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Tuesday, March 31, 2009

Wish I'd Said That

In other words, even given Dreher’s strongly conservative premises, continued discrimination against gays and lesbians still looks mighty arbitrary and unfair. Basically, conservatives know they can’t enforce their preferences on the heterosexual majority, so they’ll pick on the gay minority instead. It’s as if I were to say that eliminating the home mortgage interest tax deduction only for Asian-American homeowners was a good second-best to my preferred, but infeasible, policy of eliminating it altogether.

Matt Yglesias

Sunday, March 29, 2009

J Maynard Keynes Comments On C Romer

C Romer with lots of data in 1992 "What Ended the Great Depression?" The Journal of Economic History vol 52 pp 757-784.

This paper examines the role of aggregate demand stimulus in ending the Great Depression. Plausible estimates of the effects of fiscal and monetary changes indicate that nearly all the observed recovery of the U.S. economy priort to 1942 was due to monetary expansion. A huge gold inflow in the mid- and late 1930s swelled the money stock and stimulated the economy by lowering real interest rates and encouraging investment spending and purchases of durable goods. That monetary developments were crucial to the recovery implies that self-correction played very little role in the growth of real output between 1933 and 1942.

Now I'm not sure if Obama understands that Romer is saying that the US recovered because of Hitler who scared the gold out of Europe (she is very clear on this point in the text). She makes a strong case, but the party line is that Roosevelt deserves the credit.

Keynes with almost no data and writing in 1935 (hence before the flight) understood the issue.

In The General Theory of Employment Interest and Money
Chapter 23 Notes on Notes on Merchantilism, the Usury Laws, Stamped Money and Theories of Under-consumption Keynes argued that back in the bad old days, going for the gold was the only feasible approach.

Now, if the wage-unit is somewhat stable and not liable to spontaneous changes of significant magnitude (a condition which is almost always satisfied), if the state of liquidity-preference is somewhat stable, taken as an average of its short-period fluctuations, and if banking conventions are also stable, the rate of interest will tend to be governed by the quantity of the precious metals, measured in terms of the wage-unit, available to satisfy the community’s desire for liquidity.
At the same time, in an age in which substantial foreign loans and the outright ownership of wealth located abroad are scarcely practicable, increases and decreases in the quantity of the precious metals will largely depend on whether the balance of trade is favourable or unfavourable.

Thus, as it happens, a preoccupation on the part of the authorities with a favourable balance of trade served both purposes; and was, furthermore, the only available means of promoting them. At a time when the authorities had no direct control over the domestic rate of interest or the other inducements to home investment, measures to increase the favourable balance of trade were the only direct means at their disposal for increasing foreign investment; and, at the same time, the effect of a favourable balance of trade on the influx of the precious metals was their only indirect means of reducing the domestic rate of interest and so increasing the inducement to home investment.

That does *not* mean that Keynes was a merchantilist. In particular one can imagine how delighted he was by a process that enriched the USA at the expense of Europe.

For this and other reasons the reader must not reach a premature conclusion as to the practical policy to which our argument leads up. There are strong presumptions of a general character against trade restrictions unless they can be justified on special grounds. The advantages of the international division of labour are real and substantial, even though the classical school greatly overstressed them. The fact that the advantage which our own country gains from a favourable balance is liable to involve an equal disadvantage to some other country (a point to which the mercantilists were fully alive) means not only that great moderation is necessary, so that a country secures for itself no larger a share of the stock of the precious metals than is fair and reasonable, but also that an immoderate policy may lead to a senseless international competition for a favourable balance which injures all alike.[4] And finally, a policy of trade restrictions is a treacherous instrument even for the attainment of its ostensible object, since private interest, administrative incompetence and the intrinsic difficulty of the task may divert it into producing results directly opposite to those intended.

Thus, the weight of my criticism is directed against the inadequacy of the theoretical foundations of the laissez-faire doctrine upon which I was brought up and which for many years I taught;— against the notion that the rate of interest and the volume of investment are self-adjusting at the optimum level, so that preoccupation with the balance of trade is a waste of time. For we, the faculty of economists, prove to have been guilty of presumptuous error in treating as a puerile obsession what for centuries has been a prime object of practical statecraft.

Basically, Keynes' insight into the results reported by C. Romer is that, given the fools in the Fed and the timidity of Roosevelt, the US might as well have been an early modern country (and US policy was relatively Keynesian compared to say that of France).
Don't Go West Old Man

Paul Krugman does not think highly of German monetary policy in 1931-2 which included raising the discount rate to 12% during the Depression. One might ask if there were any unfortunate political consequences.


Having greatly enjoyed "The Stabilization of the German Mark" by Hjalmar Horace Greeley Schacht I wondered what Hjalmar was up to those years. Turns out he went West.

"he stepped down from the position of Reichsbank Chairman on 7 March 1930. During 1930, Schacht campaigned against the war reparations requirement in the United States."


"He returned as Reichsbank Chairman on 17 March 1933."

I think it is safe to say that the German economy performed better when Schacht was involved in making policy than when he wasn't.

Now I don't want to say he was a hero who would have saved Germany. In the interval he didn't just travel in the USA, " he helped Wilhelm Kepler to organize a petition of industrial leaders requesting that President Hindenburg nominate Adolf Hitler as Chancellor of Germany."

He was always a bloody minded nationalist (Before WWI author of "Germany Must Have Colonies" which I haven't read). This makes his second and third name very ironic. Not Germanic at all (in fact I just learned that Hjalmar is definitely Danish not German). Horace Greeley employed Karl Marx as a journalist, then fired him in 1848 suspecting him of excessive nationalism.

Not that Schacht didn't pay for the advice he gave Hindenburg. His Wiki opens

"Released from effective service to the Nazi government in 1939, Schacht ended World War II in a concentration camp, and was probably the only concentration camp survivor tried at Nuremberg. He was eventually acquitted at Nuremberg."

(what was the charge ? Excessive multiplicity of exchange rates ? Probably trying to enforce capital controls).

History is a prankster, and I have never understood how people manage to believe that there is a God who is not principally motivated by a really sick and twisted sense of humor.

Saturday, March 28, 2009

Dr Mr or Ms Spanish Judge Your Honor

I oppose "Torture for 6 Bush-Era Officials." A few years in the slammer would be a useful deterrent, but torture is inhumane.

Baltasar Garzon is now up to country 4, he has now attempted to prosecute officials (or former officials thank God) from Spain, Italy, Chile and the USA.

How many more ? Will he attempt to prosecute people for official actions of more than half of the countries in the world ? Wouldn't it be wonderful if he did ?
Wish I'd typed that

Thus in emergencies, to say that all the central bank has to do is to keep the money supply growing smoothly is very like saying that all the captain of the Titanic has to do is to keep the deck of the ship level. Brad DeLong

anyone who thinks that in a $14 trillion GDP that marijuana will be a meaningful and substantive force to economic recovery probably has other reasons they want marijuana legalized. John Cole
Barro, Krugman, Keynes and wage stickiness

Paul Krugman criticized Robert Barro writing

Update: I should also point out this, in Barro’s article:

John Maynard Keynes thought that the problem lay with wages and prices that were stuck at excessive levels. But this problem could be readily fixed by expansionary monetary policy, enough of which will mean that wages and prices do not have to fall.

Is it too much to ask that someone criticizing Keynes actually, you know, read Keynes — at least enough to know that he devoted a whole chapter to explaining why a fall in wages would not expand employment? Or that someone commenting on contemporary policy at least be aware that the whole reason we’re talking about fiscal expansion is that monetary policy has run out of room?

To be picky and display ultra nerdiness, I would like to note that Krugman got his citation a bit wrong. The chapter in question can only be Chapter 19 "Money-Wages" which comes after Chapter 18 "The General Theory of Employment Restated" and is explicitly a response to the natural critique of The General Theory that, if wages are flexible, involuntary unemployment is impossible.

However, the argument in chapter 19 is a bit feeble. Mostly Keynes argues that if one wants lower real wages it is better to drive up prices wtih monetary policy than to try to lower "money-wages" (nominal wages). He also claims that neither monetary policy nor wage cutting is a good approach to depressions because

Just as a moderate increase in the quantity of money may exert an inadequate influence over the long-term rate of interest, whilst an immoderate increase may offset its other advantages by its disturbing effect on confidence; so a moderate reduction in money-wages may prove inadequate, whilst an immoderate reduction might shatter confidence even if it were practicable.

Frankly that's not a convincing argument. At the UK Treasury they argued, among other things, that deficit spending would be bad for the economy because it would shatter confidence. Clearly confidence matters a lot, but if we allow anyone to declare him or herself the true profit of what the crowd will believe that the crowd will believe, we might as well give up debate and analysis and just make him or her economic dictator (fine by me for the duration of the crisis if the dictator were Krugman or Keynes brought back from the dead).

