Wednesday, September 30, 2009

Auditors for Hire

Capitalism, the above-board kind, is is deep trouble if we cannot rely on certain fundamental institutions that make markets function. Among the most important such institutions are the accounting firms that audit company books to certify that they provide fair and accurate information.

We rely on auditors to tell us companies are not lying in their financial statements. Once the integrity of the largest auditors is in doubt, we are in trouble. Read this about Ernst & Young.

Unfortunately this story is yet another confirmation that all is not well in our market system. AIG books were cooked and the auditors gave them a pass. Before that, a number of famous bankruptcies in the US including Enron were also falsely certified by auditors.

You already knew about the bond rating agencies such as Moody's and S&P that gave misleading high ratings on bonds of companies that didn't deserve them.

It is disgusting but troubling. Business ethics is at a disturbing low in economies such as the US that used to set standards for the rest of the world to follow.

Eyewitness to modern Chinese History

This wonderful story (HERE) is must reading for those interested in modern Chinese history.

Tuesday, September 29, 2009

Baghdad Blues

Just when "everyone" thinks all is swell in Iraq, you start to read disturbing stories such as this: Read Here.

If those who are in charge of the Iraq "situation" cannot agree on what is or is not important to do, you know all is not quiet on the "eastern front". Troubling.

Burn the Village to Save it - 2

Has anyone looked into the human cost of the Iraq War? Political "scientists" talking the military-speak call it "collateral damage".

Don't get me wrong. I am not a pacifist. I was very much for the war when I was told Saddam had the stuff to create a nuclear mushroom over Manhattan.

Ok. Quiz time. How man Iraqi civilians have been so far displaced by the war. In simple English, how many have had to leave their homes for any number of reasons? Homes destroyed? Too dangerous to live in old homes? No jobs? For those and other myriad reasons. I didn't know until now the number is 5 million. Size of a small country. Human tragedy. Is Iraq today better off than under Saddam? I don't know.

Read this.

Monday, September 28, 2009

Growing Sounds of Drums of War

The world we live in is a dangerous one growing more so by the day. The post War stability with the US and Soviet Union as two nuclear powers keeping the peace for fear of mutual destruction has given ways since the collapse of the Berlin to one single superpower.

World peace remained undisturbed until that American advantaged was mindlessly weakened by a series of bad Washington decisions mainly taken by George Bush. They ranged from from an expensive war against Iraq, disingenuously sold to the world as a war of necessity, to the country degrading its balance sheets to the point of near bankruptcy saved only by Chinese, Japan and Russia, just to name 3, accepting US debts, or IOU's.

Now, it is not clear what Obama may or may not do in Afghanistan. He would be wise to seek a speedy withdrawal even if that meant Talibans taking over the government. Yes, they are primitive, brutal, medieval and anti women. But unless the US could win the "hearts and minds" of the people to fight with the West, that battle, as General McChrystal has admitted, is essentially lost. See my blog yesterday.

Let's be honest. Afghanistan is NOT a war of necessity if that meant the national security of the US is clearly at stake as in WWII.

It is of course entirely desirable to have an Afghanistan become a modern, democratic country sharing the values and policies you and I would like in our own countries.

Saudi Arabia, a staunch US ally whose princes and princesses are mostly educated in the UK and in the US and yet the country remains a medieval, anti-women society that no Western country can change nor does the US make any attempt to do so.

Yes, I know Oil is the issue. But when even Saudi Arabia cannot change on its own, and Saudi is a much richer and more open society than Afghanistan, would sending more troops to Afghanistan be useful?

Nothing I have read suggests the US or any outside country can influence Afghanistan's own internal development. Not even Pakistan.

Now US is about to launch more sanctions against Iran. Read this. But sanctions are futile if you don't get China and Russia onboard. They are nowhere to be found because their global interests are now the same.

US is overstretched. It has still not adjusted to the reality that its financial and economic strengths can no longer support its unipolar geopolitical, military peace keeping role it got used to since WWII.

Battle for "hearts and minds" already lost

One of the most alarming and revealing statements in this Washington Post article on General McChrsytal's request for more troops for the futile war in Afghanistan was this:

McChrystal wants to change the goal of public relations efforts in Afghanistan from a "struggle for the 'hearts and minds' of the Afghan population to one of giving them 'trust and confidence' " in themselves and their government. At the same time, he said, more effort should be made to "discredit and diminish insurgents and their extremist allies' capability to influence attitudes and behavior in Afghanistan."

