How Different Are We Really?

Simon Jonson prognosticates about Europe's future, but has some cautionary words for the US as well.

Our leading bankers looted the state, plunged the world into deep recession and cost the United States eight million jobs. Now many of them stand by with sharpened knives and enhanced bonuses – willing to suggest how the salaries and jobs of others can be further cut. Consider the morality of that.

Will no one think hard about what this means for our budget and our political system until it is too late?

Despite the life preserver thrown by the Obama administration, which saved their institutions and bonuses, the bankers continue to whine about the rough treatment they are receiving from the government. These suposed depredations consist mainly of watered down attempts to reduce their penchant for risk that ultimately gets passed on to the rest of us.

On the Bankruptcy of Conservative Economic Theory

Matt Yglesias posts on the change in the structure of employment during Obama's first two years. You've got to be careful what you ask for. Public servants are also consumers.

Roger Goodell is a Moron (Adult Content)

Anyone besides me see an inconsistency in the way the league treated Roethlisberger and the way they have treated Favre? According to the league's statement the Favre investigation was on whether Favre violated workplace conduct policy, not to "make judgments about the appropriateness of personal relationships."

Commissioner Roger Goodell said he "could not conclude" that Favre violated the league's personal conduct policy based on the evidence currently available to him. Sounds like a replay official. Apparently the photos were inconclusive.

I'm reminded of the scene from that award winning movie Porky's where the female gym teacher insists on a line up of the private parts of the high school boys so she can identify the malefactor. For those of you who missed this great scene, here it is.

New Music On the Left

In line with transportation difficulties in the NE.

A Fitting Epitaph for John McCain

How can people become so bitter? Was McCain's original support of the Dream Act just an act, intending to make him seem compassionate enough to be President of all the people? Joe Klein's comments on McCain's about face.

Why US Financial Regulation Failed--and Will Continue to Fail

As long as we have an Office of the Comptroller of the Currency that kowtows to banks and a toothless Securities and Exchange Commission that couldn't find a violation if it was in bed with it (wait a minute--the SEC is in bed with the violators!) financial regulation is doomed to failure. Here's a decent summary of where we find ourselves now. With the Republicans assuming power in the House and people like Spencer Bacchus acknowledging how beholden Republicans are to the banks, reform has little chance of succeeding.

More Economic Theorists Should Be Economic Historians

For all those who still can't get by a crude application of the Quantity Theory of Money. Paul Krugman on the relevance of Weimar Germany. Keynes altered his thinking from the Treatise on Money to the General Theory, despite living through the 1920s. Folks, the liquidity trap is real.

Republican Party Leadership and the Will of the People

I would never argue that a country's elected representatives should slavishly follow the polls in making policy. Sometimes the people don't know what's best for them--they don't have complete information or they have been mislead by demagogues. On the other hand when you campaign as the Republican Party did on the promise to follow the "will of the people" and then blithely ignore it for partisan gain or to reward campaign contributors, you expose yourself as the [lying scum] [scurrilous dogs] [scum sucking pigs] (I'm having trouble finding an appropriately pejorative description here) you are. The Associated Press has called out the Republican leadership for their actions during the lame duck session following the election where they promised a new political world where the people's expressed desires would determine policy.

New Music

A trip outside Texas on the left.

Why Goldman Sachs Should Die

A follow-up to the last post. An example of a totally nonproductive use of financial resources that caused a transfer of wealth from one greedy party to another. I think GS is culpable. Judge for yourself. If nothing else, it makes one wonder why the Republicans are so against making these transactions more transparent. The main issue for them seems to be that it will restrict profits--but is that a bad thing? In the article below, I've added some emphasis to bring out some key issues in these sorts of transactions.

December 22: Reputational Risk - Goldman Sachs and Abacus 2007-AC1, a Look Beyond the Numbers

Location: New York
Author: Knowledge@Wharton
Date: Wednesday, December 22, 2010

Goldman Sachs is the Wall Street mega-firm that people either love or hate -- or love to hate. Its money-making prowess leaves many impressed, envious or suspicious. To admirers, the revolving door between its executive suite and high government office shows commitment to public service. Detractors call it undue influence.

Now the firm's reputation is on the line, as it fights a fraud suit brought by the U.S. Securities and Exchange Commission (SEC) over a single deal in 2007, the sale of a complex "synthetic collateralized debt obligation" called Abacus 2007-AC1. The deal lost investors $1 billion but produced $1 billion in profits for Goldman's collaborator, Oregon-based Paulson & Company, a hedge fund betting the housing bubble would collapse. While Goldman says it did nothing illegal or unethical, the SEC says the firm withheld "material information" from the investors -- specifically, the hedge fund's role in selecting underlying securities.

The case raises important questions:

Could Goldman's customers really have evaluated the Abacus risks for themselves, as Goldman claims?
Do derivatives like synthetic collateralized debt obligations, or CDOs, serve any useful purpose?
Does Goldman's defense -- that it had no obligation to alert investors to especially high risks -- undermine its claim to be a "client-centered" firm worthy of customers' trust?

"If you view your clients as adversaries, you're likely to have many fewer of them," says Wharton finance professor Richard J. Herring, describing Goldman's dilemma as it tries to be a trusted advisor while also investing for its own benefit. Adds finance professor Franklin Allen: "It looks very much like [Goldman] exploited the clients on the other side of the deal from Paulson. The problem is that the people who bought the securities at IKB Bank are not as sophisticated investors as hedge funds or as seasoned banks like Morgan Stanley or Deutsche Bank. It would have been helpful to them to know that Paulson had been involved in the design of the securities. That goes to the heart of the SEC's case." [Editor's note: While it is true that the SEC has charged Goldman with wrongdoing, the charges have yet to be proved in court.]

While Goldman maintains that its Abacus investors had all the information needed to evaluate risks for themselves, Herring says synthetic CDOs are very opaque. "They are so complicated that, in practice, it's virtually impossible with publicly available information to dig down to the underlying securities -- mortgages, credit card loans, etc. -- that need to be valued.... My impression is that, other than hedge funds -- and perhaps Goldman Sachs -- virtually no other players took the trouble to do it. They merely traded based on the credit rating bestowed by the credit rating agency."

Goldman insists it did nothing wrong in the Abacus trade. In a statement issued on April 16, after the SEC filed its case, the company said: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation." Since then, the controversy has broadened with the release by the Senate Permanent Subcommittee on Investigations of boxes of Goldman emails and documents related to other transactions. In daylong hearings on April 27, some senators said the papers show Goldman made a practice of deliberately luring customers into money-losing deals, while Goldman secretly bet against them. The Goldman case has spurred Democrats' efforts to rein in trading of complex derivatives that contributed to the financial crisis.

"The evidence shows that Goldman repeatedly put its own interests and profits ahead of the interests of its clients," Sen. Carl Levin, D-Michigan, said at a press briefing on April 26.

In a statement opening his testimony before the investigations subcommittee on April 27, Goldman chairman and CEO Lloyd C. Blankfein said: "While we strongly disagree with the SEC's complaint, I also recognize how such a complicated transaction may look to many people.... We have to do a better job of striking the balance between what an informed client believes is important to his or her investing goals and what the public believes is overly complex and risky."

The SEC charges that Goldman illegally withheld material information when it did not tell the Abacus buyers that mortgage bonds underlying the CDO had been selected with the help of Paulson & Company, one of the world's largest hedge funds. Paulson wanted to bet that the housing and mortgage markets would collapse. To do that, Paulson needed a CDO based on mortgage bonds likely to fall in value when homeowners stopped making their payments. Paulson was not included in the SEC complaint and has not been accused of any wrongdoing.

A synthetic CDO transaction requires two parties taking opposite views. The "long" party profits if the underlying securities rise in value; the "short" party profits if they fall. Each side places a bet and, in effect, the loser's losses become the winner's gains.

In the Abacus deal, completed in April 2007, Paulson took the short side and two major investors took the long side: IKB, a large German bank, and ACA Capital Management, a New York-based investment firm. Paulson worked with ACA to choose the 90 underlying mortgage-backed securities. But there is dispute about Paulson's exact role. The SEC claims Goldman led ACA to believe that Paulson was taking the long side -- that he would bet the securities would rise in value -- when Paulson was actually taking the opposite view. This, according to the SEC, led ACA to believe Paulson thought the securities were safer than they were, and that its interests and Paulson's were the same. Goldman, however, says it "never represented to ACA that Paulson was going to be a long investor."

IKB, the German bank, did not know Paulson's role, according to the SEC, which states that this role was material information that would have alerted IKB to the high risks.