The valid argument, the argument to which Krugman appeals, does not appear in chapter 19 at all. It appears in, get this, the appendix to chapter 14 "The Classical Theory of the Rate of Interest" as a discussion of "the rate of interest in ... Ricardo's "Principles of Political Economy."

in the extreme case where money-wages are assumed to fall without limit in face of involuntary unemployment through a futile competition for employment between the unemployed labourers, there will, it is true, be only two possible long-period positions — full employment and the level of employment corresponding to the rate of interest at which liquidity-preference becomes absolute (in the event of this being less than full employment.)

Keynes says that flexible wages imply full employment unless we are in a liquidity trap. Keynes clearly considers the assumption that wages are flexible to be extreme and implausible, but he agrees that wage flexibility implies only two possibilities -- full employment and a liquidity trap.

Now really, even someone who actually "you know read Keynes"* might not remember that an appendix on the history of thought to a chapter on the rate of interest is key to understanding Keynes' views on the implications of wage flexibility.

*note how I have changed the meaning of Krugman by quoting him out of context. In context "read" was a present subjunctive (I think) in the present tense . Out of context it becomes a past perfect subjunctive (I think. I am fine with Italian grammar but never learned English grammar). As written it was to be pronounced "reed" and as quoted to be pronounced "red". Sneaky eh ?

update: Welcome economistsviewers. Also I have been a bit too kind to Barro as the argument in the appendix to chapter 14 isn't really the only time Keynes mentioned a liquidity trap. In Chapter 21 "The Theory of Prices," he asserts that wages have downward nominal rigidity and this is important. He also mentions what would happen if they were flexible

If, on the contrary, money-wages were to fall without limit whenever there was a tendency for less than full employment, the asymmetry would, indeed, disappear. But in that case there would be no resting-place below full employment until either the rate of interest was incapable of falling further or wages were zero. In fact we must have some factor, the value of which in terms of money is, if not fixed, at least sticky, to give us any stability of values in a monetary system.

So when asserting that there is nominal rigidity, he notes that less than full employment would be possible even if wages were flexible.

In Chapter 21 there is also a hint that low inflation in the 19th century was caused by persistent less than full employment due to "liquidity-preference" and ... well let's spin the tape

The tendency of the wage-unit was, as usual, steadily upwards on the whole, but the efficiency of labour was also increasing. Thus the balance of forces was such as to allow a fair measure of stability of prices; — the highest quinquennial average for Sauerbeck’s index number between 1820 and 1914 was only 50 per cent. above the lowest. This was not accidental. It is rightly described as due to a balance of forces in an age when individual groups of employers were strong enough to prevent the wage-unit from rising much faster than the efficiency of production, and when monetary systems were at the same time sufficiently fluid and sufficiently conservative to provide an average supply of money in terms of wage-units which allowed to prevail the lowest average rate of interest readily acceptable by wealth-owners under the influence of their liquidity-preferences. The average level of employment was, of course, substantially below full employment, but not so intolerably below it as to provoke revolutionary changes.

He concludes the chapter with "But the most stable, and the least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in future, the minimum rate of interest acceptable to the generality of wealth-owners.[2]" the footnote reads "Cf. the nineteenth-century saying, quoted by Bagehot, that “John Bull can stand many things, but he cannot stand 2 per cent.”"

I think that John Bull had better learn to stand 2% and 1% too for that matter. The refusal to accept 2 % would be achieved by holding wealth as cash if the nominal interest rate were below 2%.

I'm sure Keynes didn't resist the tendency to give uhm Keynes the credit for the post WWII persistent low unemployment, but the logic of The General Theory suggests that the economy was helped by 2 key things. First a bit of inflation which reconciles a low real interest rate with the nominal interest rate required to get the money out from under people's mattresses, and, second, deposit insurance made checking accounts as good as cash enabling the banks to get the money to firms.

Friday, March 27, 2009

Self Referential Meta Echo Chamber Blogging

I just checked Gmail and found (to my amazement) that Brad DeLong had accepted my hinted request to be allowed to post on his blog provided I quoted either John Maynard Keynes or George Orwell.

Thrilled I went off to typepad and posted John Maynard Keynes proposing non standard monetary policy in 1937 (policymakers such as Ben Bernanke followed his advice a mere 72 years later).

Then I went to Krugman's blog. He discusses the Gold standard. I thought his readers might want to see Brad's Brad's colorized version of a league of nations graph (black and white original also from 1937).

Scrolling down, I find Brad's comment on the Krugman post which I think would benefit from a comment linking to Brad's graph.

My comment on Brad's comment on Krugman is -- over there in the USA you are not handcuffed by Golden Fetters but over here in Europe, we are handcuffed by the Growth and Stability Pact.

Then I find that Brad has already linked to the first Three comments by Keynes (including the long version of the one I posted at his blog).

Now I have open tabs, including Matty Yglesias commenting on an interview with, you guessed it, Brad DeLong and and article in the same issue of the same journal on a kid who painted a "60 foot phallus" on the roof of his parents mansion hoping that it would be noticed by google-earth. I found the e-mail from Brad authorizing me to quote Keynes and Orwell, when I went to Gmail to congratulate him on getting published by such a major huge upstanding journal and include the link to the other article.

My head is spinning.

What with all the linking and desperate efforts to get attention from google related program activities, I haven't actually gotten around to reading the interview.

OK read it. 2 thoughts. Brad thinks "many sophisticated investors" have given their money to hedge funds to manage (I think most were fools who were convinced that hedge fund managers were smart, because the hedge fund managers were, in effect, buying on margin in a bubble) and he thinks if the economy collapses we will only care about " bottled water, sewing needles, and ammunition."

Who cares about sewing needles ? Compared to Brad I'm bullish on canned food and bearish on sewing needles.

I'm off to drink some bottled water.
J Maynard Keynes Comments on the Current Crisis IV

I don’t know of any economist, who doesn’t believe that better functioning capital markets in which assets can be traded are a good idea.

Larry Summers 2009

Quite a few economists have reconsidered their favorable opinion of capital markets and asset trading in the light of the current crisis.

Paul Krugman 2009

Of the maxims of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of “liquid” securities. It forgets that there is no such thing as liquidity of investment for the community as a whole.

J. Maynard Keynes 1937
Maynard Keynes Comments on the Current Crisis

Non-Standard Monetary Policy

Robert Lucas on Non-Standard Monetary Policy 2008

A dead end? Not at all. The Fed can satisfy the demand for quality by using reserves -- or "printing money" -- to buy securities other than Treasury bills. This is the way the $600 billion got out into the private sector.

This expansion of Fed lending has not violated the constraint that "the" interest rate cannot be less than zero, nor will it do so in the future. There are thousands of different interest rates out there and the yield differences among them have grown dramatically in recent months. The yield on short-term governments is now about the same as the yield on cash: zero. But the spreads between governments and privately-issued bonds are large at all maturities. The flight to quality means exactly that many are eager to trade private paper for non-interest bearing (or low-interest bearing) reserves and with the Fed's help they are doing so every day.

Maynard Keynes on Non Standard Monetary Policy 1937

If the monetary authority were prepared to deal both ways on specified terms in debts of all maturities, and even more so if it were prepared to deal in debts of varying degrees of risk, the relationship between the complex of rates of interest and the quantity of money would be direct. The complex of rates of interest would simply be an expression of the terms on which the banking system is prepared to acquire or part with debts; and the quantity of money would be the amount which can find a home in the possession of individuals who — after taking account of all relevant circumstances — prefer the control of liquid cash to parting with it in exchange for a debt on the terms indicated by the market rate of interest. Perhaps a complex offer by the central bank to buy and sell at stated prices gilt-edged bonds of all maturities, in place of the single bank rate for short-term bills, is the most important practical improvement which can be made in the technique of monetary management.

Ben Bernanke (2009) is following their advice.

I'd say that, when Robert Lucas and Maynard Keynes agree, the probably have a point.

Of course there is a counter-argument, based, in large part, on the key question of the Central Bank's inability to pre-commit to the optimal policy rule (known as dynamic inconsistency)

The short-term rate of interest is easily controlled by the monetary authority, both because it is not difficult to produce a conviction that its policy will not greatly change in the very near future, and also because the possible loss is small compared with the running yield (unless it is approaching vanishing point). The the long-term rate may be more recalcitrant when once it has fallen to a level which, on the basis of past experience and present expectations of future monetary policy, is considered “unsafe” by representative opinion.


Thus a monetary policy which strikes public opinion as being experimental in character or easily liable to change may fail in its objective of greatly reducing the long-term rate of interest, because M2 [speculative demand for money not what we call M2] may tend to increase almost without limit in response to a reduction of r [the nominal interest rate] below a certain figure. The same policy, on the other hand, may prove easily successful if it appeals to public opinion as being reasonable and practicable and in the public interest, rooted in strong conviction, and promoted by an authority unlikely to be superseded.