Wait a second. So the General is saying, forget "hearts and minds". That battle is lost. Let's launch another one to gain "trust and confidence"? To this good general the whole exercise is merely a "public relations" campaign, as in marketing a new brand of underwear?

How could the Afghan people entrust you with confidence if they are willing to side with you with their hearts and minds? Does the good general understand the meanings of those words? You can get someone to trust you and with confidence if you had not won over her hearts and minds?

The full Post report is here.

It breaks one's heart to read it.

Sunday, September 27, 2009

Burn the Village to Save it

Imagine you are the sheriff and you want to save someone in distress. Perhaps the person is being held hostage by gangsters.
So you burst into his house with a machine gun and thank goodness you kill the gangsters, or most of them. And you manage to save the hostage. However, in that process of bravery you also end up killing his wife, children, relatives, friends of hostage. The term is "collateral damage". Unintended killings, you see.

What, if any, moral lessons you can draw from this narative?

In Vietnam the failed war policy was summed up by a marine telling a CBS TV news reporter that he had to burn down the village to "save" it from too many Vietcong's either living there or being helped by the village he just torched.

By war's end, an estimated 2 millions civilians were killed in South Vietnam and 2 millions more killed in North Vietnam. Another 1 million north and south communist military personnel were killed. All those deaths were based on the American belief, so clearly articulated by the Secretary of State Dean Rusk in his testimony to the US Senate that "if we don't fight them in Vietnam we will have to fight them in Los Angeles armed with nuclear weapons". The "them" were "Red Chinese", not even the Vietnamese.

In Iraq, civilian deaths? Read this.

The rationale, if you recall, was Saddam Hussein was armed with weapons of mass destruction. So, if you don't get him there, you will see mushroom clouds over New York. Turned out the Twin Towers were destroyed by Al Qaeda, not even welcomed in Saddam's Iraq. And they were mostly Saudi's whose king is a "loyal" friend of the US for generations.

In Afghanistan, the rationale is if you don't destroy the Talibans and Al Qaeda there, you will have to fight them again in New York and this time both Empire State and Chrysler Buildings will be destroyed, and that's just for starters. Actually, no one has said precisely that, but the logic is the same.

Frank Rich in this article in today's NY Times correctly argues that even if you managed to "save" Afghanistan from the Talibans and the Al Qaeda terrotists, that would not be the end of it. Victory will be illusory.

Bin Laden and his gang can still operate in Pakistan or some place in muslim Africa where they enjoy widespread sympathy. So, are we going to attack some countries in Africa in order to "save" them?

More than Familiarity

HSBC founded in Shanghai before the communists took over and then prospered in Hong Kong moved its HQ to London some years back. Now its CEO is moving back to Hong Kong effectively moving the HQ back. Headquarters is where the chief works even though technically Hong Kong is just a branch unlike the past before HQ was moved to London.

Familiarity with the region has nothing to do with this move. Yes, growth in China is a major factor. What is significant is the de factor affirmation at the highest echelons of the bank that the global center of gravity in global economy has shifted to Asia, especially to China, and most likely for a very long time to come.

The full story is here.

Friday, September 25, 2009

US Dollar Down and Interest Rate UP?

When the legendary investor Julian Robertson speaks, you should sit up and listen. Read and Watch here.

Here is the 64 billion dollar question. If interest rates were to go sky high --if and when Japan and China were to stop buying US debt or start selling them, would US dollar also collapse in the face of high interest rates?

Answer, it depends on a number of other factors. Is inflation in the US or in the US dollar block also going sky high? if so, what is happening to the real rate of interest? The real rate is nominal rate minus inflation rate.

Another factor to watch: would domestic savings rate in the US remain low or high? If latter, that means US balance of payments could be improving, and then the pressure to sell dollar may not be a disaster. if fact, there might even be a dollar 'shortage' if US reduces drastically its imports especially from China.

However, if Julian Robertson is correct, and he usually is, US debt is not where you want to be. You can make a fortune short selling it. Which was what Robertson has been doing for sometime, according to his own public revelations.