In an April 16 statement, Goldman argued that the long investors had no need to know of Paulson's role, or that Paulson was taking the short side of the deal. IKB and ACA "were provided extensive information about the underlying mortgage securities," Goldman said. "The risk associated with the securities was known to these investors, who were among the most sophisticated mortgage investors in the world. These investors also understood that a synthetic CDO transaction necessarily included both a long and short side." Among the key questions is whether investors, even if very sophisticated, could accurately assess the portfolio's risks on their own.

RMBS, CDS, CDOs

The case involves four types of securities that played roles in the financial crisis.

The first are residential mortgage-backed securities, or RMBS. These are pools of mortgages converted into bonds that are sold to investors, who then receive income from homeowners' monthly mortgage payments. Typically, the bonds come in a variety of grades, or tranches. Owners of the safest have first rights to the income from the pool. Owners of the riskiest are last in line, making them the first to suffer losses if homeowners fail to make payments. As compensation, they earn a higher interest rate -- and they get a bigger share of the income if homeowners do pay their mortgages.

Next are credit-default swaps (CDS), a kind of insurance policy that pays off if a debtor fails to make its payments. An investor, for example, could buy a CDS that would pay off if a company fails to make interest or principal payments on its bonds. The CDS becomes more valuable as this default risk rises or if the bond's rating is lowered, since that improves chances of a payoff. The speculator buying a CDS does not have to own the debt security being insured.

Third is the collateralized debt obligation. While there are many types, they are pools created from other securities with shares that are then sold to investors. Many CDOs, for example, were created by assembling portfolios of risky, low-rated tranches of mortgage-backed securities. The CDO is then tranched as well, just as the mortgage securities are.

Finally, there are synthetic CDOs. These are much like ordinary CDOs except that instead of owning real securities, investors own credit-default swaps on real securities. In Goldman's Abacus deal, the CDOs owned credit-default swaps that would rise or fall depending on the fortunes of a specific list of residential mortgage-backed securities, mainly on subprime loans to homeowners who are considered risky.

Evaluating the risk and potential rewards of a synthetic CDO is essentially the same as evaluating an ordinary CDO, because both depend on the quality of the underlying mortgage-backed securities, says William Frey, president of Greenwich Financial Services, a Connecticut firm that specializes in mortgage securities but does not invest in CDOs. Can an investor evaluate a CDO by studying the underlying mortgage securities? "Theoretically, yes," says Frey. But, he adds, "It's theoretically possible to check the engineering designs of the George Washington Bridge before you drive over it."

Evaluating the CDO would require studying each mortgage security in it, altogether comprising many thousands of mortgages -- perhaps hundreds of thousands of them, Frey says. A thorough evaluation would require studying the loan-to-value ratios of the mortgages, the geographical locations of the homes, unemployment rates, local default and foreclosure rates, and other factors determining how many homeowners were likely to default.

"For all practical purposes, unless you have the most sophisticated software on the market, which few investors have, you rely on the ratings agencies," Frey says, adding that a CDO investor would primarily rely on the ratings given to the mortgage securities reflected in the CDO.

The ratings agencies themselves have been criticized for giving good ratings to securities that later collapsed in value, as those in the Abacus deal did. Critics say the problem was that the agencies' fees were paid by the firms that issue the securities, as they still are, and that the raters' computer models used past patterns that did not reflect conditions in this decade.

To further complicate any analysis, two securities with identical ratings may treat their owners very differently, says Wharton finance professor Marshall E. Blume. "Ratings are a uni-dimensional measure of risk, but risk actually takes on many forms. For example, you could have two bonds with the same probability of default, which the ratings service might give the same rating to. But one bond, if it defaults, might lose a lot more than the other bond. Therefore the ratings themselves don't convey all the information about risk."

In the build-up to the financial crisis, many AAA-rated CDOs offered higher yields than other types of AAA-rated securities, suggesting the marketplace understood the CDOs were riskier despite the identical ratings, according to Blume.

In many CDO deals, the parties involved have unequal access to information, adds Kent Smetters, professor of insurance and risk management at Wharton. "The problem is that the quality of the securities held within a CDO is better known to a seller than a buyer. As a result, riskier mortgages were often put into CDOs by banks, whereas mortgages that were not sold off by the bank generally performed better. This problem is known as adverse selection."

Because assessing such risks is so difficult, CDO buyers seek any information that could affect what they are willing to pay to take on the risk, Smetters notes. "As a sophisticated investor in a CDO, I would want to know if it contained an unusual amount of junk -- that is, assets that are likely to default. That information would determine how much I would be willing to pay for the pool of assets, even if I had a high tolerance for risk-taking. It is difficult for me as a buyer to see the underwriting of the securities. Instead, the seller should disclose information that I, as a reasonably prudent investor, would want to know in making the determination of price." The law, he adds, "puts the burden on the sellers to disclose material information."

Because assessing CDOs composed of hard-to-evaluate mortgage securities is an inexact science, a prudent investor would want to know the views of anyone, such as Paulson, involved in selecting the underlying securities, says Herring. "I would certainly have been interested to know that one of the most successful hedge fund managers in history was helping to select assets for a portfolio that he intended to short. If I had been a customer, I would certainly have felt deceived and abused, even though Goldman Sachs may have been within the letter of the law. It's simply not the sort of business that a firm that wants to be known for its integrity should take on."

In its statements and Senate testimony, Goldman's view is that its customers are sophisticated investors who assess risks for themselves. At the hearing, Goldman CEO Blankfein repeatedly described customers as coming to Goldman seeking an opportunity to take on a particular type of risk, with Goldman merely complying. Several senators, however, argued that Goldman was often the initiator, using its sales force to encourage investors to buy securities Goldman no longer wanted to own. In many cases, committee chairman Levin said, Goldman encouraged customers to buy securities without telling them that Goldman was betting against the same securities by taking a short position. Blankfein said that as a market maker, Goldman has no obligation to reveal to customers its own view on the quality of any security it sells.

This view could damage Goldman's franchise, Herring says. "Goldman Sachs has made its reputation as a trusted advisor and superb investment manager. Many people would buy a Goldman Sachs mutual fund simply because they are thought to be among the best investors in the business. If [Goldman] really wants to play the caveat emptor game, however, they are giving up a valuable reputation that was hard won over decades." According to Allen, "they have this reputation of dealing on both sides and exploiting information.... I think it will hurt them.... Along the way I think we will see a lot of messy revelations. I don't think Goldman will come out of it very well."

Nonetheless, says Blume, the SEC's case is not a slam dunk. The SEC was split 3-2 on whether to file the Goldman case, and usually does not proceed unless the view is unanimous. It is often hard to define what constitutes material information, he notes.

Wall Street's Casino

The Goldman case comes as Congress is debating Democrats' proposals to rein in derivatives trading. Some lawmakers want to create a transparent centralized exchange, replacing the opaque over-the-counter system currently used, so that participants could more easily evaluate prices. Some also want trades to go through a central clearinghouse. With the clearing agent guaranteeing payment and delivery of securities purchased, there would be less worry about whether a counterparty would make good on its end of a deal.

Using an exchange and clearing agent could help make the derivatives market safer, Blume says. Because these systems, long used for stocks, reduce fees and spreads between prices bid and asked, they reduce profits for financial-services firms, which explains their opposition, he adds. A centralized system could encourage use of standardized products, which are safer because they are more transparent, though there would continue to be some use of customized derivatives traded outside the central system. Most users would opt for standardized products, just as consumers buy ready-to-wear clothing rather than have garments tailor-made because standardized products are cheaper to use, Blume argues.

Allen agrees that the customized market could shrink if a standardized derivatives market is established. "That may happen, yes," he says. "This is an interesting balance -- between how much you want over-the-counter markets with a lot of tailor-made securities versus just standardized execution on exchanges."

As the derivatives trading system is re-evaluated, some critics wonder whether certain derivatives serve any useful purpose or have merely turned Wall Street into a casino. Frey and the Wharton faculty members interviewed say derivatives linked to real assets such as mortgages do serve a purpose. The mortgage-backed security, for example, allows a lender to convert homeowners' future payments into immediate cash, so the lender can provide money to other home buyers.

Credit-default swaps allow companies and other market players to hedge against risks. A bond owner, for instance, can use a CDS to insure against the danger of not receiving principal and interest payments as promised. The problem, some critics say, is that the CDS buyer does not have to own the security that is being insured. That allows the swaps to be used for pure speculation, as if one took out 10 life insurance policies on a stranger, hoping to profit if the stranger dies -- a bet that would be illegal with ordinary insurance. Rampant speculation with credit-default swaps forced the $182 billion government bailout of American International Group. Collateralized debt obligations can serve a useful purpose when they repackage real securities, such as those backed by mortgages, says Smetters. In that case, they help supply money for homeowners.

