Even today politicians in the US, especially from southern states, argue for more rights to given back to state governments.  Given the wider differences in culture, and national identities in Europe it is not surprising that difficulties arise in finding the right blend between political and economic integration.

Romney Bashes China On The Campaign Trail Whle Bain Capital Benefits From China's Trade Practices

We learn a lot about the person who wants to be the President of the US from this article.  He will say anything to win an election, but he will do almost anything he can to make money.  Bain Capital has invested in Chinese firms that are subsidized by the Chinese government.  On the campaign trail Romney is critical of those practices, but Bain knows a good investment opportunity when it sees one.  If the Chinese government is subsidizing a firm, and it has an 85% cost of labor advantage over American firms, it is a great investment opportunity.  When Romney ran Bain Capital, he claimed that investing in China was another example of the wonders that come from free trade. It certainly has been good for Bain Capital and its investors.  Money can move anywhere in the world, and investors can benefit from unfair trade practices no matter where they reside. This is one of the marvels of globalization.  Investors are no longer dependent upon prosperity in one of the countries in which they may have a home.  They are residents of the world when it comes to making money and avoiding taxes in the country of their birth. Romney wraps himself around the American flag on the campaign trail, however.  He does not wave the UN flag which many of his supporters despise.

Romney's Views On Environmental Policy

This article contrasts Mitt Romney's positions on protecting the environment from those of past administrations and some of those from the Obama administration.  The good news is that Romney is not a global warming denier.  He admits that it is a problem and that humans contribute to the problem.  The bad news is that he continues to say almost anything to please voters in energy producing states and consumers of energy who worry about rising prices for energy due to the cost of compliance with regulations.  He also attributes the regulations to Obama, when in fact, most were put in place by prior administrations. Moreover, he accuses Obama of adding 140,000 new government jobs for environmental regulators.  In fact, most of the new government jobs have been for defense and homeland security.  He continues to adhere to a campaign philosophy that is based upon the idea that he can lie about almost anything and get away with it.  The press may correct some of his statements, just like the reporter in this article has done.  On the other hand, the number of people who will see his statements on TV outnumbers the number of people who will read this article by a wide margin.  One might call this an application cost-benefit analysis to truthfulness.

Tuesday, October 9, 2012

The Latest IMF Global Economic Forecast

The IMF has lowered its global growth forecast, but it offers some glimmers of hope.  It is particularly concerned about lower growth in Europe, and about government dysfunction in the US which could result in growth reducing fiscal consolidation. 

Der Speigel Raises An Inflation Alert

Germany suffered through a period of hyperinflation before and it has not been forgotten.  Central banks in many industrialized countries have been keeping interest rates low by a variety of methods to deal with the problems of unemployment, and high levels of household and government debt. Some, like the US, have also been purchasing government debt as well as mortgage securities.  These policies increase the risk of inflation.  This article describes many of the problems that arise with inflation.  It also discusses some of the methods that various groups use to protect themselves from the risk of inflation.  It is a good primer of what can happen when inflation raises its ugly head. The Fed, and other central banks, believe that they can keep interest rates low, and that they will be able to deal with inflation if it becomes a threat.  The central banks know why they need to do what they are doing.  Slow growth and high unemployment also present real risks. Many banks are also holding assets that they have not written down, and they could be hit with further losses from the threat of mortgage defaults. We are in a tough situation with no easy exit paths.

David Brooks Likes The Voucher Approach To Medicare

The the surprise of nobody, David Brooks tells us that a market based approach to cutting Medicare costs is better than the Obama plan.  His argument is simple and wrong.  Its simple because he assumes that Obama's ACA plan will not reduce costs.  In that case, we must try something else.  He admits that we don't know whether the voucher plan will work, but it is better than doing nothing. Moreover, despite the fact that most healthcare economists do not believe that the voucher plan will cut costs for beneficiaries, his faith in a market based approach is undeterred.  We already have the kind of plan that he wants for Medicare in the US.  Businesses who provide healthcare coverage, and individuals who purchase their own plans, can choose among a number of insurance companies that compete for their business.  Businesses are able to negotiate lower premiums than individuals, but their premiums continue to rise faster than inflation.  Individuals, with little negotiating power, and less information, do even worse.  Why should we expect that seniors would be better served by competition among insurance companies, than businesses or individuals are able get today from competing insurance providers?  Moreover, government would still be involved in the "market".  Government would set the value for the vouchers, and its decision will determine the level of benefits that seniors will receive from insurance companies that have demonstrated an inability to contain healthcare provider price inflation.  Seniors will receive fewer benefits, or they will have to pay the cost for price inflation.  Insurance companies will also be less constrained than they are by the ACA.  It is in their best interest to offer insurance to the healthiest candidates and reject those most in need of healthcare.  Around 25% of Medicare beneficiaries account for 80% of Medicare's payments.

The summarize David Brooks' astute analysis of almost every problem, we should favor market outcomes over government determined outcomes.  Therefore, we should vote Republican, even if they only like market outcomes that work to the advantage of their supporters. 