Thursday, September 24, 2009

Cheap Money Policy

We can now safely assume money will remain "cheap". Therefore, stocks, gold, commodities, financial stocks will do well. Here is the relevant paragraphs from today's NY Times:

“Economic activity has picked up following its severe downturn,” the central bank said in a statement after a two-day policy meeting. It said financial markets had improved further, that activity in the housing market had increased and that household spending seemed to be stabilizing.

But Fed officials also cautioned that the recovery would be slow and repeated their vow to keep the benchmark overnight interest rate at virtually zero for “an extended period.” That almost certainly means until at least sometime next year.

The full article is here.

It's Greed, Of course.

So the famous and big accounting firm, Ernest & Young admitted its audit back in the early 1990's of bankrupt Japanese consumer electronics firm, Akai, a subsidiary of a HK firm, Semi-Tech, was in error. Ahem. We now know for sure creating accounting did not start big US firms before and during that big boom and now bust in this century.

I knew that case. I even knew that crook, James Ting, who founded Semi-Tech. Never bought a share since I didn't trust an entrepreneur with a soft hand shake and shifty eyes.

Prior to being a big time crook, he was by all accounts a regular Joe professor in Canada doing research and writing papers few would read. Then he discovered the stockmarket. More important he discovered the wonderful world of investment banks and brokers who make a living by selling, or passing on stuff, to "investors". And he also discovered the friendly auditing firms who competed tooth and nail for a big corporate account. Lots of fee incomes. Accountants live on chargeable fees the way lawyers do.

Remember the US rating agencies? They too live on fees. Remember Wall Street firms? Yes, them too. You get the picture.

So Semi-Tech went bust because the numbers certified by reputable accounting firms were bogus. James Ting went to jail for cheating, but got off after serving only 2 years on a technicality. Ah, the wonderful world of Law in the West.

The full article on this sordid episode is here.

Nation Building - 3?

There is a real possibility Obama will not get sucked into another Vietnam War in Afghanistan. The NY Times article suggests to me Obama is leaking his options to prepare the public for a change. He maybe refocusing his objective in Afghanistan targeting only Al Qaeda even if that meant Taliban might retake the government.

Yes, if Taliban resumed power, they would take the country back to medieval ages and the women would suffer a lot. But the
Talibans were never a threat to the national security of any nation, not even the Pakistani's who are their neighbors.

My two simple rules of foreign military adventures to help other nations to "nation build":

1) If the nation you want to build is not totally behind you, especially the people, don't do it.
2) If your own national balance sheets are weak, meaning you cannot really afford it, don't do it.

Afghanistani's are not totally behind the West to save it from the Talibans. Some are, but most remain cynical since Kabul is so corrupt. And then the US is already head over heels in debt. Washington should first strength its own nation building before taking on the task of modernizing the "graveyard of empires", Afghanistan.

Tuesday, September 22, 2009

Nation Building - 2

Does this article remind you of what happened during the Vietnam War?

The more the US worked to prop up the Saigon leaders as fighters for democracy, the more the south Vietnamese people turned cynical and became more sympathetic to the Vietcongs.

History is repeating itself. Sad.

The New Land of Opportunity

America in Chinese means Beautiful Country. It was the Land of Opportunity. Now? Read this.

Monday, September 21, 2009

Nation Building?

Note the two simple words in General McChrystal's 66-page report military assessment of the Afghanistan war: "nation building".

This is an excerpt from today's Washington Post:

"...McChrystal said he thinks the way to meet the president's relatively narrow objective of denying al-Qaeda's return to Afghanistan involves a wide-ranging U.S. and NATO effort to protect civilians from insurgents by improving the Afghan government's effectiveness. That means not only more troops, but also a far more aggressive program to train Afghan security forces, promote good local governance, root out corruption, reform the justice sector, pursue narcotics traffickers, increase reconstruction activities and change the way U.S. troops interact with the Afghan population.

The implicit recommendation is that the United States and its NATO partners need to do more nation-building, and they need to do it quickly..."

You should know immediately this war is doomed if these two words are part of the necessary conditions to win it. Why this is so is straightforward.

You cannot change a nation by adding more troops unless the country you wish help had a democratic tradition by way CORE Values held broadly by the people and second by the way of INSTITUTIONS that embodied those values before trouble began.

Afghanistan before troubles started when the Taliban took over was a primitive, medieval run by tribes.

US leaders are still not learning history. You cannot change it into a country with values worth our lives to defend when it is not ready.