But synthetic CDOs, like those in the Goldman case, do not pump money to people or companies with real needs, says Frey. Synthetic CDOs, adds Blume, are more like side bets among spectators standing around a craps table in a casino.

While the creation of ordinary CDOs is limited by the availability of underlying assets like mortgage securities, an unlimited volume of synthetic CDOs can be created because they are not tied to asset-based securities but to credit default swaps, which themselves can be created in unlimited numbers. Thus, synthetic CDOs satisfied a hunger early in the 2000s for investments with high ratings. Because the ratings were poorly done, many mortgage-related securities collapsed in value, and synthetic CDOs magnified the losses.

Says Frey: "In looking at securities ... I ask one simple question: Is there an economic reason to have this transaction? And if the answer is 'no,' what does this transaction do?" Synthetic CDOs don't pass his test, Frey says. "I don't really see any need for them. I don't see that there is a real underlying economic need for that transaction. What does that transaction really accomplish, other than to move money around? Moving money around is not an economically productive event."

Published: April 28, 2010 in Knowledge@Wharton

Income Inequality: Live with It or...

Tyler Cowen discusses how our current level of unequal incomes has happened and what it means for our economic future (the most interesting part of the discussion comes late in his article). Our problem is that we have allowed (or been helpless to prevent) a marginally productive industry (finance) to take over the economy to the point where rewards bear little relationship to the benefits provided and may, because of the periodic crashes, cost in aggregate far more than they contribute to society.

The basic problem is that the financial sector reaps the gains during flush times and the rest of us pay the bills when things turn bad. This is not a zero sum game within the financial sector. The key is what Cowen calls "going short on volatility." Wall Street habitually bets against "tail outcomes," --unlikely disasters. They can reap enormous profits and when the unlikely events occur, they hand the bill to the government. The tempting response is to say, let them fail, but the financial sector is not wholly without beneficial impact on the economy. Despite the merry-go-round of fairy dust laden collateralized debt, the financial sector does make actual loans to productive enterprises and helps to reallocate consumption and savings through time, as well as providing the bulk of the means of payment that keeps the economy moving.

Once commercial banks become embroiled in the non-productive aspects of financial activity, we are all at risk and the government has no alternative but to step in and halt the crisis. The depressing side is that because the malefactors were unpunished in any real sense, we are left with the prospect that it will happen again.

The Futility of the Quantity Theory

James Hamilton explores the relationships within the the quantity theory equation (MV=PY--the quantity of money times its velocity of circulation equals the price level times the real level of GDP). This relationship may in fact hold in the long run (we all know what Keynes said about that) but this equation, using the usual definitions of M offers no insight into the current economic situation.

Paul Kasriel (chief economist at Northern Trust) has recently proposed the level of bank credit as a substitute for M in this equation. I suppose time will tell whether this substitution will work out as a useful definition in the equation, but it does seem to offer some explanatory power in the situation in which we find ourselves at present. Of course, the principal weakness in the quantity theory remains: it does not take into account the position of the economy vis-a-vis economic capacity. When does a change in the left side of the equation affect P and when does it affect Y?

The Greening of the Military

Benjamin Friedman on initiatives by the Marines and Navy to reduce fossil fuels.

Welcome, Alice, to Wonderland

Several of my friends don't like Paul Krugman or his columns. Sometimes I wonder if what they don't like most is his penchant for deflating those people who consistently argue for failed policies or for theories of the economy that are patently wrongheaded. This column is an example of Krugman's ability to focus on the foibles of those he calls "Very Serious People." They are mainly people who are consistently wrong (and usually in positions of authority or influence) or who consistently change their opinions for political effect.

And Anyone Should Be Surprised Why?

It's a sad state of affairs when the only person in Washington with a consistent position on the issues is a madman.

Republicans v. Tea Party

Read this point by point column by Dana Milbank listing how quickly the Tea Party supported Republican candidates are repudiating the promises they ran on. So much for throwing the rascals out. The Republicans have always been the hidden proponents of pork and deficits. Tea Party Patriots were either naive or stupid to believe that the party wasn't corrupt from the inside. Touch the tar baby and be immediately absorbed. The Republicans are the evil Borg of politics.

David Leonhardt on the Health Care Law

Opposition to the Health Care Law Is Steeped in Tradition. Leonhardt shows that the new health care law is one more step in the destruction of America, including Social Security, Medicare, income tax, Brown v. Board of Education, the minimum wage and civil rights laws. The nation will topple if this trend isn't reversed soon.

Simon Johnson on Reforming the Tax Code

Mr. Johnson, author of "13 Bankers," offers a strategy for the President on the deficit and taxes.

1984 in 2010

Republicans everywhere appear intent to thoroughly rewrite the history of the financial crisis. When the whole Financial Crisis Inquiry Commission refused to eliminate the terms "Wall Street," "Shadow Banking," deregulation," and "interconnection" from the report, the Republican members broke away and issued their own report. How anyone can describe the financial crisis without mentioning Wall Street and deregulation will be a mystery to most people. This is a tactic often repeated by the right when they get on the wrong side of an issue. They did it with Social Security, denying that they were in favor of privatization. No lie is too big for the Republicans. They've found that if they repeat a lie often enough (and these days, cry about it) they can eventually get most people to believe them, or at least give them the benefit of the doubt.

The Republican members want to blame the financial crisis on the government--specifically Fannie and Freddie. But as Paul Krugman notes, Fannie and Freddie didn't operate in Ireland, Iceland, Spain, Latvia and all the other countries that experienced housing bubbles. To make things worse, in 2006 Peter Wallison, one of the Republican members of the Commission, roundly criticized Fannie and Freddie for not doing enough to help out low income borrowers. He argued that the agencies were lagging behind their private counterparts.

Barry Ritholtz (author of "Bailout Nation") posed a set of questions to the Republican renegades. While I doubt that they will be answered, the questions themselves are instructive.

This week Spencer Bachus, the incoming G.O.P. chairman of the House Financial Services Committee, told The Birmingham News that “in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks.”

9/11 First Responders

The Republicans filibuster and then run out on legislation to assist first responders to the 9/11 attacks. Majority Leader Reid couldn't get the Republicans to stay after Christmas to take up this issue. If there was any doubt left in my mind that Republican Senate leadership is scum, it's gone now. How can anyone in good conscience support these people? John Stewart (in a serious interview) talks to four first responders and juxtaposes their comments with the comments of two senior Republican senators.

Education

This piece by Ken Robinson came to me from my sister by way of my daughter (both of whom are professional educators). It confirms things I have learned from my wife, who is also a professional educator. One really interesting thing is how the graphical presentation makes it so much more real. Probably a further indication of the truth of what Robinson says.

The thing that puzzles me is that in terms of received measures, the US is being beaten in most scientific areas by countries where education is even more regimented than here. Does this mean we are doing an increasingly worse job at an outdated approach to education? On the other hand, I think the US still leads in invention (creativity)--measured by most of the usual conventions. I guess the big question is: Could we do even better?

Fair Representation for Everyone

Texas Representative "Kino" Flores, convicted on felony ethics charges, will be able to vote in the upcoming session of the Texas legislature. There is apparently no law barring felons from participating as long as they were convicted while in office. Personally I don't see the problem with this. Flores has a natural constituency in Texas--all those ethics felons, both convicted and unindicted like Tom Delay, Rick Perry and numerous others. Everyone deserves to be represented by their peers. I understand Flores intends to move to Illinois to run for governor in 2014.

Why "Printing Money" Doesn't Matter

You can't eat money.

What's the Problem, Folks?

One has to wonder at the motivation of those Attorneys General who are trying to get the courts to overturn the health care plan. The Republican precursor plan in Massachusetts appears to be working very well.

Beats Afganistan

My Favorite War a column by Gail Collins. I'm routinely amazed by the enormous juxtaposition between the religious Christmas and the commercial Christmas. It's like Santa came down the chimney and delivered baby Jesus. How did we get from a manger and shepherds on a hill to a parade of lights sponsored by a beer joint? The fact that some people can equate the two is absolutely astonishing.

Sprint and Android

I've got a new phone! My Palm Pre (which I really liked) developed a flaw in the face plate. Sprint kindly replaced it with a new one. However, the new one never performed very well--in particular it wouldn't hold a charge for more than 3-4 hours. I went back to my Sprint corporate store, where they checked it out, reloaded the software and told me that they couldn't find anything wrong with it. After two days in DC, which I spent mostly without a phone during the day, I called back to the store and talked to the manager. The resolution was that he set me up with a new HTC EVO for nothing and no extension to my contract. Talk about customer service! We've been Sprint customers for almost two decades from the time we lived in KC and we really didn't want to switch. Our loyalty is now assured.

