Author: Jonathan

My simulations are science; yours are politics.

I’ve taken the liberty of emphasizing the dirty bits. Don’t let the children see.

Charlatans and Cranks…

Greg, Greg, Greg, Greg, Greg, Greg. Setting fire to your own credibility to please your political masters is a very myopic intellectual strategy. It is doubleplusungood to say: “It’s bad when a Democratic president and his economic advisors do it, but it was just wonderful peachy when a Republican president and I did it.”

What Greg Mankiw says in 2009, via Obey:

Why is Greg Mankiw freaking me out?!: [T]oday I find on the [Greg Mankiw web]blog this text on the stimulus plan, which contains the following: ‘The expression “create or save [4 million jobs],” which has been used regularly by the President [Obama] and his economic team [Christie Romer, Larry Summers, Jared Bernstein, Tim Geithner, etc.], is an act of political genius. You can measure how many jobs are created between two points in time. But there is no way to measure how many jobs are saved. Even if things get much, much worse, the President can say that there would have been 4 million fewer jobs without the stimulus. […] So he gave us a non-measurable metric…‘

And if I type “mankiw 2003 tax cut effects” into the Google search box, the fourth hit takes us to “Charlatans and Cranks”—what Greg Mankiw said in 2003:

Greg Mankiw: On Charlatans and Cranks: [T]he actions the President [George W. Bush] took made the recession less severe. As the President [George W. Bush] has discussed, analysis done within the Administration has shown how his tax cuts have substantially offset the series of adverse shocks that have been buffeting the economy. Simulations of a conventional macroeconomic model show that, without the tax cuts, the level of real GDP would have been about 2 percent lower in the middle of 2003. About 1.5 million fewer people would have jobs today. The job market is not what we would like it to be right now, but it would have been worse without the Administration’s actions. One can view the short-run effects of these tax cuts from a classic Keynesian perspective. The tax cuts let people keep more of the money they earned. This supported consumption and thus helped maintain the aggregate demand for goods and services. There is nothing novel about this. It is very conventional short-run stabilization policy: You can find it in all of the leading textbooks…

Forgetting that teh Google exists is a very elementary blunder.

In the long run, I think, the coming of Google will greatly increase the degree to which people say what they think rather than what they believe will ingratiate themselves to some powerful group. Being exposed as transparently two-faced is humiliating, and if you say what you really think and only what you really think then you are safe—except, of course, for having your words ripped from context, and for those cases in which what you really think actually does change over time. But as the realization that teh Google exists, more and more ganders are going to think twice before they try to make sauce for the goose…

Aren’t the Internets handy, though? I heard the NPR piece about half an hour ago and wondered if what he was saying (about bank nationalization) could possibly be true. Thus Dean Baker:

NPR Misrepresents Bank “Nationalization” Yet Again

NPR presented an expert asserting that the taxpayers would be liable for all bank debt when it takes over bankrupt banks. This is not true. The government has no legal liability for the bad debt of bankrupt banks. It has generally honored not only the deposits but also the bonds of banks that were taken over by the FDIC, but it has no obligation to do so. If the current crisis leaves such a large volume of bad bank debt, it would be under no legal obligation to repay all of this debt at 100 cents on the dollar (presumably it would make owners of subordinated debt take the first hit).

—Dean Baker

I haven’t seen this yet (I’m on the road), but I thought I’d pass it along.

Reporters Covering the Financial Crisis Should Listen to Simon Johnson

Simon Johnson is the former chief economist of the International Monetary Fund. I don’t know him personally, but from his writings and his past positions, I would guess him to be very much a centrist economist. He presented a very clear and carefully thought account of the nation’s financial crisis on Bill Moyers’ Journal last night. This is well worth everyone’s time.

—Dean Baker

Here’s Simon Johnson:

The situation we find ourselves in at this moment, this week, is very strongly reminiscent of the situations we’ve seen many times in other places. But they’re places we don’t like to think of ourselves as being similar to. They’re emerging markets. It’s Russia or Indonesia or a Thailand type situation, or Korea… I have this feeling in my stomach that I felt in much poorer countries, countries that were headed into a really difficult economic situation, when there’s a small group of people who got you into a disaster, who were still powerful, and disaster made them more powerful… Don’t get me wrong — these are fine upstanding citizens who have a certain perspective and a certain kind of interest, and they see the world a certain way… That web of interest is not my interest or your interest or the interest of the taxpayer. It’s the interest, first and foremost, of the financial industry in this country.

Dean Baker (but you knew that, didn’t you?):

NPR Tells Us That the Question is Whether Taxpayers Pick Up All of Investors’ Losses or Just Some of Them

Unfortunately, I am not kidding. In an incredibly poorly informed piece on the foreclosure crisis (they apparently still haven’t heard of the housing bubble), NPR concluded with a quote telling listeners that, “We’re really just trying to figure out who bears the loss. Do we want the government to bear it all, or do we want some of it to be pushed onto investors?”