Monday, October 8, 2012

The Truth About Jobs And Conspiracy Theories From The Right Wing

Paul Krugman argues that the recent jobs report contained good news.  Unemployment fell below 8% to 7.8%.  On the other hand, this was bad news for those who want to get replace Obama with a more friendly face.  Many of them responded to the good news by claiming that the BLS fudged the data in order to help Obama.  The right wing in the US has a tendency to invoke conspiracy theories to explain facts that do not conform to their belief system.  The GOP has done whatever it could to derail government efforts to deal with the recession in order to gain political advantage.  We got a weak fiscal stimulus as a result and the Federal Reserve has had use monetary policy, without the added advantage of fiscal stimulus.  That, of course, led to conspiracy theories about the Fed as well as political threats to the Fed's independence.

Cost Disease And Our False Healthcare Problem

This is a review of a book that makes a paradoxical claim.  It argues that the cost of healthcare, education, handcrafted products etc. are on the rise because they are labor intensive.  It is hard to provide these services with fewer people.  On the other hand, we will always be able to afford them because we will have to work fewer hours to pay for them.  That is because of rapidly increasing productivity in producing things with the assistance of machines.  The biggest problems that we face comes from producing products like fossil fuel devouring vehicles and weapons which continually fall in cost as a result of rising productivity.  This causes us to destroy the environment and to engage in continual warfare.

This is an interesting argument because rising productivity can be our friend rather than our enemy.  It depends upon how we spread the benefits from rising productivity.  If the benefits are divided between labor and capital, we can afford to purchase expensive services that make our lives worthwhile.  We will also employ more people in providing the services that we desire.  The composition of GDP will shift from producing more things that we can get rid of with a great benefit, and consuming services that really make our lives better. 

One of the problems that we suffer from today is cost disease.  Our politicians tell us that we can't afford things like healthcare that make our lives worthwhile.  We can afford healthcare, education and other desirable services as long as we spread the benefits from productivity more liberally.

Sunday, October 7, 2012

Obama's Debate Performance And The US Ryder Cup Team's Loss

Tom Friedman made several good observations on the presidential debate.  Obama's campaign, like the US Ryder Cup Team, became over-confident and it has adopted a loss avoidance strategy, instead of playing to win big.  The president was also unprepared for the new Romney that he encountered in the debate.  Romney has adopted a new persona as a center right candidate.  He is now the defender of the middle class.  Obama can no longer assume that Romney will direct his messaging to the Tea Party.  He knows who they will vote for.

Friday, October 5, 2012

Romney Surprised Obama By Featuring Analysis Of His Tax Plan By Conservative Think Tank

Mitt Romney is getting a little help from his friends as the election campaign draws to a close.  Conservatives have funded numerous think tanks to assist them in opinion making.  An analysis of his tax plan by the conservative American Enterprise Institute helped him in his debate with Obama and it is being featured in his current ad campaign.  The AEI analysis of his tax plan is described as a non-partisan analysis that disproves claims made by two other studies that Obama used to argue against Romney's tax plan.  The huge investments made by conservatives to fund scores of "non-partisan "think tanks" has been a good investment.  They outnumber progressive think tanks by a wide margin.

Overleverage, And Faulty Incentive System Caused Financial Crisis

This article was written in response to an article by Andy Haldane who argued the central bank dependence on DSGE models contributed to the financial crisis.  The use of leverage by banks expanded rapidly during the crisis and the failure of regulators to deal with increasing leverage was a more important problem.  It may be more important to examine the political economy of deregulation and the incentive systems in banks that rewarded bankers for achieving short term financial targets.

There are problems with central bank reliance on DSGE models which view credit expansion as exogenous to the real economy.  I tend to agree with Mainly Macro, however, that deregulation and the use of leverage to maximize short term performance and bonus's was more important.  There was a failure of corporate governance throughout the global banking system.  Little has been done to reduce the threat of future financial crises from poor corporate governance.  They still operate under an asymmetric incentive system that provides huge rewards for short term performance, and weak penalties for management risk taking on the downside.

Wednesday, October 3, 2012

Questions That Should, But Wont Be Asked At Presidential Debate

Political candidates prefer to talk about vague generalities, and they are usually supported in this effort by the press.  It will be interesting to see whether the presidential debate is about "zingers" without substance, or whether the candidates will pressed to provide answers to important questions like these suggested by Robert Reich.  If they anticipated this kind of questioning, they probably would not agree to a public debate.  The debates usually conform to ground rules that are agreed to by both campaigns.

Why Global Banks Should Be Unbundled

During the real estate boom global banks were valued at 3 times their equity and their balance sheets responded with a similar increase in assets.  Today investors value global banks at a fraction of their equity.  One dollar of equity is worth 50 cents of value.  The global banks have moved from value creation machines to value destruction machines.

The collapse in the valuation of global banks is explained by their legacies and by prophesies about their future.  Investors are concerned about overvalued assets still on their balance sheets that have not been written down to the market value.  They also have problems evaluating their business models.  The banks have so many franchises that they have become too complex to value.  They are not only too big to fail, they are too complex to value.  Perhaps unbundling their franchises might make them more easy to value.  Instead of building reserves they might go back to their primary job of allocating assets to their most productive uses.