My new HTC EVO Android phone? It's fabulous. I don't use the 4G feature much, because out here in the sticks, I'm just over the hill from a good signal. But I tell you, if 4G is faster than Sprint's 3G network, it's nearly instantaneous. There's not a lot of difference in speed between my phone and my cable internet hook up. I'm an Apple guy and I've always coveted an iPhone, but not any longer. The EVO is blazingly fast and does everything you'd want a cell phone to do--especially provide crystal clear phone calls.

The EVO has all sorts of features I haven't tried out yet--like functioning as a five connection wi-fi hotspot. It's going to be fun figuring everything out.

If We Could Solve Our Problems by Soaking the Rich...

In an earlier post I made the argument that Americans in general are completely unrealistic when it comes to balancing what they want from government with what they are willing to pay for. It's not even clear that what they want is a smaller government. As a new Bloomberg poll shows, this attitude stretches across almost all the political spectrum. It's "leave my taxes alone, but make the rich pay more" and "don't touch my entitlements."

New Music

Songs by Townes Van Zandt and Steve Earle over on the left.

Is Obama Too Nice to Lead or Is He Just Dumb?

The perplexing administration of Barack Obama continues. Polls (all polls, not just some of them) show that the public does not support tax cuts for the upper income brackets (most of the thoughtful wealthy--Gates, Buffet, et al. don't support them either). Despite this, President Obama refused to make the Republicans shut up or put up over this issue, capitulating without even a skirmish. Does he really believe that playing nice with the people who have vowed to make him a one-term president will cause them to change their ways? How naive can an Democratic politician be?

Every Democrat running for office in 2012 would have been overjoyed to paint his Republican opponent as anti-middle class for holding up their tax cuts to make sure that the wealthy got theirs. Instead, now they are going to have to explain a further burgeoning of the deficit. How successful have they been at that so far?

I am completely mystified by the President's behavior. His attack on his allies this week goes beyond the pale. Bring back James Carville.

Back to the Middle Ages

Just to show that we continue to elect people ignorant of both economics and history, A couple of dark age Republicans have advocated a return to fixed exchange rates and gold. Paul Krugman comments.

In other news, Republicans have demanded that doctors consider reintroducing the practice of treating illness by bleeding their patients.

With Republican health care policies, we may all be reduced to using leeches as a medical procedure.

Too Late

When did Obama get so spineless? This is incredible. He has got to have the worst advisors any Democratic president has ever had. As Paul Krugman explains, we've set ourselves up for a massive budget crisis in the future. If we refuse to pay for the government we want--defense, Social Security, Medicare--we will face an impossible task in the next decade. Take that you poor, elderly and sick Americans.

What Do Republicans Really Want?

They seem willing to take on the job of death panel. With respect to health care, Republican controlled Arizona seems to have done exactly what they accused the Democrats of wanting to do. Read this editorial by Gail Collins on Medicare in Arizona.

The Rich Strike Again--With Help From People Who Ought to Know Better

Why in our supposedly Christian nation, do we have such a problem with helping people? As Paul Krugman notes in his column, if there's a government program that helps rich people, it doesn't get much flak from policy makers. Witness Medicare. As Krugman notes, if grandpa needs a by-pass, even the rich are happy to have the government around to pay for it. But if the formerly working poor need something besides cat food to live on, let's make them work a little longer to get it and then make sure they don't get as much when they become eligible. Anyway, why would this matter to the longer lived wealthy with their 401ks?

Everyone who has been paying attention knows that funding Social Security is not a problem for itself or the budget over the next two decades and that fixes are easy, but that Medicare is an enormous and immediate fiscal issue that Congress and the President keep dodging.

It's becoming clearer by the day that President Obama has lost his way. He still says all the right things, but seems completely unable to translate them into a policy that is consistent with the beliefs of the people who said: "Yes, we can!"

It's Time..

for those people who don't have a dog in the fight to get out of the way and listen to those who do. Stephen Suh's extrapolation of Admiral Mullen's comments on DADT are priceless. One more example of how weak our current crop of senators really is.

Stephen Suh:

This statement was the best of Mullen's testimony:

One final word. And with all due respect, Mr. Chairman and Senator McCain, it is true that, as Chairman, I am not in charge of troops. But I have commanded three ships, a carrier battle group and two fleets. And I was most recently a Service Chief myself. For more than 40 years I have made decisions that affected and even risked the lives of young men and women.

What was left unsaid, but was clear to everyone but probably John McCain himself, was

You sniveling little weasel, I didn't get a free pass from the Naval Academy because of my daddy, I didn't get to fly planes because of my daddy, and I certainly didn't get to keep flying planes after wrecking every goddamned one of them because of my daddy. You've never been a real soldier in all the years of your miserable life, so why don' t you shut up and let us do our jobs, hmm?

The Big Short

I finished reading Michael Lewis's latest book, "The Big Short," on the plane back from DC last night. I think it is a must read for anyone who wants to understand what happened with the housing bubble between 2005 and the present. It is both a funny and infuriating book. I wish it contained more answers about how to prevent the next Wall Street crisis, because there will certainly be another one--it's only a matter of time.

The recent action by Congress and the regulators have done nothing to correct the conditions that gave rise to the financial catastrophe we've endured over the last three years. As long as Wall Street firms have the ability to lie, cheat and steal from ordinary Americans with impunity we are exposed. An enormous amount of brainpower goes into the financial sector every year to generate obscene profits that enrich a very small number of people. The resources expended in this sector and the profits they produce have been defended with the argument that they serve to spread risk and make markets more efficient. The absurdity of this argument is now clear.

The actions of AIG, Goldman Sachs, Bear Sterns, Morgan Stanley and even Citicorp, Bank of America and other commercial banks created risk instead of spreading a given amount of it and ultimately led to the lockup of the financial system and situation from which we have still not recovered.

Opportunities Squandered

I suspect Brad DeLong is right in most of his points about things we could have done to avoid the mess in which we now find ourselves. On the other hand, I don't see that any of them were likely to have been adopted by our politicians--Democrat or Republican. Any of them would have taken more courage or insight than any of them have shown in recent times.

The Liberal Answer to Bowles/Simpson

Haven't read it all yet, but the proposal from Our Fiscal Security is here.

Why We Continually Fail to Do the Right Things for the Economy.

Brad Delong asks the question: The Retreat of Macroeconomics.

And Paul Krugman answers: The Failure of Moderation.

If one knows history, the history of economic thought and J.M. Keynes, it's hard to imagine why anyone would ever believe him to be any kind of radical or that the policies coming from his theory of the economy could be socialist. Almost entirely, Keynes' policy prescriptions were aimed at preserving the status quo as he knew it and avoiding the sort of economic conditions that might create an environment where communism or socialism became desirable options. Nonetheless, we seem unable to follow a middle path as we address economic problems.

Defunct Economists--But Which Ones?

Brad Delong talks about Keynes' famous statement. One should be impressed that because of their policy prescriptions, Keynes and Friedman find themselves in the same camp. Friedman's comments in 2000 after a speech he delivered on Japan's economic problems show he would have been a vigorous supporter of QE2. The repudiation by Friedman (always seen as the free market's champion) of the Austrians is also instructive.

Rolling Stone: Doonesbury Turns 40

For Robert. Gary Trudeau talks about Doonesbury

Those Democrats Sure Are Bad for Business

with all that socialism and uncertainty. The report on third quarter profits is out and it's the highest ever recorded. Of course, the rate of growth is no where near strong enough to return us to full employment any time soon. Too bad the business party kept the stimulus from being larger.

Are We Smarter Now?

Lessons from 1937-1938. Or are we going to make the same mistakes again?

Are Congressional Republicans Anti-American?

All available evidence suggests they are and they're not even shy about admitting it. John M. Berry in The Fiscal Times talks about the evidence and shows that this is not a new approach for the Republican Party.

This true not just for the economy, but also for foreign affairs. See this discussion on the probability that the Republicans will oppose ratification of START, even though every single US security expert in and outside the Pentagon supports it. As Ed Luce notes the chief beneficiaries of opposing ratification would be North Korea and Iran.

What Mandate?

A new McClatchy poll shows that the mandate received by the Republicans may not be what they think it was. A majority of Americans either want the new health care plan retained or expanded and a substantial majority (2 to 1 in most cases) like some of its best known benefits, such as barring insurers from denying coverage for pre-existing conditions. One thing people don't like: the mandate that everyone must buy insurance. Of course, keeping the provisions people like and dumping the mandate would bankrupt insurance companies, who would no longer be able to spread their risk.

The survey also showed that most Americans side with the administration on extending the Bush era tax cuts--but not for earners making more than $250,000.