Bush lost it when he pulled his troops from Afghanistan to Iraq. Now to refight that battle to destroy Al Qaeda now helped by a resurgent Taliban is near impossible when Kabul is run by corrupt drug lords.

What Afghan is his or her right mind would help the US to keep those drug dealers as rulers of a "democratic" Afghanistan?

It's Too Late, Mr. Krugman!

Paul Krugman is furious that Obama is reluctant to cap the paychecks of Wall Street even as some of his senior staff are finally making noises that obscene bonuses should be.

Well, as I have pointed out on several occasions, it's too late. Reforms should have taken place when the government was on the verge of forking over the many billions to rescue those responsible for blowing up their firms. Now the horse has already bolted from the gate. $$ cashed and pocketed. The accessories to arson folks are still in charge.

Second, it is enormously difficult to determine what should the paycheck sizes should be from the OUTSIDE.

DC should have replaced the sitting Boards with a totally new cast of characters accountable to the shareholders and the public and not to the CEO's and Chair that appointed them to the Boards. They should institute new paycheck policies. Right now the same Boards that had allowed the management to run amok are still there. How can you work with them to put in new policies?

Third, as Krugman pointed out, Obama himself is not on board on changing Wall Street in any significant fashion. His senior staff, while making noises about reforms, are not all on board either.

I am going to make a bet. Nothing much will change on Wall Street. It is 5 minutes to game end and the score is Wall Street 4, Joe Public 0. It will take a miracle to even the score. No way. His New York Times column is reproduced here:

Published: September 20, 2009

In the grim period that followed Lehman’s failure, it seemed inconceivable that bankers would, just a few months later, be going right back to the practices that brought the world’s financial system to the edge of collapse. At the very least, one might have thought, they would show some restraint for fear of creating a public backlash.

But now that we’ve stepped back a few paces from the brink — thanks, let’s not forget, to immense, taxpayer-financed rescue packages — the financial sector is rapidly returning to business as usual. Even as the rest of the nation continues to suffer from rising unemployment and severe hardship, Wall Street paychecks are heading back to pre-crisis levels. And the industry is deploying its political clout to block even the most minimal reforms.

The good news is that senior officials in the Obama administration and at the Federal Reserve seem to be losing patience with the industry’s selfishness. The bad news is that it’s not clear whether President Obama himself is ready, even now, to take on the bankers.

Credit where credit is due: I was delighted when Lawrence Summers, the administration’s ranking economist, lashed out at the campaign the U.S. Chamber of Commerce, in cooperation with financial-industry lobbyists, is running against the proposed creation of an agency to protect consumers against financial abuses, such as loans whose terms they don’t understand. The chamber’s ads, declared Mr. Summers, are “the financial-regulatory equivalent of the death-panel ads that are being run with respect to health care.”

Yet protecting consumers from financial abuse should be only the beginning of reform. If we really want to stop Wall Street from creating another bubble, followed by another bust, we need to change the industry’s incentives — which means, in particular, changing the way bankers are paid.

What’s wrong with financial-industry compensation? In a nutshell, bank executives are lavishly rewarded if they deliver big short-term profits — but aren’t correspondingly punished if they later suffer even bigger losses. This encourages excessive risk-taking: some of the men most responsible for the current crisis walked away immensely rich from the bonuses they earned in the good years, even though the high-risk strategies that led to those bonuses eventually decimated their companies, taking down a large part of the financial system in the process.

The Federal Reserve, now awakened from its Greenspan-era slumber, understands this problem — and proposes doing something about it. According to recent reports, the Fed’s board is considering imposing new rules on financial-firm compensation, requiring that banks “claw back” bonuses in the face of losses and link pay to long-term rather than short-term performance. The Fed argues that it has the authority to do this as part of its general mandate to oversee banks’ soundness.

But the industry — supported by nearly all Republicans and some Democrats — will fight bitterly against these changes. And while the administration will support some kind of compensation reform, it’s not clear whether it will fully support the Fed’s efforts.

I was startled last week when Mr. Obama, in an interview with Bloomberg News, questioned the case for limiting financial-sector pay: “Why is it,” he asked, “that we’re going to cap executive compensation for Wall Street bankers but not Silicon Valley entrepreneurs or N.F.L. football players?”

