Saturday, March 28, 2009

Moral Equivalence

There are two articles, side-by-side in the New York Times, which show how low the U.S. has sunk.  The first is entitled "Spanish Court Weighs Inquiry on Torture for 6 Bush-Era Officials."  The second's headlined "European Court Seems to Rankle Kremlin."  

In one the Europeans are judging the Americans, in the other, the Russians.  That is a "moral equivalence" (between Russia and America) that does not speak well of America.

Sunday, December 28, 2008

A Keynesian Moment

There is some talk that this is a "Keynesian moment" - meaning that it is a time where Keynesian theory should be implemented.  I think it is such a moment, but in a different sense - when the status quo theory and a generation of economists are discredited.  As pre-Keynesian economics was considered to be invalidated by the Great Depression, so current economics, the kind that praises unlimited free trade, free markets, and globalisation, will be rejected.

Economists aren't making things any better for themselves.   Brad Delong proposes to "drive a recovery" by giving everyone 500 000 dollars to buy a house.  A truly silly idea, no?  You would think he would get whacked from all sides. But no - we have another economist Paul Krugman linking to the post and applauding it.

Why oh why can't we have better economists?

Friday, December 19, 2008

The Fed - Why it will Fail, How it will Fail

Via Naked Capitalism, we learn that the Fed will now lend to hedge funds:

The Fed said on Friday it would offer low-cost three-year funding to any US company investing in securitised consumer loans under the Term Asset-backed Securities Loan Facility (TALF). This includes hedge funds, which have never been able to borrow from the US central bank before, although the Fed may not permit hedge funds to use offshore vehicles to conduct the transactions.

I have nothing against hedge funds per se, but this is sure to raise flags for members of Congress, as well as the public, especially after the Madoff fraud. Why then is the Fed so keen on doing it? Because it is now in exactly the same situation with credit-card debt, as it was with housing debt a year ago. It failed with housing debt, and it will fail with credit-card debt. The latter has reached unsustainable levels, it can't go on. But the Fed refuses to accept this fact, because it needs and wants to keep the American consumer spending. The Fed simply doesn't understand what "unsustainable" means and hopes that by mere force of will (Bernanke's "We will not stand down") it can keep the waves from crashing or force the horse to drink. While Krugman has compared Wall Street to a Madoff-like Ponzi Scheme, the real Ponzi Scheme is now being run by the Fed.

So how will it end? By a classic rush-to-the-exits, in a crowded theater where someone has yelled "fire". The Fed is putting lots of illiquid assets on its balance sheet, which it won't easily be able to get rid of, should the original owners default. It is effectively borrowing short - massively - and lending long - massively. This works until it doesn't. It works, as long as there is confidence that it work. There is confidence that it will work, so long as the participants think everyone else has confidence that it will work. It stops working when enough people decide they don't want to lend short any more. The confidence evaporates, the Ponzi scheme gets blown, and the exits are swamped.

Thursday, December 18, 2008

There Is Justice

In an idea straight from late-night comedy, Bloomberg reports that Credit Suisse is planning to pay some of its bonuses in toxic waste:

The bank will use leveraged loans and commercial mortgage- backed debt, some of the securities blamed for generating the worst financial crisis since the Great Depression, to fund executive compensation packages, people familiar with the matter said. The new policy applies only to managing directors and directors, the two most senior ranks at the Zurich-based company, according to a memo sent to employees today.

Well, bravo to the one at Credit Suisse who thought of this one. I just hope that, when used as a bonus, the waste is valued at the level Credit Suisse is carrying it on its books - no discounts permitted (although, of course, this can just be finagled by giving out more toxic waste).

Wednesday, December 17, 2008

The Logic Isn't There

Free exchange (via Economist's View) writes, in an entry called "The science isn't there:"

First of all, I know that we all consider economics a science, but as sub-fields go, macroeconomics is one of the least science-y. Among the reasons—too many variables, too small samples, no repeatable experiments, and so on. ...

Which is why it's important to have a good, qualitative model of the mechanisms involved to supplement the data analysis.