J. Maynard Keynes 1937

And what does Prof. Lucas have to say to that ? A mere $ 1 trillion many not be enough to move long term interest rates below the rate which market participants consider normal. Lucas is making rapid progress, so he might catch up with Keynes 70 years ago some day.
The Limits of Monetary Policy

We have recently learned that, while the Fed can do what it wants with the safe rate of interest (formerly known as the "pure rate of interest") it can't do much about the TED spread. Why didn't anyone think of that before 2007 ?

(4) There is, finally, the difficulty discussed in section iv of Chapter 11, p. 144, in the way of bringing the effective rate of interest below a certain figure, which may prove important in an era of low interest-rates; namely the intermediate costs of bringing the borrower and the ultimate lender together, and the allowance for risk, especially for moral risk, which the lender requires over and above the pure rate of interest. As the pure rate of interest declines it does not follow that the allowances for expense and risk decline pari passu. Thus the rate of interest which the typical borrower has to pay may decline more slowly than the pure rate of interest, and may be incapable of being brought, by the methods of the existing banking and financial organisation, below a certain minimum figure. This is particularly important if the estimation of moral risk is appreciable. For where the risk is due to doubt in the mind of the lender concerning the honesty of the borrower, there is nothing in the mind of a borrower who does not intend to be dishonest to offset the resultant higher charge.

J. Maynard Keynes 1937
Music, Prince and the Revolution

Those who forget history are doomed to repeat metaphors in The General Theory.

Chuck Prince

“So long as the music is playing, you’ve got to keep dancing. We’re still dancing.” Chuck Prince, former chairman and chief executive of Citigroup, was interviewed by this paper only a month before the music stopped. A few weeks later he was out of a job. With these comments, he got to the heart of the banking crisis.

Simon Johnson

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone,

J Maynard Keynes

This battle of wits to anticipate the basis of conventional valuation a few months hence, rather than the prospective yield of an investment over a long term of years, does not even require gulls amongst the public to feed the maws of the professional; — it can be played by professionals amongst themselves. Nor is it necessary that anyone should keep his simple faith in the conventional basis of valuation having any genuine long-term validity. For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops some of the players will find themselves unseated.

Musical chairs going around and around. However, the call from the former chief economist of the IMF to man the barricades and take back our government from the bankers is a bit novel. I wonder what's next, Cardinals for free love or boxers against violence ?
Mark Kleiman thinks that Bilbo Baggins is the protagonist of The Lord of the Rings

The Man ain't got no culture.
But at least he hasn't been Ayn Randed.

Actually this version featuring "man he ain't got no culture" even better even though Paul didn't lose his harmonica..
Decline in Republican Party Intellectual Standards

Bush, famously, described his first budget by saying, "It's clearly a budget. It's got a lot of numbers in it."

At least he was clear on the concept.

Sadly, the GOP has not been able to retain policy makers with Mr Bush's level of expertise

Inspiringly moderate or moderately inspiring ?

Obama said that it's “not acceptable for children and families to be without a roof over their heads in a country as wealthy as ours.” Evidently it is acceptable for single adults to be without a roof over their head.

I'm pretty sure he meant what he said and said what he meant. That he intends to try to eliminate child homelessness but does not intend to try to eliminate adult homelessness.

Oddly, I really find his declaration moderately inspiring just because it is so unreasonably modest. If he had said homelessness was "not acceptable", I would have assumed that he meant "not good" and that he planned to accept it. His strangely moderate condemnation of homelessness strikes me as a declaration of serious intention.

Now that doesn't mean that he can eliminate family homelessness, but I wouldn't put it past him (with luck a lot of luck).

Thursday, March 26, 2009

Now I know Why I'm Always Tired

I've been moonlighting at the European Parliament in a fugue See me one row behind and to the left (naturally) of the Czech prime minister who is calling the stimulus the "road to hell."


By why am I not rich (they get paid a lot).

Tuesday, March 24, 2009

Homophobic Hell the Man's Psychotic

Think Progress illustrates Antonin Scalia's triumph over logic.

in his dissent for Lawrence v. Texas, Scalia said

The Texas statute undeniably seeks to further the belief of its citizens that certain forms of sexual behavior are “immoral and unacceptable,” ....

[skip to a quote from another context]

... Scalia said it was “preposterous” to categorize gay people as “politically unpopular”
Elite Groups

Non Senator Al Franken will be honored by the USO for his tireless efforts to entertain US service people.

I was surprised to learn something I should have known

"the nation's 98 living Medal of Honor recipients"

That's a small group. There are currently the exact same number of non Medal of Honor winning senators as Medal of Honor recipients (Daniel Inouye is a mamber of both groups).

Over 2% of Medal of Honor recipients are now or have ever been Senators (Bob Kerry has been a senator) .

I don't want to be ghoulish, but I can't help wondering how many living hands and feet of Medal of Honor recipients there are, since the two Senators both won the medal when they continued fighting after losing a limb.

On a more mature note, I wonder who the other 96 are, and why I never looked them up. I owe them.

Monday, March 23, 2009

I never thought that Brad was poor (successful textbook and all that) but I had no idea that he and Lucien Bebchuk were *that* rich.

Brad yesterday

The World Is Divided into Four Groups of People

This weekend, at least, the world appears to be divided into four groups of people:

* People who have no opinion of the Geithner Plan because they have not been briefed on it...
* People who are strongly opposed to the Geithner Plan because Tim Geithner is a socialist who wants to destroy American finance...
* People who are strongly opposed to the Geithner Plan because Tim Geithner is a corrupt plutocrat who wants to give Americans' money to the princes of Wall Street...
* Lucien Bebchuk and me...

The New York Times Today

"Markets Leap More Than 5% on Details of Bank Rescue"

Maybe Lucien Bebchuk has the spare hundreds of billions.

Of course it is possible that the market soared because the socialist Geithner overplayed his hand and, so much the worse, so much the better, the Randian revolution is nearer. Or because the plan is positive proof that "Tim Geithner is a corrupt plutocrat who wants to give Americans' money to the princes of Wall Street" and investors think that they are the princes of Wall Street (I mean people have the strangest fantasies some times).

Still I must admit I'm surprised.

Sunday, March 22, 2009

Robert Waldmann

I think the reason the CDO market is frozen is that CDO owners are not willing to sell at the market clearing price, because they would then have to mark their remaining holdings to market. This is one hypothesis.

(after the jump I will re-review others and explain why I find them unconvincing)

I'd say that people are convinced that something else must be going on, because of an earlier example of market freezing. I say frozen markets are a sign that people care a lot about the latest price and will not sell an asset at a price higher than their perception of its hold to maturity value, because they don't want the transaction to be recorded in the market to which they mark.

So, why would broker-dealers have done such a thing say the last time markets froze ?
That would be during the Long Term Capital Management meltdown/Freeze up metaphor mixer.

Why lo and behold, it is alleged that markets froze because all broker dealers were manipulating the mark to market value in this book I read "Inventing Money. subtitle includes "long term capital management" or "LTCM""

The assets were long maturity calls on European stock indices. LTCM was massively short these options. The market price of the options became absurdly huge and trading volume fell to roughly zero. LTCM collapsed. Now given the absense of actual trading, the price to which they were marked was the list price as listed by broker/dealers. All major broker dealers were LTCM counter parties. LTCM had REPO accounts so if the mark to market value LTCM's holdings at a bank fell to zero, the bank could seize the holdings including a short position on a grossly overpriced option.

So long as all broker/dealers refused to sell the options for less and no one wanted to buy them for that absurd price, they could seize a valuable LTCM position.

It was rumored that broker/dealers were secretly trading the options at lower prices.
So, it is alleged, that the market freeze up then was pure fraud.

I just know what I read in this book. I don't know if it is true. However, I think the allegation makes it unwise to use the case to prove that market's freeze up for reasons other than dishonesty about the true value of assets.

Here I argue against three other explanations of the current freeze.

Another would be adverse selection. Only the worst of the CDOs are for sale so the market price is the price of the worst of the worst. This can happen if sellers know more about the value of assets than buyers (check) and buyers have to bid on assets and let sellers accept some of the bids and reject others (huh). The second condition doesn't hold. As I've argued repeatedly below, if I had the money I could offer to buy x% of a bank's CDO book at a y% discount but only if they sold me equal proportions of the book. Adverse selection problem largely solved.

Another would be that everyone is panicked (except Geithner, Paulson and Summers). or that everyone has to deleverage. This would really have to be everyone. With frozen markets willingness to buy even a small amount of the assets at a high price would be enough that the latest market price wouldn't be the latest fire sale price.