In other words, the only mandate the Republicans received was to fix the economy and their plan is to do nothing (except extend the tax cuts).

They'll Say Anything, Part N

If one is charitable, one can assume Paul Ryan is simply ignorant--of both economic theory and history. Otherwise he is a charlatan. Either way one has to wonder if he is fit to be a member of Congress. The sad part is that it's just that he is more willing to expose his shortcomings than most of his colleagues. Publicity is what matters, not whether you have anything intelligent to say.

Update: additional examples that Paul Ryan missed during his intensive study of monetary history.

Jane Smiley's New Book on the Invention of the Computer

Wired magazine interviews Jane Smiley on her new book, The Man Who Invented the Computer

A Cautionary Tale for the US

Republicans continue to be enamored with the notion of supply-side economics as practiced during the Reagan years. This despite the fact that Reagan actually raised taxes more often than he cut them. Tax cutting is alleged to provide incentives that will stimulate the economy. However, slavish allegiance to an economic proposition whose actual practice in the US is questionable has taken Ireland to the point where the country is close to being bankrupt. Estimates of the size of the bailout needed to bring the economy into balance range as high as a third of the country's GDP. In a Bloomberg news article, Chris Farrell surveys the damage supply side economics has done to the Irish economy.

Have Aliens Kidnapped Rick Perry and Put a Moron in His Place?

No, that's really Rick Perry, recently re-elected as Governor of Texas. In Texas, we get what we pay for. Wait, that's backwards.

Joe Klein's Counterpoint to Glenn Hubbard on the Deficit Comission

Joe Klein in Time Magazine comments on the reaction to The Bowles/Simpson Commission. I have some sympathy for both sides. I suspect the truth lies somewhere in between. For example, here's a link to the Tax Policy Center's analysis of the federal income tax implications of the report.

Taxes versus Spending

I don't often agree with Greg Mankiw, but this is a pretty good explanation of why the government's finances are so screwed up.

In Good Company?

Republican leadership demonstrates once again their ignorance and how bankrupt their thinking is. Eric Cantor, one of the "young stars" of the Republican Party, rejected the idea of a VAT (value added tax) as being "too European." A VAT was one potential solution to the budget problems suggested by the deficit commission. Catherine Rampell provides a map of the 150+ countries around the world that currently use this device to fund their governments. The question is: would we rather be associated with European governments (and Canada, Australia, Japan, China and India) or the likes of Saudi Arabia, Libya, Iran, Angola and Myanmar?

The Usual Suspects

As Paul Krugman notes in his NYT editorial, most of the opposition to the Fed's recent policy statement is self serving: Germany and China are afraid that a weakening dollar might erode their large trade surpluses--trade surpluses on which their current economies depend. The Republicans don't want any success on the economy until they have milked the current recession for all the political gain they can manage.

More curious are the few "economists" who wrote an open letter to Chairman Bernanke asking him to abandon QE2 because it devalued the dollar and would cause inflation. Well, yes. That's the point of the policy. Make the dollar more competitive so US manufacturers can expand their markets and stop the downward spiral of price increases to help restore consumer confidence.

Just as curious (or from my perspective, more curious) are the few economists who have always been counted in the monetarist camp who now seem to have abandoned Milton Friedman and his view of how the economy works. Bernanke, it turns out, is more monetarist than they. QE2 is the exact prescription Friedman offered the Japanese when they faced a similar situation. Ironically Chairman Bernanke offered the same solution. He may be late to the party, but at least the Chairman has the virtue of consistency with respect to his view of the economy.

Why Now Bernanke?

Way too little, way too late. After Obama gave fiscal policy a bad name, the Fed is going to give monetary policy a bad name. Now the knee jerk answer is going to be...do nothing at all. Wait--that's what the renowned economist Sarah Palin recommended.

Our Taxes are Too Low

Read the reasons why from Uwe Reinhardt: Why I Would Raise Taxes.

More on the Deficit Commisssion

Further analysis of the report, plus there's another, perhaps less political report due soon.

John Chait Deal or No Deal?

Mark Schmidt Wait for a Better Deficit Report.

Where Have All the Monetarists Gone?

One more example of the sorry state of macroeconomics. What are these formerly respectable economists thinking? In economic terms, I wasn't brought up as a monetarist, but I could recognize that there were times when that model fit the economy best (as did Keynes, as shown in his writings prior to the GT). Now some old-line monetarists seem to have forgotten all they know (or are determined to ignore it). Is this an example of the economics profession's version of just opposing everything done by those in a position to do something?

Paul Kasriel on Alan Meltzer and QE2.

Right Wing Liars--These People Will Say Anything

They hope no one will check the facts. There's way too much of this going around these days. Don't Limbaugh, Beck, Bachman, et al. have any real issues to discuss? I guess not.

Too Good to Check, Thomas L. Friedman.

Some Useful Analysis of the Bowles/Simpson Tax Proposals

Glenn Hubbard:

[W]e are in a difficult situation in large part because we have designed entitlements for a welfare state we cannot afford. And, perhaps less obviously, they show how we have used the tax code as a vehicle for special-purpose spending that weakens both the efficiency and fairness of our tax system.


I would argue instead that we have designed entitlements for a welfare system we are unwilling to pay for, rather than what we can afford. This is a problem for Democrats as well as Republicans. Until Democrats honestly address the costs as well as the reasons for the (weak) welfare state, they are as much to blame as the other side for any budgetary stalemate. Taking care of the less fortunate is not at odds with economic growth in the long run, but we don't seem to be able to have a reasonable discussion about our aims and their potential costs.

I don't agree with everything Hubbard says in his opinion piece, but most of it makes a lot of sense. Our tax code is a mess. So much so that it's almost impossible to know what effect changes would have on various income classes. It is entirely possible that the Bowles/Simpson proposals would end up with top earners paying more, even though their marginal rate would go down--depending on the effects of changes in deductions from income.


Glenn Hubbard in the NYT on the tax reform portion of the Bowles/Simpson deficit proposal.

Why Now?

Tea Party Principles in their own words:

Tea Party Patriots, Inc. as an organization believes in the Fiscal Responsibility, Constitutionally Limited Government, and Free Markets. Tea Party Patriots, Inc. is a non-partisan grassroots organization of individuals united by our core values derived from the Declaration of Independence, the Constitution of the United States of America, the Bill Of Rights as explained in the Federalist Papers. ... We hold that the United States is a republic conceived by its architects as a nation whose people were granted "unalienable rights" by our Creator. Chiefly among these are the rights to "life, liberty and the pursuit of happiness." ... We hold, as did the founders, that there exists an inherent benefit to our country when private property and prosperity are secured by natural law and the rights of the individual.

Message to the Tea Party - What took you so long to get angry?

You didn't get mad when the Supreme Court stopped a legal recount and appointed a President, voiding the will of the people.

You didn't get mad when Cheney allowed energy company officials to dictate energy policy and push us to invade Iraq, where thousands of American servicemen and women died.

You didn't get mad when we illegally invaded a country that posed no threat to us.

You didn't get mad when we spent over 800 billion (and counting) on said illegal war.

You didn't get mad when the Patriot Act was passed, restricting the "unalienable rights" of US citizens.

You didn't get mad when Bush borrowed more money from foreign sources than the previous 42 Presidents combined.

You didn't get mad when over 10 billion dollars in cash just disappeared in Iraq.

You didn't get mad when you found out we were torturing people.

You didn't get mad when a covert CIA operative got outed, endangering her life.

You didn't get mad when Bush embraced trade and outsourcing policies that shipped 6 million American jobs out of the country.

You didn't get mad when the government was found to be illegally wiretapping Americans, violating their basic civil rights.

You didn't get mad when Bush rang up 10 trillion dollars in combined budget and current account deficits.

You didn't get mad when you saw the horrible conditions at Walter Reed Army Medical Center.

You didn't get mad when we gave people who had already more money than they could spend over a trillion dollars in tax breaks.

You didn't get mad with the worst 8 years of job creations in several decades.

You didn't get mad when Federal regulators looked the other way while banks and Wall Street reaped billions writing faulty mortgages, short-sold the debt and even wagered that the debts would fail.

You didn't get mad when over 200,000 US citizens lost their lives because they had no health insurance.

You didn't get mad when lack of oversight and regulations from the Bush Administration caused US citizens to lose 12 trillion dollars in investments, retirement, and home values.

No, you finally got mad...

When a black man was elected President and decided that people in America deserved the right to see a doctor if they are sick.

Things Are not Looking Up

Survey of professional forecasters from the Philadelphia Federal Reserve. Note that the average of all forecasts has worsened. This is not good news, folks.

What Happens When You Lose Your Health Insurance?

It turns out to be pretty scary.