If I had been eating Corn Flakes, they would have been coming up my nose. Fortunately, not. So, after admitting there's no there for macroeconomics considered as a science, Free Exchange still thinks it's important to have a model. I don't think so. Models should help to make useful predictions; so models are relevant only in subjects which are scientific. Otherwise, they are simply a special type of crossword puzzle - perhaps useful for reflection, but irrelevant to the real world. Sure, economists like them, because they constitute a sort of private language which take time to learn and evaluate, and create a barrier-to-entry to non-economists. And so in a tawdry sense of "useful" - in the sense of keeping the riff-raff out - models may be useful in a non-scientific subject. But they don't improve our knowledge of the real world - because a subject which is not a science cannot.

Tuesday, December 16, 2008

The Rush to Stimulus

There was a rush to war five years ago. A crisis was created, an urgency was declared, action came before thought , and - the Americans messed it up completely.

The Americans are at it again. They are trying to badger foreign governments into stimulating their economy through massive deficit spending because - well, because they can't think of anything else to do, and they imagine that it is better to keep pedaling and risk hitting a wall than fall off straightaway. It's part of the short-term philosophy of life that has sent Americans to the mall and living off their credit cards. The threat of government default doesn't worry them, not because it shouldn't, but because it seems to far-off in the future, and one more trip to the casino beforehand, after all, might save them.

When the Iraq War was being discussed, there was much talk of American "hard power" versus European "soft power." I was always a bit skeptical about this as a distinction, because the Americans are just as expert at soft power as the Europeans, if they only put their mind to it. Case in point, would be the determined Anglo-Saxon media campaign against the Germans, who are resisting going off the deep end and spending money for the sake of stimulus. This is from a Bloomberg article entitled Merkel’s Popularity Sinks on Handling of Crisis, Poll Shows":

Chancellor Angela Merkel’s popularity slumped last week amid criticism that the leader of Europe’s biggest economy is doing too little to stem the country’s slide into recession, a poll showed.

Asked whom they would vote for if the chancellor could be elected directly, 47 percent named Christian Democrat Merkel, compared with 51 percent a week ago, according to a Forsa poll for Stern magazine and RTL television.

That’s still 22 percentage points ahead of Social Democrat Vice Chancellor Frank-Walter Steinmeier, who garnered 25 percent support, 2 percentage points more than a week earlier, Stern said in an e-mailed statement.

Merkel’s declining popularity may reflect criticism that the chancellor is lacking determination to fight the economic downturn. Nobel Prize-winning economist Paul Krugman told Spiegel magazine that Merkel is “misjudging the severity” of the crisis and “wasting precious time.”

Merkel’s declining support may be rubbing off on her party. The Christian Democrats fell 1 percentage point to 37 percent and the pro-business Free Democratic Party, her preferred ally, rose 1 point to 13 percent.

The combined total of 50 percent, maintained for a third week, would still allow the CDU and FDP to form a coalition government if replicated in national elections in September 2009.

So Merkel lost 4 percentages in a week, her party lost 1 point, and her coalition stayed steady - and Bloomberg ties it to her resistance to a stimulus package because at the same time, Herr Krugman told Spiegel he wasn't happy with her. On the contrary, I would say that Merkel understands much better than Krugman the severity of the crisis, and how important it is to keep some money in the till to help people when they need it, two or three years down the road, rather than frittering it away in a go-for-broke strategy based on a failed economic ideology.

What, may I ask, is Krugman's exit strategy?

Saturday, December 13, 2008

Is Deflation Inevitable?

London Banker (via Naked Capitalism) writes: "The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly hard to finance and ultimately contract."

Surely the U.S. can do what Zimbabwe is doing - and Zimbabwe is not encouraging domestic and foreign creditors and investors? So deflation is not inevitable; it depends on choices that the U.S. government and federal reserve make, from hereon in. Maybe we'll get deflation; maybe we'll get deflation then inflation; maybe we'll get inflation then deflation. But I don't think any is inevitable, at least not yet.