Another would be that everyone has to deleverage. Again *everyone*.
Commenting on Drum again in one day

Drum argues that the US public will have to eat the toxic assets in any case and that Bank shares are basically worthless so who cares.

Now, it's true that if we nationalize we'd wipe out the shareholders of the bad banks. But although that's the right thing to do, it's also pretty small potatoes since stock prices have dropped so far that shareholders in bad banks have virtually no equity left at this point. (Sweden didn't even bother trying to wipe out shareholders when they nationalized Nordbanken in 1992, for example. They just bought out the minority shareholders at the highly depressed market price.) What's more, a lot of those shareholders are mutual funds and pension funds anyway. The amount of bankster wealth that would be wiped out in a nationalization is probably pretty small.

Look the aim is not to keep the banks going with worthless shares forever OK.
Shares are worth nothing now, but, if the Geithner plan works, they will be worth a lot. So will shares in nationalized banks. But if we nationalize the value shares which are actually worth something will go into the Treasury. Geithner's plan is not to keep zombie banks staggering around forever. If shareholders are not wiped out and if the plan works as promised, they will end up with a huge amount of money given to them out of your tax dollars.

Also, I know this is so totally 2 days ago, but remember that little dust up about AIG bonuses ? The issue is not the shareholders; they lost long ago. It is the managers. Will they be able to pay themselves £11 million a year (and claim it is $1 million ?). Will they be masters of the universe or subordinates of the subordinates of Geithner ?

CEO compensation is a tiny amount of money, even in banking. Total compensation over $250,000/yr for all employees is not. That's the money Atrios is after.

Managers at banks don't want banks to be nationalized. Geithner is willing to give hedge fund managers tens of billions of US dollars to protect the sacred power of the Bank managers who messed up.
Commenting on Drum

update: Oh wow. Drum linked to this post. A Political animal stampede. I want to stress that, while I tend to use a confident tone, I really don't know anything about finance.

kevin Drum discusses Valuing the Toxic Waste

After all, if markets can overvalue assets on the way up — and obviously they can — then they can also undervalue them on the way down. There's a pretty good chance that the toxic waste in question really is worth more than the market is currently willing to pay for it.

It is hard for markets to freeze at a price far from subjective effective hold to maturity value. It is easy for markets to flow (opposite of freeze) at such prices.
The current situation is not just that many people are willing to buy Toxic Waste at a huge discount and some owners are willing to sell it. It is also necessary that no one is willing to pay a higher price for toxic waste which happens not be available in a fire sale. Someone should be willing to buy at least a little bit of an asset at say 90% of that persons expectation of its hold to maturity present value. That would be enough to give a market price which isn't absurdly low.

In contrast back during the bubble one could sell short a huge amount of toxic waste at its huge price without affecting that price. People were willing to buy a huge amount at that price. Current owners are just not selling huge amounts of toxic waste at huge discounts (the market is frozen remember). That's the difference. It really has to be that no one wants it except at a huge discount and that really means no one not fewer people than want to sell it at a higher price (so long as they won't sell it at the huge discount because they would have to mark down the identical assets that they still own).

a lazy shorthand that a lot of us have fallen into: namely the notion that the value of mortgage-backed securities is certain to keep plummeting because home prices themselves still have another 20-30% to fall. But these securities aren't backed by the value of the homes they represent. They're backed by mortgage payments. Home prices could fall by half, but the value of the securities wouldn't drop by a dime if homeowners kept making their monthly payments. Their value only drops if default rates go up.

So what causes default rates to rise? Falling home prices are certainly a factor, since it's more tempting to mail in the keys when your loan is way underwater. Rising unemployment is an even bigger factor: if you lose your job, you're more likely to stop paying the mortgage. And the crappy lending practices at the height of the bubble produced a surplus of buyers who have always been more likely to default than average.

I comment

You understate the effect of home prices on the value of mortgage based assets for two reasons. First the value of the assets is not just based on default rates, it is also based on cents on the dollar recovered through foreclosure. That clearly falls when home prices fall. Also, if a homeowners have positive equity I'd guess that even if they have say zero income, they can fend off foreclosure by taking out a second mortgage to pay the first (even if this debt is junior it is covered by the equity in the home). So default rates are higher for under the water mortgages for a reason different from mailing in the keys.

Obviously, then, there's tremendous uncertainty about future default rates. But the market appears to be valuing most mortgage-backed securities these days at something like 30 cents on the dollar. That's crazy. When you factor in recovery rates, it assumes that over three-quarters of all homeowners will default on their loans. That might be true of the absolute worst of the toxic waste, and it's certainly true of the equity tranches of even the better stuff, but on average? No way. 30 cents on the dollar simply doesn't represent a reasonable long-term value for most of this stuff.

But everyone is scared, and when there are no buyers prices get unreasonable.

Your argument rests entirely on the figure 30% which does sound low. In fact, it seems that it would be low even if we could be absolutely sure that all mortgage debtors will never make another payment. Recovery after foreclosure should be worth more than 30% of face value on average.

You assume that the figure 30% applies to all mortgages or, at least, to all securitized mortgages. Whatever gave you that idea ? What if the figure comes from mezzanine tranches of CDOs of by liars loan only MBSs ? There are some assets which no one will buy for more than 30% of face value. They are called toxic sludge. Are they representative mortgages ? I think that's unlikely.

A key point is that there are patient, brave deep pocketed investors still out there. Warren Buffet is one and he controls enough money that there doesn't have to be another one. If the current market price is so absurdly low, why isn't he buying? If he is worried about adverse selection and counterparties with more information picking lemons to sell him and keeping the cherries, then why not offer to buy say 1% of a banks total MBS and CDO of MBS book ?

I think the fact that this isn't happening shows that the prices banks demand for their toxic sludge are higher than justified by a sober patient valuation by an agent with a huge capacity to bear risk.

To get a market price of 30 cents on the dollar it has to be that no one is willing to buy even a small amount of the asset for more. Banks would be delighted to sell a little of an asset for a high price so they could mark the rest to that high price.

The claim that everyone is scared must be literally true. Everyone. Warren Buffet has to be terrified of maybe losing a billion while probably making many billions.
How likely is that ?
Attempted DeLong smackdown meets It's a Dirty Rotten Job But Someone's Got to Do It.

Brad DeLong attempts to defend the Geithner plan. I consider this a good sign for the USA and a bad sign for Berkeley economics department economic history teaching. He is brilliant as always and almost convincing. I post some of his argument and all of my comment

Q: What is the Geithner Plan?

A: The Geithner Plan is a trillion-dollar operation by which the U.S. acts as the world's largest hedge fund investor, committing its money to funds to buy up risky and distressed but probably fundamentally undervalued assets and, as patient capital, holding them either until maturity or until markets recover so that risk discounts are normal and it can sell them off--in either case at an immense profit.


Q: Why isn't this just a massive giveaway to yet another set of financiers?

A: The private managers put in $30 billion, but the Treasury puts in $150 billion--and so has 5/6 of the equity. When the private managers make $1, the Treasury makes $5. If we were investing in a normal hedge fund, we would have to pay the managers 2% of the capital and 20% of the profits every year; the Treasury is only paying 0% of the capital value and 17% of the profits every year.

We own the FDIC too so we are bearing 97% of the downside risk. Hedge fund investors can't end up with less than zero if the manager ends up with zero. This makes the analogy clearly false.

Second, the fact that hedge fund investors do it does not mean that it isn't essentially giving lots of money to already rich people in exchange for a chance to bear a lot of risk. You do not, in general, assume that investors are rational. You can't turn the efficient markets hypothesis on and off at will.

Finally, no one is willing to invest in someone's second hedge fund (well maybe someone is but it is dumb). If I have one hedge fund that is generating me income of 10 million a year and another one where I have limited risk, I might just take huge gambles with the second, to, you know, maximize the value of my option. If all my income comes from one fund, I won't be so casual about it becoming worthless. I think that hedge fund managers typically keep a lot of their wealth in their one fund too. The one example I know of LTCM was like that except for one manager who put more than all of his wealth in LTCM by borrowing to super duper leverage.

Investors can tell how much fund managers have taken out. I don't know anyone who invests in a hedge fund, but, I suspect, that if the manager takes a lot of money out of it, they switch funds.

The fact is that the Geithner deal will have highly positive expected returns for the private partners even if the expected returns on the investment are negative. Loss limited to 3% of the investment and gain equal to 17% of the gain is an extremely valuable Geithner put. This means that, if the private partners really are experts and know what assets are worth in expected value, they will pay more and the US government will have large expected losses.