That’s an astonishing remark — and not just because the National Football League does, in fact, have pay caps. Tech firms don’t crash the whole world’s operating system when they go bankrupt; quarterbacks who make too many risky passes don’t have to be rescued with hundred-billion-dollar bailouts. Banking is a special case — and the president is surely smart enough to know that.

All I can think is that this was another example of something we’ve seen before: Mr. Obama’s visceral reluctance to engage in anything that resembles populist rhetoric. And that’s something he needs to get over.

It’s not just that taking a populist stance on bankers’ pay is good politics — although it is: the administration has suffered more than it seems to realize from the perception that it’s giving taxpayers’ hard-earned money away to Wall Street, and it should welcome the chance to portray the G.O.P. as the party of obscene bonuses.

Equally important, in this case populism is good economics. Indeed, you can make the case that reforming bankers’ compensation is the single best thing we can do to prevent another financial crisis a few years down the road.

It’s time for the president to realize that sometimes populism, especially populism that makes bankers angry, is exactly what the economy needs.

A Tired Old Movie

Here we go again, just as in Vietnam. Read this article.

The US military is calling for more troops to be sent in Afghanistan. Without it, the military predicts failure.

I don't blame the military. When the going is not well, they will always call for more troops. You can easily conclude that the enemy is stronger than you and therefore you need more help.

Stronger does not mean the "other" side has more troops or more fire power. It means the objective in Afghanistan of securing the country for your own military and political is beyond your capability given the level of troops.

Question is this: how much more is enough? That's the central issue in the logic of escalation. It is a moving target.

US's Vietnam effort failed for similar reasons. The objective of turning the country in favor of the US/Saigon alliance was beyond the capability of the US. Why was that has been the subject of many many books.

Unless you can win the hearts and minds of the people you want the help, over time the war becomes unacceptable to any civilized people.

Remember that famous interview by a CBS TV reporter with a marine who had just torched a Vietnamese village: "Sir, we need to burn down this village in order to save it."

If the Afghan tribes are not risking their lives to support the West in their own country and are instead giving aid and comfort to Taliban and Al Qaeda, however reluctantly, the ending of this tired old movie is a sad and a predictable one.

Afghanistan was not called the burial place of empires for nothing.

The State of Macro Economics - End it!

The back and forth between fresh and saltwater economists has to end soon. The details are of interest only to the few ordained in what they think is higher mathematics. Most mathematicians I have talked to, in fact, consider the sort of math economists indulge in suspect in their selective usage -- a bit like shopping in supermarket. You take what you like on different shelves without too much attention how a math theorem is proved.

The "big picture" of this whole debate is not all that vague.

Market economics, read some version of laissez-faire, has to be the best available tool to create more wealth than any other know systems. To paraphrase the immortal words of Winster Churchill, "Free market is the worst economic system, except for all the others."

However, it is also clear that to allow total freedom in the economy is like allowing two football teams to police their matches without a competent, fair and uncorrupted referee. In other words, we need a government.

Here is the perennial problem. Call it "human conditions". You can't live with it (government), you can't live without it.

Most governments are indeed incompetent, unfair and corrupt. But if you totally abolish them, the end result may well be a state of permanent chaos and wars, a la tribal conflicts in Africa.

So what to do?

Well, free market won't work without a fair referee. To ensure the referee stay clean and fair, you need a political system to enforce. Ergo, democracy.

And then you need to invest in a competent government. It sounds easy, but history shows it ain't. Otherwise, we won't have so many underdeveloped countries whose biggest problem lies squarely in dismal public governance. Ergo they have lousy governments.

Ask any African, Latin American, Vietnamese, North Korean, Thai, and most recently Americans.

There are not so many secrets in economic or, indeed, political theories. It's the people, "stupid".

We cannot NOT have laissez-faire, but we cannot have total laissez-faire. We cannot allow a government to become "too" big, yet we cannot NOT have a government.

To find the "optimal" mix will continue to be a huge challenge for all of us. For there isn't one simple answer. The rest is just conversation. Sometimes it is interesting. Often it is self-indulgent for academics.

Sunday, September 20, 2009

Giving Economists a Bad Name

Greg Mankiw is a famous professor of economics at Harvard. He writes one of the most popular blogs in cyberspace. He worked for George W Bush, not a crime for sure, and is against much of Obama's economic policy based on what he has been writing. For the record, so am I.