“He [newly elected Rep. Andy Harris, R. MD] stood up and asked the two ladies who were answering questions why it had to take so long, what he would do without 28 days of health care,” said a congressional staffer who saw the exchange. ... “Harris then asked if he could purchase insurance from the government to cover the gap,” added the aide.

It's called the public option, stupid.

Record Low for Inflation

Catherine Rampell in the NYT on the recent inflation numbers. Apparently Sarah Palin lives in an alternate universe.

There's Still Time to Take Off the Gloves

As far as the economy goes, Obama has wasted two years. Will he waste the rest of his first term? If he does, he'll be a one-term President.

How do you get from Texas to Ireland?

Lone Star Bailout and
Ireland's Big Mistake

Just after the S&L bailout I was in Texas playing golf. A friend of mine who is in commercial real estate took us over to Padre Island to look around. We went up to a penthouse apartment that was once owned by a prominent Texas politician. The politician had taken out a $1.5 million loan to buy the property, which was on the market at that point for $250,000. $1.25 million up in smoke. Sound familiar? As the two articles above indicate, Texas was the worse financial sector abuser during the 80s. That's why there are almost no locally owned large financial institutions in the state. They all failed and were bought up by out-of-state companies.

Paul Krugman

Some recent columns that help explain current economic trends:

Axis of Deflation

The Problem

Swan Songs

Merchants of Misery

Liquidationists of the World Unite where some people who ought to know better show that politics trumps economics. The list of economists against QE2 is informative in that it includes almost no prominent "Republican" economists.

Alan Blinder on QE2

With all the hysteria surrounding recent Fed actions, it's refreshing to read--in the WSJ, no less--a reasoned assessment of the context and likely effects of QE2. Alan Blinder, in a column in the WSJ, takes on the critics (some of whom ought to be embarrassed by their comments--they are in positions of responsibility within the Fed no less--demonstrating as they do a complete lack of economic comprehension on the level of Econ 101). The irony is that Blinder does not even completely agree with the Fed's policy, but at least he understands it and its intended effects. (To read this column, Google "In Defense of Ben Bernanke Alan Blinder" and select the first hit--otherwise you need to be a subscriber to the WSJ)

One Path to Resuming Economic Growth.

Ed Dolan argues that tax reform could have dual benefits--deficit reduction and laying a sounder base for future economic growth. The US tax code has to be one of the biggest impediments to a stable growth path. Rationalizing the code by reducing or eliminating the patchwork of deductions would allow lower marginal rates and still yield the income necessary to fund the federal budget. If we want to introduce certainty and simplicity into the government's finances, this is the place to start.

Henry Aaron on the Deficit Commission

Henry Aaron, probably the most respected public sector economist in the country has offered a take on the report of the Bowles/Simpson commission. Here are some highlights:

● The plan calls for a reduction from baseline in federal health care spending of about one-third by 2040, but doesn’t say how that target will be achieved.

● The plan would block grant Medicaid, which would increase the marginal cost to the states of Medicaid— benefit levels and coverage—by anywhere from 100 percent to more than 200 percent. The result would be powerful incentives to cut benefits.

● The plan presents four options for modifying the tax system, but doesn’t endorse any. All would tax capital gains as ordinary income, which means doubling the rate on them.

● All tax plans would end or curb deductions for charitable contributions. That would curtail the capacity of the private sector to provide relief to vulnerable populations, at the same time that the principal programs supporting these very populations – Medicare, Medicaid and Social Security -- would be slashed.

● The deductions for mortgage interest and property taxes would be curbed or eliminated—this, during the most severe housing price collapse in at least seventy-five years.

● Deductions for contributions to IRAs, Keogh plans, and 401k plans would be ended.

● Social Security benefits would eventually be cut by 25 percent for people earning $43,000 today and by 40 percent for those earning $100,000. Note the double whammy—less Social Security and no tax-sheltered savings plans. The plan actually contains some modest increases in Social Security benefits, so that it actually increases the deficit until well after 2020

● The plan says it would fix the Medicare fee cuts for doctors scheduled for next month, but it doesn’t say how – other than to establish a new payment system to reduce costs and improve quality.

● The plan would freeze salaries of federal employees for three years, cut the federal work force by 10 percent, and dump 250,000 contract employees. To offset these cut backs, the plan calls for an increase in productivity of federal workers, but it doesn’t say how.

This report, which is apparently supported only by the two chairman, has to go down as the most useless expenditure of human time in the history of the United States. The commission was supposed to bring an actionable plan that could be voted up or down by Congress. Instead we have a hodge podge of half-baked proposals that are not only not actionable, but are ridiculous on their face.

A Proposal for the Reform of Macroeconomics Instruction

Brad DeLong.

Take the NYT Deficit Puzzle--If You Dare

It's harder than it looks. No matter what your political persuasion, it's likely you'll have to kill (or at least injure) some sacred cows if you are really serious about solving the deficit. If nothing else, the puzzle shows how difficult it is for people to really be serious (and not just give lip service) to deficit reduction. Here's the puzzle: NYT Deficit Puzzle. And David Leonhardt's explanation of where the policy options came from.

My budget puzzle solution.

The Deficit Commission Boondoggle

The beginning rather than the end? We already had a beginning. This is no help at all. Paul Krugman on the Deficit Commission and here. They didn't do their job. Krugman:

"Under the guise of facing our fiscal problems, Mr. Bowles and Mr. Simpson are trying to smuggle in the same old, same old — tax cuts for the rich and erosion of the social safety net."

Great Football Day for NU and Mizzou

The 'Cats own Iowa--victories in 5 of the last 6 games. Today it was 21-17 with a touchdown by the Cardiac 'Cats with less than a minute and a half to go.

Mizzou bounced back with a victory over another ranked team, beating K-State 38-28. Blaine Gabbert bounced back from a horrific performance against Texas Tech.

Go 'Cats!!

MIZ--ZOU. Fight Tiger!!

Happy Veterans Day from Rick Perry

Texas Republicans set to cut support for veterans.

It's Time to Dump the Erudition and Get To Work

Harold Pollack on President Obama. We cannot let the Republicans claim a mandate they didn't get. There is no evidence that the "people" fail to support the policies of the Obama administration and the legislation that has come from them. The results of the mid-term elections demonstrate that people are tired of the economic stresses we face and don't think the government has done enough. The results don't mean that they think Republican policies are the answer.

As Serious as a Heart Attack

If you've read anything at all about the recently released report from the Deficit Commission, you should know that it is another slap at the middle class and a transparently obvious attempt to lower taxes on the rich. It makes our tax system more regressive, it makes unnecessary proposals regarding Social Security and fails utterly to deal with the most dangerous budget issues facing our country over the next three decades. In a recent column, Kevin Drum provides graphic evidence that viewing the Commission's report as even a starting point may be a significant mistake.

Thinking Straight About Health Care Reform

At The Incidental Economist there is a lot of good stuff explaining the state of health care in the US and about the PPACA. This particular article explains how the act is a piece of whole cloth--or using their analogy, a three legged stool. Other posts illuminate the shocking state of health care in our country relative to the rest of the world.

Ordinary People Aren't the Only Ones Who Vote Against Their Own Interests

Despite the degree to which US businesses have profited from the first two years of Obama's presidency, their consensus view remains that he is bad for business. Too bad he didn't give them more stimulus--they would probably be rioting in the streets if their profits were even higher. This follows a perplexing historical trend. Democratic administrations have historically been better for business than Republicans, yet businesspeople continue to see them as the enemy. Apparently they didn't stay awake in either their history or economics classes. Bloomberg comments on the current crop of businesspeople with a gun aimed squarely at their feet.

If You Are Over 65 and Voted Republican in Texas, Here's Your Reward

Texas Republicans consider dropping out of Medicaid.

Actually, Justice for the Guilty Rich

Joseph Stiglitz, "Justice for the Few." This will go down as one of the most shameful episodes in American economic history. The victims of the recession caused by the financial crisis are victimized again by the perpetrators of that crisis. How Bank of America, et al. can complain that their property rights are violated by homeowners claiming bankruptcy over their excessive mortgage debt is laughable. Did they or did they not make these loans of their own free will? Bad judgment on their part doesn't protect them from the workings of the law.

Mark Morford--Gonzo Editorialist

I'm going to start reading this guy regularly. His most recent column.

He Really IS Crazy

Rick Perry on Social Security. The Over 65 crowd will regret voting for Republicans.

Stephen Suh on Cogitamus: Rick Perry's talk of seceding from Social Security is surprisingly incoherent, even for a Texas Republican. He just won reelection, which suggests to me, at least, that he is already setting his sights on the 2012 GOP presidential nomination.