If Geithner didn't want the USA to lose money, he could design the program so that hedge fund managers put of 3% of the capital and get, say, a 4% share. That way they would be willing to buy assets at 4/3 of their expected hold to maturity value *if* they were risk neutral, less since they are risk averse. This way I'd guess that they are willing to pay double their estimate of the expected hold to maturity value, because of the value of the Geithner put.

I admit that my guess has nothing to do with any calculation of the value of the option. I'm guessing that Geithner wants to buy toxic sludge at twice its hold to maturity value, because that is the only price at which banks are solvent -- that he wants to give banks the value of their toxic sludge but wants to pretend that he didn't do it on purpose. I am using the current market price as my estimate of the hold to maturity value. OK so I'm switching the efficient markets hypothesis off and on, but its the only estimate we have. I'd say there is a lot of wealth in the world and selling pressure can't keep assets undervalued for months.

The fact that CDOs are not being bought and sold doesn't mean that there is no one able to buy them because everyone is deleveraging. It has more to do with the fact that they are on balance sheets at values much higher than anyone is willing to pay. Current owners won't sell at the current market price, because they are not marking to the current market price not because they can't find buyers at the current market price.

Oh and adverse selection my ass. If I had a billion dollars, I could go to Goldman Sachs and say I want to buy 0.1% of your CDO proportional to your current portfolio. If you want to sell me some of them and not all of them, you can go to Geithner -- he's the one who wants to give you money. Doesn't seem to be happening does it ?

update: pulled back from comments

"The fact that CDOs are not being bought and sold doesn't mean that there is no one able to buy them because everyone is deleveraging. It has more to do with the fact that they are on balance sheets at values much higher than anyone is willing to pay. Current owners won't sell at the current market price, because they are not marking to the current market price not because they can't find buyers at the current market price."

You offer zero evidence for this proposition. You spend an enormous time on this blog arguing that markets are not efficient, but here insist on using the "market" price as a reasonable estimate of the net present value of the assets, even though there is no liquid market in these assets. You can offer hypotheses about why that is, but what we know is that the market doesn't exist right now. The vast majority of the "prices" that are being used for markdowns are fire-sale prices. It's absurd to think that the prices that distressed institutions are willing to sell at are real prices.

I'm glad you called this an "attempted smackdown," because it certainly doesn't succeed.

1:35 PM
Blogger Robert said...

I admitted to the inconsistency in my turning the efficient markets hypothesis on and off (and after accusing Brad of doing that).

On the substantive contested claim it is just not true that *everyone* is deleveraging. This is a fact, and I have evidence. Warren Buffet, for example, decided to pick up more exposure to Goldman Sachs. I don't need another example.

Brad's analysis is aggregate (he is a macroeconomist).

Now it has been alleged that no one is buying CDOs because the seller knows more about the CDO than the buyer so there is an adverse selection problem and there is an equilibrium of no trading except for fire sales.

I think this argument is based on an absurd assumption that all sales must be via market orders on double auction markets. There is no need for me to allow the seller to pick the lemons to sell me and keep the cherries. If I had the money, I could offer to buy 1% of a banks CDO book for, say 60% of face value. That is demand an equal fraction of all of their CDO's.

No one has done this. Banks are very eager to deleverage. Warren Buffet is buying -- something -- but not a part of any banks current CDO book. I think my explanation, for which you claim I present no evidence, is the only explanation which fits that fact, which I call evidence.

Saturday, March 21, 2009

La Carica Del 101 !

I'm finally blogging about the best news I've read from Italy in years. 101 members of the majority in parliament wrote a letter to prime minister Sivlio Berlusconi asking him not to make the vote on a bill a vote of confidence (which means no amendments allowed). The issue was that the bill contains the proposizione 738 provision that Doctors have to inform on undocumented aliens who seek medical care.

But back to the parliamentary heroes and heroines. The leader of the back bench uprising against the new Legge Razziale and defender of the Constitution (the right to health and not mere health care is right there in the Italian constitution) is, of course, L'Onorevole Mussolini.

Friday, March 20, 2009

The instabill imposing a 90% tax on bonuses paid by TARP recipients to people in families with income over $250,000 is getting mixed reviews.

There are two perceived flaws of the bill which cancel out.

1) firms can just raise salaries to replace bonuses. Salaries are not subject to the special tax.

2)it is too broad applying to all TARP recipients including firms that have done fine and took the money as a public service (assuming there really are such firms). Even firms which need TARP help aren't all total disasters like AIP-FP and employ many people who have performed excellently.

Now put 1 and 2 together. Ah yes. Firms which are not controlled by the US government can rename bonuses salary and avoid the tax. AIG can to, but it won't. The argument for paying the AIG-FP bonuses is that there is a contract. That contract won't be replaced by another one designed to dodge the 90% tax.

So, in the end, the tax applies only to people getting bonuses whose employers don't want to pay them that much (certainly including all bonus recipients at AIG-FP).

That's the way to constitutionally write a bill of attainder. Make a general law that appears to hit many people with a loophole that all but the intended victims can use to escape.

Now I think a bill taxing bonuses of employees of firms at least 80% owned by the Treasury would be fine, but looks like Rangel likes to keep his constitutionality clearer than that.
AIG but at least not about bonuses

I'm thinking back to the long ago days when AIG was an AAA rated corporation. I just thought of a new financial situtation which was almost identical to the situation at the time except that AIG would not have been rated AAA.

The situtation at the time includes a special purpose entity (SPE) issues a debt instrument. A bank buys the debt instrument and insures with a CDS from AIG.

An almost identical setup, except for the ratings, would be if AIG bought the debt instrument from the SPE and issued a bond with the same face value and the SPE issued a CDS on the AIG bond. Finally AIG would issue a super special CDS on AIG which is senior to all debt (legally impossible I think) and the SPE buys this special AIG issued AIG CDS. To the client who buys the AIG bond and the CDS the flow is the same. The client is paid in full unless both AIG and the SPE go bankrupt. The client will have to pay more for the AIG bond and less for the CDS but it should be same cash flow same total price.

To AIG the risk is the same. They just pass on the interest from the SPE instrument so long as the SPE pays and take a hit if the SPE goes bankrupt. The SPE has the same flow. If counterparty risk weren't priced in CDSs the flows would be identical.

However, AIG would have a rather different balance sheet. This way everything is really almost the same, but AIG would have an additional $ 3 Trillion in debt. This would give AIG a debt equity ratio which would make an AAA rating impossible (or AA or well I don't know but they would have appeared to be super leveraged as indeed they were).

Here I think the only difference is that on balance sheets CDSs written are recorded at market value not at notional value. Thus CDSs written on $ 3 trillion of debt instruments didn't look huge on the balance sheet.

I think my current effort is a slight improvement over my past efforts to describe an example which shows why current accounting practices and ratings agencies approach to balance sheets don't work together.

Thursday, March 19, 2009

Dueling Headlines

New York Times

Fed Plans to Inject Another $1 Trillion to Aid the Economy
Published: March 18, 2009

Washington Post

Fed to Pump $1.2 Trillion Into Markets
Greatly Expanded Purchases Are Designed to Lower Interest Rates, Stimulate Borrowing
By Neil Irwin
Washington Post Staff Writer
Thursday, March 19, 2009; Page A01

The extra $ 200,000,000,000 is not due to the passage of a day. The current front page of includes

Fed’s Move Still Shaking Up Markets
By JACK HEALY 20 minutes ago
The Fed’s decision to inject $1 trillion into the economy pushed the price of government bonds higher and dragged down the value of the dollar.
New Island Being Born Near Tonga

$ 200,000,000,000 = 0 ?
A Trillion Here A Trillion There and Soon You're Talking Real Money

I don't know if it is the huge sums which have been thrown around recently or pride in innumeracy but Edmund Andrews treats $ 200,000,000,000 as a rounding error.

In an article entitled "Fed Plans to Inject Another $1 Trillion to Aid the Economy"
(by someone else) he opens

WASHINGTON — The Federal Reserve sharply stepped up its efforts to bolster the economy on Wednesday, announcing that it would pump an extra $1 trillion into the financial system by purchasing Treasury bonds and mortgage securities.

Later he writes

Since last September, the Fed’s lending programs have roughly doubled the size of its balance sheet, to about $1.8 trillion, from $900 billion. The actions announced on Wednesday are likely to expand that to well over $3 trillion over the next year.

Well over $ 3 trillion - $ 1.8 trillion = well over $ 1.2 trillion.

Well over 1.2 trillion - $ 1 trillion = well over $ 200,000,000,000 =
such a tiny sum that it can be ignored in the headline and first paragraph.

What possible justification is there for writing "an extra $1 trillion" not "more than $ 1 trillion" (assuming people have noticed that there are already some dollars) or "more than an extra $ 1 trillion" which is an ugly sentence but not an arithmetic error of well over 200,000,000,000 ?