Looking Ahead For Romney Zingers In The Presidential Debate

Romney has been rehearsing the zingers that he intends to use in the presidential debate.  Zingers are one line put downs that he will use paint a negative picture of President Obama.  His campaign team believes that some of the zingers will stick and turn his campaign around.  Dana Milbank, who has been following the Romney campaign,  compares debate zingers with a sugar laden treat marketed by Hostess with the same name.  It is all empty calories with no nutrition.  When Romney or Ryan are asked to provide some nutritional food for thought on the campaign trail they have nothing to offer but empty platitudes.  They hope to win the election by selling zingers.

Is The Era Of Unlimited Growth Nearing An End?

Martin Wolf writes in the Financial Times that we may be reaching the limits of productivity enabled economic growth in the rich nations.  He uses the data and arguments of Prof. Gordon which I posted a few days ago.  He asks a simple question that is behind the analysis provided by Prof. Gordon.  Would you rather give up running water or your cellphone?  His answer is clear.  The innovations, like running water, that were made during our second industrial revolution were more profound than the innovations that are driving growth today.  The US, for example, is on the innovation frontier and productivity is slowing down.  Other nations will catch up with the rich nations, and countries like the US will no longer benefit from rising productivity.  The elite in the rich nations will be well off, but everyone else will less well off.  Wolf tells us to get used to it.

The post that follows below on China shows where the growth will take place.  Emerging economies will have greater access to productivity enhancing technology as they move towards the technology frontier established in rich countries.  They will grow and become more prosperous. Multinational corporations may benefit from global growth but that will not trickle down to the middle classes where they are domiciled.

Building Sustainable Prosperity In China

If China pursues the American Dream of prosperity, we will need another planet as China's middle class develops its own dream of prosperity and consumption.  This article describes some the efforts underway in China to shape a sustainable vision of prosperity among China's growing middle class.

NY State's Attorney General Files Fraud Suit Against Wall Street Banks

Despite widespread fraud, and other criminal activities that took place prior to the collapse of the financial system, there have been no criminal charges against the Wall Street bankers who were primarily responsible for the collapse of a system based upon fraud.  The Attorney General of New York has filed criminal charges against Bear Stearns under a state law that dates back to the Great Depression when Wall Street banks did not escape so lightly from criminal prosecution.

Bear Stearns, which was acquired by JP Morgan in a fire sale, during the bank bailout season.  They are being prosecuting for a failure of due diligence.  They purchased loans that that did not conform to their underwriting standards.  They packaged these loans into securities which they sold to unsuspecting investors.  The securities lost much of their value as the underlying loans went into default.  Instead of protecting the investors who purchased the securities, Bear Stearns demanded cash compensation from the loan originators which it kept.

The NY State Attorney General is prosecuting this case on its own.  Neither the Federal Justice Department, the SEC or other federal agencies are supporting the prosecution.  JP Morgan is fighting the charges.  Therefore, the Attorney General's office will collect more information to support its charges against Bear Stearns/JP Morgan.  This may pave the way for further prosecutions.

Tuesday, October 2, 2012

Entitlements And Private Equity Firms

We here lots of complaints about entitlement programs that are available to most Americans.  This article contains a list of the entitlements that are expected by private equity managers in return for their role as "job creators". 

Monday, October 1, 2012

The Role Of Economics In The Financial Crisis

Andrew Haldane, who is an Executive Director of Financial Stability at the Bank of England, argues that economics was one of the many factors that contributed to the financial crisis.  He describes the intellectual viruses within economics that played a major role in financial crisis.

History is full of cycles in money and credit that have spilled over the real economy.  They have been ignored for several reasons.  The first reason is academic.  Central banks use DSGE models of the "real economy" in which asset prices, money and credit play a minor role because they have dominated macroeconomics since the 1970's.  The second reason is that inflation targeting assumed a dominant role in central banks.  The rapid rise in the ratio of bank assets to GDP since the 1970's did not concern central banks.  Moreover, bank regulators focused on the health of individual banks instead of system risk in the banking system.  Haldane concludes that economic history should receive more attention in economic curricula and that more attention should be given to the behavior of institutions such as central banks and commercial banks.

The second virus that affected economics is new and more virulent. Conventional economic models are based upon the behavior of representative agents that rely upon linear mathematics.  The financial crisis is better described as a complex interaction of tightly linked financial and social agents.  The system is highly adaptive when it is not stressed.  On the other hand, it behaves in a non-linear and maladaptive fashion when it reacts to fear. The break down in the system, following the collapse of Lehman Brothers, is not well captured by conventional models which assume representative agents.  Its time to move on from the DSGE models that are dominant in academics towards models that capture the system dynamics of the real world.

New paradigms in science do not easily replace dominant paradigms simply because they are contradicted by unpleasant facts.  It will be awhile before academics, whose prestige is based upon prevailing models, are ready to accept a new paradigm. In the meantime it is better to lessen the role that they play in policy making.  There is also an ideology underlying the DSGE models that has become part of our general culture, and which contributed to the financial crisis. It is the ideology of self correcting markets that work well as long a government does not attempt to intervene in the market.