If so, they'll actually have a fight on their hands between Perry and Palin for who combines the least amount of intelligence with the most amount of pure insanity. It'll be interesting to see how Perry manages to use secession language as a platform for becoming president of the nation from which he so desperately wants to secede.

Holding My Nose

Like Hussein Minstrel Boy, I wish this wasn't how I feel when I vote for most Democrats. Stages of Dealing --Anger. On the other hand, this is a great Joan Jett song.

The Surprising Reaction to Quantitative Easing

Paul Krugman: The simple fact is that we have a global excess supply of savings, which is doing terrible things to workers. The reasonable thing is to do something about it; it’s deeply unreasonable, and deeply irresponsible, to invent reasons not to act because you’re clinging to simplistic slogans. Read more of this excellent analysis here. Also, the WSJ remains a bastion of stupidity.

What Does Transitivity Mean?

Apparently the football polls don't know: Missouri beat Oklahoma 36-27 (and the game wasn't that close). Missouri also beat Texas A&M 30-9 (at A&M). Plus Texas A&M beat Oklahoma 33-19. However, the polls rank Oklahoma above Missouri. Somebody's not paying attention.

Transitivty: a relation between three elements such that if it holds between the first and second and it also holds between the second and third it must necessarily hold between the first and third. I.e. Missouri>Texas A&M, Texas A&M>Oklahoma, thus Missouri>Oklahoma. In this case we also have the absolute: Missouri>>Oklahoma. There is no justification whatsoever for the ranking order in the polls. At least the computers like Missouri better. The Human polls are looking increasingly like they make no sense whatsoever.

Look What "We" Did.

Elect the legend, ignore the facts. Texas vs. the "big spending states."

Marching Mizzou Is 125 Years Old this Year

The "Big M of the Midwest." The fight songs: Every True Son/Fight Tiger.

M-I-Z

New Music

Some more Texas music. I got back from Chicago tonight and saw that I had a new episode of Austin City Limits on the DVR. Here's the link if you're interested: Robert Earl Keen and Hayes Carll on Austin City Limits. I've posted a signature Robert Earl Keen song over on the left. I like him a lot, particularly his tribute to Levon Helm--"The Man Behind the Drums."

Why Did the Financial Sector Turn on Obama?

Simon Johnson argues in an opinon piece in the NYT that despite the financial lifeline that Obama threw the banking system, they gave generously to the Republicans in the recent election. Why would this be so? This morning the reasons became clear. Bloomberg News reported that House Republicans are already talking about restricting the impact of the financial reform legislation through "Congressional oversight."

Fact vs. Fantasy

How does the US experience with fiscal policy during the last few years compare with other countries? It's now widely (if wrongly) accepted that fiscal policy was tried in the US, but failed. Paul Krugman has some charts that compare the US and German experience. The US has done better regarding output than Germany, which is widely viewed as having eschewed fiscal expansion in favor of austerity. The irony is that, as the data shows, real government expenditures grew more rapidly in Germany than in the US.

Sound Advice

Matt Yglesias suggests that Obama should "move to the White House," i.e. act more presidential. I think that Obama has devalued the office a bit during his first two years. Partly this was forced, because he needed to deal directly with recalcitrant members of Congress (many in his own party) in order to get key parts of his agenda passed. Now it's time to concentrate on some of the powers explicitly granted him in the Constitution, specifically filling vacant judgeships and foreign policy.

The Reasons Why

Paul Krugman's "pre-mortem." I've always argued that the most important thing about electing a president was to see who he would have as his advisors. Usually I've meant that in the sense that I expected the advisors to be smarter than the president. In Obama's case, he surrounded himself with people who weren't as smart and who were willing to settle for less than he promised. Why Obama let them convince him that less was good enough will remain a mystery.

Stiglitz on QE2 and the Stimulus.

Ezra Klein's conversation with Joseph Stiglitz. Not just an argument about the likely ineffectiveness of quantitative easing. Professor Stiglitz also describes the fiscal stimulus and its effect in simple terms.

Why You Should Vote for Bill White

Perry is at best unethical and at worst a crook. A summary from the Burnt Orange Report.

Throw Out the Bathwater and the Baby or Masochism as National Policy

Why does logic appear to be gone from America? Economic theory at this level is not hard. One will always equal one and one-half will equal one-half. But the people must be punished. As Pogo said, "We have met the enemy and he is us."

Survey of Health Care in the US

This is a very interesting and telling study of where the US ranks in terms of health care comared to other similar industrialized countries. I can't help but wonder whether a major reason for the US falling short of other countries on most measures is due to the disparity in health care across the population in the US. For example, we have the highest infant mortality in the group and the highest incidence of mothers dying in childbirth. I suspect the incidence in both cases is unevenly distributed across economic class--low for well-to-do and high for everyone else

People This Ignorant Shouldn't Be Allowed to Vote

Most Americans don't know what the Obama administration and the Democratic Congress has done for them.

Keith Olbermann on the Tea Party Candidates.

On MSNBC Kieth Olbermann summarizes the qualifications of some of the prominent Tea Party Candidates for national office.

When Will Evidence Matter?

Economists need to stop promoting theories that don't explain what is happening (and may be actively harming the economy) and pay attention to the evidence.

Not Quite There Yet

As I feared today was the "tough" game for Mizzou. They won't be a class one team until they can win on the road against a strong opponent. While I wasn't able to watch today's game (I'm in Chicago where it wasn't on TV and anyway I was at my grandson's football game), the score and statistics reminded me of the Texas game I saw in Austin two years ago. In that game Mizzou came out flat and got so far behind in the first quarter that they couldn't catch up, even though they outplayed Texas in the second half. One of these days, Mizzou will suck it up and play well on the road against a ranked opponent, but they are not quite there yet.

Depression Economics Explained

The spending death spiral.

More Wackiness in American Politics

The polls show voters are going to vote Republican even though they like Democrats better. And Obama polls higher than either party. Go figure.

Why Does Big Business Hate Obama?

Just to show how screwed up the leaders of the business sector and especially the Chamber of Commerce are, new data shows once again that Democratic administrations are much better for business profits than Republicans. I've never understood why business tends to vote Republican. It's as though there's a disconnect between what they think is good for their economic health and what is actually good for them. The recent data is not an anomaly. Democrats have almost always been better for the economy than Republicans. The main reason, I think, is because the Republican "me first" philosophy is not productive. Things work much better when the bulk of Americans are doing well. Our increasingly skewed income distribution and the emphasis on tax cuts for the wealthy is an environment that will lead to a less vibrant economy. We will all do less well if Republican policies prevail.

Maybe Hayek Needs a Better Publicist

Hayek Quotes of the Day.

The Time Has Come for Rational Drug Laws

Nicholas Kristof in the NYT with three good reasons to legalize marijuana.

What Would Milton Friedman Do?

Imagine my surprise! Sane economic commentary from the WSJ. David Wessel evaluates quantitative easing based on Friedman's economic advice.

Whoops! Meg Whitman Should Drop Out of the Race Immediately

From Cogitamus. If you don't know your history, you better watch what you say.

Additional Thoughts on Obama's "Failure"

Sorry, but I can't seem to leave this topic alone. Further thought suggests to me that the real issue is something that I've posted about before, but maybe not in this context. Perhaps Obama's approach to the stimulus bill was one of attempting the bipartisan cooperation he promised during the campaign. Was it a surprise that the Republicans in Congress had a different definition of bipartisanship--agree to my proposals or I'll obstruct any proposal you put forward? Maybe it shouldn't have been. Obama's mistake was not calling them out. The Republican leadership is a bunch of back-stabbing scum who will tell any lie to attack Obama. We know that now. I hope Obama takes a different tack in the future. The unfortunate part of this is that the Democrats will probably lose the House, so things are likely to be worse with the Republicans in power there.

From Martin Wolf: A Sane and Cogent Assessment of Obama's "Failure"

In a Financial Times article, Martin Wolf makes the point that many of us have made in the past several weeks--Obama's economic policy has been more of a communications failure than a policy failure.

The key paragraphs:

Unfortunately, the Republicans have succeeded in persuading a large enough portion of the American public that if the patient had been left entirely alone, he would be in perfect health today. This is surely a fairy story. But voters naturally pay little attention to calamities averted. They focus only on how far experience falls short of what they desire. Mr Obama gains no credit for the former and much blame for the latter. His aspirational rhetoric no doubt worsened the disappointment.

The president’s willingness to ask for too little was, it turns out, a huge strategic error. It allows his opponents to argue that the Democrats had what they wanted, which then failed. If the president had failed to get what he demanded, he could argue that the outcome was not his fault. With a political stalemate expected, further action will now be blocked. A lost decade seems quite likely. That would be a calamity for the US – and the world.