Why does the headline inform us that the Fed is trying to help the economy. The readers who think it is trying to hurt the economy won't be convinced. Why not "Fed Plans to Inject Over $1 Trillion" or "Fed Plans to Inject More Than Another $1 Trillion" ?

Or if, for some reason, they just can't bring themselves to admit that they (and the Fed) don't know an exact figure, at least the closer approximation of $ 1.2 trillion not 1 trillion ?

What can citizens do when the Journal of Record sometimes treats $200,000,000,000 as nothing and quotes Republicans making a huge fuss over (well spent) millions ? Can't people agree that numbers matter when they are 9 12 digit figures in dollars ?

update: Oh my, I consistently wrote 200,000,000 that is 200 million when I meant 200 billion. How very embarassing. Read the comments for the most amazingly polite correction.

Monday, March 16, 2009

Income Distribution, Infant Mortality, and Health Care Expenditure

Tilman Tacke
Robert J. Waldmann

Do health outcomes not only depend on an individual's absolute level of income, but also on their relative income position within a society? We use infant mortality as a heath status indicator and find a significant and positive link between infant mortality and income inequality using cross-national data for 73 countries. Holding constant the income of each of the the poorest three quintiles of a country's population, we find that an increase in the income of the upper 20% of the income distribution is associated with higher, not lower infant mortality. Our results imply that, e.g., a one percentage point decrease in the income share of the richest quintile would decrease infant mortality by roughly one percent. The association of higher income of the rich and higher infant mortality becomes statistically insignificant when we control for health care expenditure. Our results indicate that the correlation between infant mortality and income inequality is partly explained by the fact that income inequality is high in countries where public investment in health care is low.

Full pdf here.
I am storing pdf's at google sites so you can see my research efforts

1. Income Distribution, Infant Mortality and Health Care Expenditure by Tilman Tacke and Robert Waldmann

2. Xin Long & Alessandra Pelloni & Robert Waldmann, 2008. "Lump-Sum Taxes in a R&D Model," CEIS Research Paper 120, Tor Vergata University, CEIS, revised 14 Jul 2008

3. Emanuele Millemaci & Robert J. Waldmann, 2008. "Dynamically Inconsistent Preferences and Money Demand," CEIS Research Paper 129, Tor Vergata University, CEIS, revised 09 Sep 2008.

4. Nazaria Solferino & Robert J. Waldmann, 2008. "Predicting the Signs of Forecast Errors," CEIS Research Paper 135, Tor Vergata University, CEIS, revised 24 Nov 2008.

5. Carlo Ciccarelli & Luigi Giamboni & Robert J. Waldmann, 2008. "Cigarette Smoking, Pregnancy, Forward Looking Behavior and Dynamic Inconsistency," CEIS Research Paper 132, Tor Vergata University, CEIS, revised 14 Nov 2008.

6. Giamboni, Luigi & Millemaci, Emanuele & Waldmann, Robert, 2007. "Evaluating how predictable errors in expected income a ffect consumption," MPRA Paper 12939, University Library of Munich, Germany.

7. Ricci Andrea & Waldmann Robert, 2006. "Employment Protection, Firms’Financed Training and a Theoretical Analysis," Departmental Working Papers 230, Tor Vergata University, CEIS.

8. Robert Waldmann "The Infant Mortality Rate is Higher Where the Rich are Richer."

It seems that the version of 8 above doesn't contain the tables with the actual empirical results. Here are some relevant tables (I don't promise that they are numbered in a way which corresponds to references in the text). Thanks to Tilman in comments. I have sole responsibility for remaining amazing sloppiness.

9. Robert Waldmann, 2001. "Dollarization Of Liabilities And The Value Of Collatera," Departmental Working Papers 137, Tor Vergata University, CEIS.

Friday, March 13, 2009

Anonymity Vs Anonymity

Glenn Greenwald has a very interesting post alleging that AIPAC grossly abused anonymity granted by journalists to imply that Charles Freeman was being paranoid (and presumably anti semitic) when he claimed that they were involved in reversing his appointment as chairman of the national intelligence council. Basically it was possible for Joshua Block to suggest that he had not campaigned against Freeman, because he had made journalists promise to keep his campaigning on background.

Greenwald strongest evidence is an article by Walter Pincus which includes

For example, the American Israel Public Affairs Committee (AIPAC), often described as the most influential pro-Israel lobbying group in Washington, "took no position on this matter and did not lobby the Hill on it," spokesman Josh Block said.

But Block responded to reporters' questions and provided critical material about Freeman, albeit always on background, meaning his comments could not be attributed to him, according to three journalists who spoke to him.

Oh yes. Three anonymous journalists who can't write that an anonymous source is trying to mislead the public over their own signatures without huge costs but who can become anonymous sources themselves.

Hah Mr Block, two can play that game, or, in this case, four can play that game.

I love it.

Now note that Block has not been caught lying. He said "took no position on this matter and did not lobby the Hill on it," not 'didn't campaign through discussions with journalists on background'. He's clearly good at his job, misleading while not lying.

However, Fred Hiatt is totally incompetent. A Washington Post editorial included "Mr. Freeman himself will now win plenty of admiring attention. Crackpot tirades such as his" the day before Walter Pincus proved that the tirade was not a crackpot tirade at all.

Is there anything that an opinion editor can do in an effort to prove he should be fired that Fred Hiatt has neglected to do ?

Thursday, March 12, 2009

Kevin Drum Writes

"the bank's marketing budget — which no one in their right mind thinks should be shut down during a recession"

Guess I'm not in my right mind. I'd say it would be a good idea to impose a temporary regulation that no entity with a banking license is allowed to spend money on marketing. I will stipulate that banks have chosen profit maximizing marketing budgets. This does not mean that the Citibank marketing budget maximizes Bank of America profits. I'd guess that banks' marketing mainly serves to win clients from each other not to increase total demand for banking services.

Consider the ban on TV advertizing of cigarettes. This was followed by a huge increase in the profits of cigarette companies. They were no longer spending money to steal customers from each other.

Now, I don't want to ban marketing and adverstising in general. Hell no, then I'd have to pay to read Kevin Drum's blog. But banks need cash right now. I think it would be good if other sectors picked up the budget for free to the user content.

So I think a good way to prop up banks is to ban marketing by banks (also lobbying of course).

Just to make my proposal clear. I do not propose banning marketing only by troubled banks which have received public money. I think it would be a bad thing if banks with strong balance sheets were allowed to market and banks with weak balance sheets were not allowed to market. I propose a (temporary) regulation which applies to all banks. Oh except maybe for the temporary part.
Jack Cafferty on Grammar.

I'm in a glass house and I want to throw a stone. Cafferty writes

" Where to start?

Bobby Jindal: "I'm certainly not nearly as good of a speaker as Obama." Good OF a speaker? How about not as good at eighth-grade grammar either. It's embarrassing.

Sarah Palin? Billing the taxpayers for her kids to travel to official events the children weren't even invited to?"

He didn't ask "how to end a sentence ?" but am I the only person who is amused by someone criticizing someone else's grammar then ending a sentence with a preposition ?

I have nothing against ending sentences with prepositions, but I think it is silly to grammar check politicians who use non standard grammar to convince us that they are regular folks, just like we are (that is just as us).
Clive Crook Says Obama is French

He alleges that American liberals, like me, should be pleased.

Where has France gone too far, in the view of an American liberal?... Presumably, liberals approve of the universal health care, the generous and extensive welfare state, the comprehensive worker protections, the stricter regulation, the vastly more-generous subsidies for higher education, the stronger unions, the higher taxes, and especially the higher taxes on the rich

Henry Farrel sums it up perfectly "arguing that American individualism is likely to wilt if exposed to nasty foreign influences smacks more of a kind of capitalist-road José Bové-ism than any serious kind of intellectual analysis." But I wrote a long screed before reading his post.

Crook claims I like "the higher taxes, and especially the higher taxes on the rich" in France (and Italy where I pay them) and that this has something to do with Obama.

Obama is proposing higher taxes on the rich and lower taxes on everyone else. Now my enthusiasm might not be share by all US liberals, but I think we all support low taxes on the lower middle class and working poor (not low in absolute value as we like negative taxes).

Crook is doing the usual trick of the depraved class warrior (on the side that's actually fighting the class war -- the allies of the rich) of asserting the question must be taxes high or low, not taxes progressive or regressive.

Now Crook (like many liberals) might argue that if you support increased spending, then you must support higher taxes on the non-rich, so the tax cuts for all but the rich are a feint a trick. None of them present calculations supporting their claims. Also all divide the US into the rich and everyone else and suggest that if you increase taxes on the rich and the upper middle class (whose material wealth is rich beyond any dream avarice had a few hundred years ago) you must increase taxes on the working poor and the lower middle class.