Of course, that’s the question. Investors can’t be expected to know what they are doing, the little boys and girls need the government to help them out. After all, that is why we have the government. No one would want to leave wealthy investors’ fate to the market. The only question is whether we bail them out completely, or maybe force them to suffer some loss due to their bad investments.

It’s great that NPR framed the range of views that it will present on this issue so clearly. Of course there are people who think that the government should focus on helping homeowners rather than wealthy investors who are too dumb to know how to invest their money. …

The Financial Times’ Martin Wolf.

Why Obama’s new Tarp will fail to rescue the banks

… The new plan seems to make sense if and only if the principal problem is illiquidity. Offering guarantees and buying some portion of the toxic assets, while limiting new capital injections to less than the $350bn left in the Tarp, cannot deal with the insolvency problem identified by informed observers. Indeed, any toxic asset purchase or guarantee programme must be an ineffective, inefficient and inequitable way to rescue inadequately capitalised financial institutions: ineffective, because the government must buy vast amounts of doubtful assets at excessive prices or provide over-generous guarantees, to render insolvent banks solvent; inefficient, because big capital injections or conversion of debt into equity are better ways to recapitalise banks; and inequitable, because big subsidies would go to failed institutions and private buyers of bad assets.

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.

Assume that the problem is insolvency and the modest market value of US commercial banks (about $400bn) derives from government support (see charts). Assume, too, that it is impossible to raise large amounts of private capital today. Then there has to be recapitalisation in one of the two ways indicated above. Both have disadvantages: government recapitalisation is a bail-out of creditors and involves temporary state administration; debt-for-equity swaps would damage bond markets, insurance companies and pension funds. But the choice is inescapable.

If Mr Geithner or Lawrence Summers, head of the national economic council, were advising the US as a foreign country, they would point this out, brutally. Dominique Strauss-Kahn, IMF managing director, said the same thing, very gently, in Malaysia last Saturday.

The correct advice remains the one the US gave the Japanese and others during the 1990s: admit reality, restructure banks and, above all, slay zombie institutions at once. It is an important, but secondary, question whether the right answer is to create new “good banks”, leaving old bad banks to perish, as my colleague, Willem Buiter, recommends, or new “bad banks”, leaving cleansed old banks to survive. I also am inclined to the former, because the culture of the old banks seems so toxic. …

Let’s just skip to Robert Reich’s conclusion:

Geithner’s Plan: It’s Not Transparent and It’s Still a Bailout

… In other words, Geithner and Fed Chair Ben Bernanke continue to do pretty much what Hank Paulson and Bernanke did: They hide much of the true costs and risks to taxpayers of repairing the banking system. Those risks and costs should be put on the people who made risky bets on the banks in the first place – namely bank shareholders and creditors. Shareholders of the most troubled banks should be wiped out entirely. Bank creditors- except depositors – should take major hits. And top executives who were responsible should be canned. But Geithner and Bernanke don’t want to take these steps for fear of spooking the Street. They think it’s safer to put the costs and risks on taxpayers — especially in ways they can’t see.

Geithner’s plan is better than the first Wall Street bailout but make no mistake: It’s not transparent, and it’s still a bailout.

NY TImes. No comment is really necessary, but Barry Ritholtz obliges us anyway.

In their defense, analysts point out that most regulators, economists, journalists and investors failed to foresee this financial catastrophe. And the worsening economy did prompt a cut in their buy recommendations.

Sheesh.

Paul Krugman.

What the centrists have wrought

I’m still working on the numbers, but I’ve gotten a fair number of requests for comment on the Senate version of the stimulus.

The short answer: to appease the centrists, a plan that was already too small and too focused on ineffective tax cuts has been made significantly smaller, and even more focused on tax cuts.

According to the CBO’s estimates, we’re facing an output shortfall of almost 14% of GDP over the next two years, or around $2 trillion. Others, such as Goldman Sachs, are even more pessimistic. So the original $800 billion plan was too small, especially because a substantial share consisted of tax cuts that probably would have added little to demand. The plan should have been at least 50% larger.

Now the centrists have shaved off $86 billion in spending — much of it among the most effective and most needed parts of the plan. In particular, aid to state governments, which are in desperate straits, is both fast — because it prevents spending cuts rather than having to start up new projects — and effective, because it would in fact be spent; plus state and local governments are cutting back on essentials, so the social value of this spending would be high. But in the name of mighty centrism, $40 billion of that aid has been cut out.

My first cut says that the changes to the Senate bill will ensure that we have at least 600,000 fewer Americans employed over the next two years.

The real question now is whether Obama will be able to come back for more once it’s clear that the plan is way inadequate. My guess is no. This is really, really bad.

via Time Magazine

Update: via Barry Ritholtz, the same graph extended to all post-WW2 recessions. Click either graph for a bigger version.

And while we’re at it, one more view, same as the previous graph but in percentages rather than absolute numbers (and fewer recessions).