In Voting, Less May Be More

Matt Yglesias makes the point that the average American votes for too many different offices. It's obvious here in Texas. On our off-year ballot, I had to make 36 choices, including 14 judges and neither of our senators were up for reelection this year. This didn't include 4 local ballot initiatives.

Tea Party Thugs, but It's OK with Rand Paul

Rand Paul has refused to censure his followers for attacking this young woman. Video. Notice the flags and other symbols of America prominently displayed by the thugs. Both saddening and sickening. This wasn't even a Rand Paul Rally--it was a debate between him and his Democratic opponent.

Update: Thug asks for apology.

Why Do We Sweat the Small Stuff?

Thomas Friedman in the NYT on "Can't Keep a Bad Idea Down, an analysis of what candidates are concentrating on:

All that’s missing is any realistic diagnosis of where we are as a country and what we need to get back to sustainable growth. Actually, such a diagnosis has been done. A nonpartisan group of America’s most distinguished engineers, scientists, educators and industrialists unveiled just such a study in the midst of this campaign.

Here is the story: In 2005 our National Academies responded to a call from a bipartisan group of senators to recommend 10 actions the federal government could take to enhance science and technology so America could successfully compete in the 21st century. Their response was published in a study, spearheaded by the industrialist Norman Augustine, titled “Rising Above the Gathering Storm: Energizing and Employing America for a Brighter Economic Future.”

Charles M. Vest, the former M.I.T. president, worked on the study and noted in a speech recently that “Gathering Storm,” together with work by the Council on Competitiveness, led to the America Competes Act of 2007, which increased funding for the basic science research that underlies our industrial economy. Other recommendations, like improving K-12 science education, were not substantively addressed.

So, on Sept. 23, the same group released a follow-up report: “Rising Above the Gathering Storm Revisited: Rapidly Approaching Category 5.” “The subtitle, ‘Rapidly Approaching Category 5,’ says it all,” noted Vest. “The committee’s conclusion is that ‘in spite of the efforts of both those in government and the private sector, the outlook for America to compete for quality jobs has further deteriorated over the past five years.’ ”

But I thought: “We’re number 1!”

“Here is a little dose of reality about where we actually rank today,” says Vest: sixth in global innovation-based competitiveness, but 40th in rate of change over the last decade; 11th among industrialized nations in the fraction of 25- to 34-year-olds who have graduated from high school; 16th in college completion rate; 22nd in broadband Internet access; 24th in life expectancy at birth; 27th among developed nations in the proportion of college students receiving degrees in science or engineering; 48th in quality of K-12 math and science education; and 29th in the number of mobile phones per 100 people.

Instead, we get "Obama is a Muslim socialist, cut taxes" and other assorted drivel. The Democrats are so busy sorting out the lies told by Republicans that they've missed the chance to stress all that has been accomplished in the past two years: health care reform, financial reform, tax cuts for 95% of Americans, consumer protection...

On the Bernanke Mistake

Yglesias at Think Progress:

"I think people tend to overestimate the number of mistakes Barack Obama has made in his presidency. But the flipside of that is that they underestimate the severity of the mistakes that are real. Giving the most important economic policy job in the country to someone who doesn’t share his values, ideology, and partisan loyalty was a big big big mistake and it’s reflected in Bernanke’s conduct around questions like this one [fiscal policy]."

Will There Be a Second Chance?

Or will the people who got us into this mess be able to make things worse? Paul Krugman.

What Happened to Obama's Communication Skills?

Frank Rich's column on the administration's failure to go after the people who caused the financial crisis, was more interesting to me because of the long litany of things that Obama has done, but failed to communicate to the country. This is especially true regarding the tax cuts his administration has put in place. According to recent polls, only 8% of the populace is aware that he has cut taxes for 95% of Americans. If the Republicans make substantial gains in the midterm elections, it won't be because Obama hasn't done anything, it'll be because no one knows what he's done.

Foreclosure Density in the US

Brad DeLong offers this map from the Washington Post:

You Can't Stop Us!

COLUMBIA, Mo. -- A line of ordinary folks in green "Event Staff" shirts stood facing the Missouri student section late Saturday.

"You can't stop us!" the students chanted, and every time they did, one of the green shirts would glance back at the thinner line of actual law enforcement officers behind them with a look that pleaded, "You've got this, right?"

Even if his colleagues couldn't stop the outpouring of raging hormones from the stands, University of Missouri police officer Dustin Moyer had his assignment locked down tight. Moyer, a five-year veteran of the force in his first season as Missouri coach Gary Pinkel's gameday bodyguard, predicted Saturday's result two weeks earlier. Not long after the Tigers beat Colorado, Moyer began formulating a plan.

"He was real serious," Pinkel said. "He said, 'I want to know how you want to get off the field when we beat Oklahoma."

And the goal posts went to Harpo's.


Read more: http://sportsillustrated.cnn.com/2010/writers/andy_staples/10/24/oklahoma.mizzou.insider/index.html?eref=cfg#ixzz13HkBE0b9

Mizzou Has a Defense!

Great game. Mizzou out did OU in effort and conditioning. The "easy" game is over now. On to the tough game next week in Lincoln.

More Texas Music

I've posted some new songs over on the left. More Texas music from The Texas Tornados, Raul Malo and Flaco Jimenez, and Ry Cooder and Flaco Jimenez. All three are one sort of Texas music or another. You'll notice that several of the tunes I've posted were recorded at Gruene Hall, a Texas hill country music venue that has been operating forever. Everyone and anyone in Texas music has performed here.

Engines of Growth

I read an article in the NYT today about the decline in small businesses in Greece due to the government's austerity program. Consumer demand has cratered due to the recession and has been exacerbated by the forced decline in government workers and pensions. While it's unlikely to ever be as bad in the US, it's ironic that small businesses are often held out as the engine behind economic growth and it's exactly those businesses that are hardest hit by austerity programs. The Greek government's response has been to promise to funnel cheap funds to the small business sector. One has to wonder at the sheer idiocy of these programs. If businesses are failing because they can't sell their products, why do they want to borrow any money, cheap or otherwise? The thinking of policy makers who push these opposing and harmful policies is impossible to understand. There is a body of economic theory that stretches from Malthus and Mill through Keynes to the present day that provides us with the ability to understand what is going on in the economy. Our leaders ignore it at our peril.

Life in America

LZ Granderson on discrimination.

Do People Really Think This is Worth the Risk?

Kevin Drum has collected political and scientific information on climate change. Frankly this scares the hell of me. But then I'm not much of a gambler, even with events that will only affect my great grandchildren. The real irony here is that if the projections are true, the beneficiaries of our lack of action will be Russia and China. The GOP must have a discount rate approaching infinity.

QE2--What Are the Choices?

Ed Dolan has a very good post today where he succinctly lays out the two major alternatives open to the Fed if they do engage in additional quantitative easing. As he points out, the principal issue with the most aggressive strategy is whether the Fed has the ability to dial it back once further easing has had its desired effects. For my part, I'd go for the more aggressive approach, otherwise we risk the same response we had with the fiscal stimulus: "it doesn't work." Then we'd be living in a world where our only recourse would be austerity--the economic equivalent of the 18th century medical practice of bleeding.

Too Big to Fail, Again

Simon Johnson makes the point that it may be time for another stress test for the largest banks. The last one was largely a farce--for the reasons another one may be necessary now. Several of the big banks (Bank of America, in particular) may have outstanding exposures to the mortgage market that were not recognized in the first stress test. Some of these banks (Bank of America, in particular) are already in a precarious capital position. It's likely that few people anticipated that we would be faced with a looming "too big to fail" crisis this soon after the last one. The likelihood that major banks will have to buy back a significant portion of the mortgages they originated (thereby increasing their capital requirements) is high enough that hedge funds have begun to buy up depreciated mortgage paper. They expect that they will be able to put much of it back to the originating banks at par. In the financial reform bill, the Republicans shot down a proposal that would have created a fund financed by the banking system that could have been used if the worst occurred. They falsely labeled it as a bail out of too big to fail banks. Now we may looking at the prospect of the largest bank in the country facing insufficient capital with few options remaining for the government.

Robert Skidelsky and the Economics of Austerity

A very lucid description of how the current economic problems are world wide in scope and why current proposals in the developed countries are going to hurt rather than help. More on the economics of austerity by Robert Skidelsky.

Keynes and Friedman--Fellow Travelers

I recently mentioned to a correspondent friend that I thought in light of the idiocy that passes for a lot of macroeconomics these days, I saw more in common between Keynes and Friedman than either of them has with the New Macro. Here's a good example from Brad DeLong who still reads what our predecessors had to say about economic theory.

Read DeLong's post here.