Spreadsheets at dawn. I am prepared to be convinced that the richest 10% don't have enoughoincome that taxing them (us? I don't know or care) will cover anything Obama has in mind with (small) tax cuts for everyone else (and I'll let Crook assume that he has lots of secret spending in mind). I am also prepared to believe that some people at about the 90th percentile will go Galt.

My honest view is that taxes on the working poor and lower lower middle class choke off employment growth and that this, and nothing else, is the cause of poor employment growth here in Italy.

The change in GINI (inequality) pre-tax to post tax is similar in the USA and in other industrialized democracies. They have higher taxes, but do *not* have especially higher taxes on the rich (or does Crook have other numbers ?). Yes higher taxes not especially on the rich imply more social welfare spending and much more equalization due to taxes *and* transfers, but the claims that Obama wants higher taxes and only especially on the rich and that France has higher taxes especially on the rich are absolutely without any basis in reality and demonstrate ignorance or dishonesty.

So my mind goes back to an actually good essay "The coming end of US economic American Triumphalism" by Brad DeLong (OK so it didn't bring the exact title to mind). Despite the title it was triumphalistic. DeLong claimed that the US had discovered 3 wonderful things. One was the internet (called standards and identified with the anti trust case against ATT), I forget another and the third was the Earned Income Tax Credit.

Does Clive Crook know what that is ? Does he think it is a coincidence that the US has the EITC and a high employment to population ratio ? Does he think the increase in the EITC the last time the US went European and imposed "higher taxes especially only on the rich" was followed by a downward shift of the Phillips curve and extraordinarily rapid growth of employment, because of another strange coincidence. Does France have a policy like the EITC ? Finally, can Crook reconcile his critique of Obama with the making work pay tax cut which, you know, is law ?

I'd say that Crook decided that someone had to criticize Obama, since the Republicans certainly aren't up to it. He had no ammunition, so he appeals to arguments which can't be refuted by evidence (claims about culture), the assertion that someone who has cut taxes for 95% of families (and proposes to make them permanent) will increase those taxes for oh about all 95%, pretends that taxes for the rich and non rich must move up and down together, identifies the 90th percentile with the 20th under the name "middle class",and appeals to nationalism and xenophobia.

Clive Crook is very smart. If this is the best case he can make against Obama, my opinion of Obama has improved, and I didn't think that was possible.

Wednesday, March 11, 2009

Esprit de Press Corps ?

Am I correct that Alec MacGillis just broke ranks ?

I this article I read

Johnson cautioned against over-confidence, saying that an article on the Wall Street Journal's front page today about the doubts that six Democratic senators have about the bill may have been "a little optimistic" -- "even though I planted a lot of that story."

Now I am not surprised that lobbyists (Randy Johnson is the National Chamber of Commerce's "point man on labor legislation") brag about planting stories, but I'm not used to reading in one newspaper that a story in another newspaper was "planted."
Testing Limits

I wonder whether the PC police have retired now that Obama is President. I'm going to find out soon after posting this.

The Briar Patch Strategy

I am fascinated by the fact that Obama might not just be the US President who signs a bill guaranteeing universal health insurance, but that he has managed to get the health insurance industry to beg him for universality.

I suspect he justed wanted to avoid the scary word "mandate" promise voter/consumers only new options and nice things and a chance to free ride and stake out a position slightly to the right of John Edwards (remember him ?).

But I really really want to believe that he had it all planned. That in arguing against the mandate he is saying "Please please don't throw me in the briar patch."

OK so now we see if uncle Remus tar baby stories are PC now. Since I have about 3 readers I might have to wait a while until the PC police person shows up (and you know I have someone particular in mind).
Kevin Drum has a good idea, but is much to timid

The question is how can Obama pierce the bubble.

Ezra Klein proposes someone to summarize the blogosphere so he can gain from the policy expertise out there (fame is going to the kid's head).

Drum says just read some blogs (and keep those blogs secret).

Nahh to get out of the insider elite circle of pundits, talking heads, print journalists and bloggers he's got to anonymously become a Kos diarist, a freeper, a member of Democracy underground and, just for balance a member of the The People’s Revolutionary Council for Centrism 4 Connecticut for Lieberman.*

So the real question is, what nickname should he choose ?

To me the high point of the Obama Presidency and the only rival for high point of human history with the time Vaclav Havel declared Frank Zappa ambassador plenipotentiary to the US government was the "mutts like me." joke, so I favor mutt712098 (whatever it takes to be a unique nickname).

OK so I'm not serious, I think the high point of Republican rule in my lifetime was "read my hips"

* This passage was missing from the post as noted by a commenter. I swear the site was hacked by our arch enemies, the dread Connecticut Centrist Revolutionary Council for for Lieberman.

update: Total incoherence due to cutting and pasting reduced thanks to Vance Maverick in comments.
OK It's Hopeless.

Capitalism can't be saved from investor idiocy

Wall Street rallied on Tuesday with the kind of gusto that can only come from the starving.

Citigroup (nyse: C - news - people ) Chief Executive Vikram Pandit released a memo on Tuesday saying that the bank had been profitable in the first two months of 2009, and that was confident about its capital strength. (See "Pandit Paints Rosy Picture.”)

Investors still believe in corporate profit statements.

Pandit is a pundit (I think that pandit is the correct spelling anyway).

Geithner said he was doing a good job and so investors were convinced.

To be Frank, the fact that Barney can move stock prices almost reconciles me to investor insanity.

If the US economy survives, we will owe it to Atlantic City and the Mohegans (reports of whose tragic end were greatly exaggerated and also their name was misspelled) who are offering these maniacs a way to gamble without destroying the economy.

p.s. I don't think this post is of general interest or worthy of a large audience, but, since I am angry that the stock market shot up, I will cross post at
It's a Dirty Rotten Job, but Someone Has to Do it II.

Atrios knows what the USA could use right now.

You know what we could use right now? Another lovely little war. Anyone know who the current Hitler of the week is?

Oh so the US economy needs a new Hitler so like WWII ended the depression ...

OK I Robert Waldmann declare myself supreme dictator of the universe.

I am a radical Manskist.

Our slogan is "maximize the score" (we are sometimes confused with obnoxious pro football coaches)

My aim is to enslave the USA and force you all to conduce serious social science based on credible identifying assumptions and without any reliance on economic theory.

If you love truth, freedom and distributional assumptions, you have no choice but to spend huge amounts of money to fight me.

I'm virtually in your census block collecting your data.

Bwa ha ha ha.

Tuesday, March 10, 2009

Rule of Law Re-established in the USA (for now).

Faced with the severity of the constitutional crisis caused by George W. Bush, as a temporary emergency measure, Barack Obama has decided to suspend the normal US legislative process under which laws are written by the President and the Office of Legal Council. Instead he has a radical proposal to have congress write the laws.

“To ensure that all signing statements previously issue are followed only when consistent with these principles, executive branch departments and agencies are directed to seek the advice of the Attorney General before relying on signing statements issued prior to the date of this memorandum as the basis for disregarding, or otherwise refusing to comply with, and provision of a statute,” he wrote.

What a radical ? He is, as David Brooks argued, a Jacobin with no respect for the established order. He offered no arguments in support of his radical legislation by congress proposal.

However, constitutional scholars note that this is a temporary measure and that President Obama more or less promised that there will be new signing statements ending the dread revolutionary period of lawfulness (importantly he didn't mention the possibility of *gasp* vetoing legislation which he considers unconstitutional).
No One Could Have Predicted

Matthew Yglesias reports that Ezra Klein reports that key Republican senators claim to be willing to compromise on health care reform. They demand that the bill not be forced through via budget reconciliation (they know no filibuster and they are irrelevant). On substance they have one line in the sand “Forcing free market plans to compete with these government-run programs would create an unlevel playing field and inevitably doom true competition,” that is, they suggest a deal.

No medicare for all public option and they will hold their nose and accept universal health insurance.

Why didn't anyone think of using the public option as a bargaining chip ? Let's google
"public insurance option" "bargaining chip"

I'm not dumping on Yglesias. I'm sure he would have made the list if I had googled slightly different strings.

The weird thing is that it is all going according to script. The health insurance companies are begging for a mandate. Did Obama realize that universality was good for the insurance companies so he could make them pay for it ? The public option would bankrupt them. Klein reports what he and many others predicted, that it would be abandoned as a bargaining concession.

I love Obama, but the political skill of the Obama team almost scares me. They are geniuses or they are very very lucky.

One quibble. Yglesias quotes without comment a false claim from Regina Herzlinger from the Manhattan Institute "Switzerland, which enables universal coverage without any governmental insurance through this system, benefits from costs 40 percent lower than the U.S. and, unlike the single-payer systems in the U.K. or Canada, excellent results for the sick." If you look at health outcomes, the U.K. and Canada have excellent results for the sick too. Yglesias is reporting on the weakness of conservative opposition to universal care, but I don't think a false claim about single payer systems should be allowed to become a consensus, because conservatives keep repeating it and non-conservatives are tired of pointing to the same evidence again and again.
More Comments on Gender

In contrast to Hilzoy, Kevin Drum is wondering why quants in finance all seem to be ex physicists not ex mathematicians.

3 theories

Overbye suggests a couple of possibilities. #1 is the glut theory: "Physicists began to follow the jobs from academia to Wall Street in the late 1970s, when the post-Sputnik boom in science spending had tapered off and the college teaching ranks had been filled with graduates from the 1960s. The result, as Dr. Derman said, was a pipeline with no jobs at the end."

#2 is the affinity theory: "The Black-Scholes equation resembles the kinds of differential equations physicists use to represent heat diffusion and other random processes in nature. Except, instead of molecules or atoms bouncing around randomly, it is the price of the underlying stock."

Those both sound plausible, if incomplete, so here's another thing to think about. Even among the number crunching set, physics has a reputation as the most aggressive, male dominated branch of geekdom: only 14% of physics PhDs are women, the lowest of any of the sciences. (Math is pretty male dominated too, but pales compared to physics: 29% of math PhDs are women.) If the first thing that "aggressive and male dominated" reminds you of is the
big swinging dick
world of high finance, give yourself a gold star. Call this the testosterone theory: physicists are attracted to Wall Street because they like the atmosphere.

My comment

I don't agree with Overbye's theory No. 1. Math funding has shrunk and shrunk as computer scientists ate mathematicians lunch. That's a huge glut.

I think your big swinging dick theory is closer to the truth. I have 2 ideas.

1) math has become so absolutely abstract that you can't convince even idiot wall street CEOs that it has something to do with the real world. Mathematicians have a problem, they can't explain the issues addressed decades ago, which suggested the topics studied by their advisor, which have something to do with their research. Pure math has just gone so far out there into the barely imaginable that mathematicians can't understand what mathematicians in other fields are saying.
In contrast physics is tied down to the real world so there isn't such a profusion of incomprehensible equations.

2) Given the collapse of funding, public interest, everything that afflicts pure math the best mathematicians aren't going in to pure math. This was already true when I graduated in 1982. Pure math skill brain power might be a great way to lose hundreds of billions, but it impresses people.

3) my main theory. There is a very clear hierarchy in physics with particle theory the tip of the pyramid. Basically, physicists agree that the really important problems (as in mathematical problems) are few. There is very little room at the top. So physics generates a few superstars whose work on the core issues interests and convinces the profession and many wannabees.

Evidence: Bill press (full prof. at Harvard) said, when you're in graduate school you will be interested in two topics -- particle theory and the one you will actually work on.

Physicist turned biologist (forget his name) "There aren't enough problems in physics and I'm not going to be the one to solve them."

In mathematics one can be the worlds leading expert on a micro field which no one cares bout. Math is free to go where the mind wanders, so you can wander away from your competitors without loosing face.

In physics many are called but few are chosen. Thus physics exports ultra competitive people with damaged egos.
Interesting Gender Experience

I read a beautiful post about horrible horrible events here. I had an interesting experience, because I was confused about who wrote it. One of the great things minor semi redeeming aspects of wasting so much time reading blogs is that I often get confused about who's blog I am currently reading. As noted by Jorge Louis Borges (of course)
the same text has different meanings depending on who wrote it (you know context and all that).

I'm kind of slow, so I haven't fully grasped the fact that the Political Animal(s) aren't Kevin Drum any more (my hippocampus knows but I was reading on automatic pilot). This means I read the post assuming it was written by a man -- Kevin Drum.

Now I have a very high opinion of Drum, but I was struck by the compassion, sensitivity, and humility of the post, the immediate sympathy for the parent as well as the deceased child, the readiness to face the possibility that the author might do such a thing (there but for the grace of my child crying go I).

I was particularly struck by the immediate concern about the spouses of such parents and the realization (yes it's true) that this is a very different horror than the horror of being the forgetful parent. Odd, I thought that he is so deeply married that he automatically thinks "spouse" even when in the furthest hypothetical speculation imaginable.

Then I got to the end of the post and read "hilzoy." I felt sharp disappointment. Oh yeah nothing special here, the post wasn't written by an amazingly sensitive, compassionate humble (oh and wise) man. It was written by a woman. Nothing remarkable.

Now I don't consider myself a monstrously sexist, self hating male, or rather I didn't, but you got to admit that I have issues.

p.s. 12 out of 229 of the words in my comment on sensitivity compassion and humility are the word "I."

update: Mark Kleiman also wrote a brilliant post on babies left in cars dying from the heat. In it's own way it is as excellent as Hilzoy's post, but it is very very different. It is much briefer. It cuts straight to the policy proposal. Kleiman sees a problem and thinks of how to solve it -- and save babies lives and save their parents from horrible suffering. I'm sure he has as much compassion as Hilzoy, but he doesn't show it.

Kleiman links to Yglesias. Also excellent. Yglesias goes to the facts (a summary of the event and a photo). I get the spouse bit. The parent in question is a man. He is on trial for negligent manslaughter. Yglesias asks if putting such people on trial is an efficient utility maximizing policy. He is compasionate too, but, very much like Kleiman has an engineers approach. A policy question a problem to be solved. He is criticizing a prosecutor.

Now maybe I've only learned about Hilzoy, Kleiman, and Yglesias, but I don't think so.

two final thoughts.

I remember before the blogosphere when I couldn't read brilliant wonderful expressions of sympathy for all those who suffer, but made do with the sophomiric crap published by The Economist and The New Republic. I like the blogosphere.

2) I hate hate hate cell phones. I quote from Gene Weingarten's article "beset by problems at work, making call after call on his cellphone. "

I agree with Kleiman and Hilzoy that the solution is the $40 baby in car seat with ignition off lullaby alarm, but I really wish cars had a feature which made it impossible for the driver to speak on a cell phone.

Hmm a problem. A jammer in the stearing wheel ? No they don't work so great without jammers. I think the cell phone needs to cooperate. Two or three signals in the car makes it possible for the cell phone to figure out it is within reach of the driver and it refuses to work. It can be done. The cost sure wouldn't be $40 per system. The regulation is politically impossible

Monday, March 09, 2009

My Morning at the Questura

I was summoned today the questura (police station) to have my finger prints taken so I can get a new "permesso di soggiorno" (Italian green card). Lo Stato Italiano is getting modern and efficient so I was summoned via an SMS.

Now this is all very embarrassing, because I need a new permesso because I lost the old one. I applied for a new one less than 2 years ago.

I tried to do the fingerprints earlier and was told to come back on the date I was summoned.

Now the really funny part. Thursday I was convinced it was the 9th of March and I went there. They said they don't do fingerprints on Thursday. I assume none of my readers have had the experience of being sure on the 5th that the date is the 9th.

So anyway today I go on the right day. I wait a long time. I notice many nice things about the questura. First there is the same office for Permessi di Soggiorno and Italian passports so actual Italian citizens have to wait in line along with us foreigners. Second they are very non racist with a photo of a police woman hugging to black children and a photo of Toto (famous Italian comedian who starred in hundreds of films) being arrested by a black police officer.

So I'm about to get my fingerprints taken with a new cool computerized machine (like the one they use for foreigners entering the USA even tourists). They ask me to wait for a young women who is actually picking up her actual permesso.

But her prints don't match. She says "That's my mother's permesso." Oooops. Now the automatic response we Italian public sector workers have for such situations is something along the line of "I can't do anything for you. You will have to come back later." The optimal response is to stand there and look sad. Needless to say the woman's permesso was filed alphabetically next to her mothers. She left the office with a shiny new permesso di soggiorno. The new ones are smart cards not pieces of paper with a photograph stapled on (I wish I were kidding).

So my big moment. The person helping me typed my name correctly (ending with double n. Robert Waldman has had the right to live in Italy). Then her face falls. She says "you're married to an Italian." Well yes I am. Following instructions on the wall I noted that fact to a colleague of hers about an hour earlier.

Oh no, I have to go to another office.

Now my cell phone definitely specifically told me to go to that office.

Now I run into an Italian public sector computer system. With Italian civil servants everything is against some rule. However, if you stand there and look sad, they bend the rules.

This approach does not work with computers.

So I thanked the police person and left the questura.

I discovered oddly, that I was ecstatically happy. I mean it was a nice sunny day and this time, it wasn't my fault. Everyone had been very kind and polite.

So why was I so happy ? Well I have long given up on finding an actual human being as incompetent as I am, but, at least, I have found an organization as incompetent as I am.