He is not in favor of the Obama's medical plan. I am neutral on this issue. However, I do find his latest thought on medical cost disappointing because it is disingenuous. Here is an except....

"...Imagine that someone invented a pill even better than the one I take. Let’s call it the Dorian Gray pill, after the Oscar Wilde character. Every day that you take the Dorian Gray, you will not die, get sick, or even age. Absolutely guaranteed. The catch? A year’s supply costs $150,000.

Anyone who is able to afford this new treatment can live forever. Certainly, Bill Gates can afford it. Most likely, thousands of upper-income Americans would gladly shell out $150,000 a year for immortality..."

His full article is here.

He is defending the high cost of medical care in the US implicitly because it takes money to invent a pill and by inference the high cost of such care in the US is justifiable. His article ignores totally the well-documented argument that medical cost/GDP is much lower in other advanced countries with a government sponsored plan that has produced as good if not better result in health care.

Read this for comparative costs of US vs Europe.

The Rage!

Frank Rich, the NY Times columnist, was a fervent Obama supporter in his columns when Obama was campaigning. His writings were lethal against the right wing GOP, Fox News, anti-Obama crowd.

Glenn Beck is the controversial Fox News TV so-called newsman who, like his cohorts on Fox News, uses that platform to express their opinions more than reporting news.

Now we find Frank Rich telling us Beck is not all wrong at all when he criticizes Obama on his economic policies.

In the Asian context, it is like ex Taiwan President Chen Shui-bian saying KMT, his life-long enemies, were not all that wrong at all.

So, you know there is something very fundamental going on. Frank Rich and Beck are both expressing a rage felt across the land about Obama's kids glove treatment of Wall Street bestowing on them billions without getting much in return.

You can read Frank Rich's column here.

The State of Macro Economics 4

In rereading David Levine's complaint about Paul Krugman's complaint, I couldn't help feel this is the sort of things you hear in a bitter divorce. How? It is just petty.

Krugman was not of course totally correct. What ailed macroeconomics is more than fresh vs saltwater. That too. The idea that mathematical models can describe an entire economy and then predict what it may become is rather ambitious to be polite.

By contrast, in particle physics, the Standard Model is based firmly in probabilistic statements.

Worse, the arrogance of economists is usually unbearable. It is in no small part helped by this equally arrogant Nobel Prizes of Economic Science handed every year to certify the "scientific" accomplishment of economic theories.

What is wrong with economics?

Nothing -- until you take it too seriously.

Human behavior is intrinsically difficult to "model" by mathematics. Do we understand how we behave in a couple situation? Parents and children? Can we "model" their behavior by mathematics?

Yet economic models are passed out as if they really meant something "scientific".

A cursory look of professional articles, like the one I posted, should be a warning sign to anyone making an honest living that these academic economists are living in a different world pretending they could "model" what we do.

The Levine article is fundamentally flawed. He didn't really answer Krugman's complaint. True you can always find this or that economist talking about bubbles, depressions and unexpected disasters.

Yet, pick any serious textbooks on macro, look at any top 10 PhD programs in economics, those cases are never, ever at the center of studies

99% of all models PhD students MUST study at freshwater universities describe a world where little of what we have witnessed happened. As Krugman correctly pointed out at those places if Keynes was mentioned at all, it would be presented as a case for dismissal.

Krugman is correct in pointing out the principal way economics is taught is terribly wrong, especially at freshwater universities. He was somewhat too generous with saltwater universities that have placed too much importance on modeling using mathematics increasingly irrelevant to realities, even when these saltwater types are not free market ideologues like the Chicago guys.

Saturday, September 19, 2009

The State of Macro Economics 3

Professor of Economics at Washington University, St Louis, David Levine, wrote a sarcastic rebuttal of Paul Krugman's famous essay on the profession. In Levine's essay, he used this article as one "proof" that Krugman had no idea what he was talking about.

Do take a quick look. Quick is the key. If you know how to translate it into human language about inflation, which should have been a simple enough concept, let me know.

Levine's letter is HERE.

This is Wrong!

Private firms should be able to pay whatever they want to their employees. What the US Government is proposing now is not just too late and impossible to implement lest they are run directly by the government, it is counter to the spirit of capitalism. Read this.

It is up to the Boards of Directors of Wall Street and other firms to ensure that what is done within the firms are fair and proper to the shareholders.

"Excessive" payments in the past that led to bonus-fixated executives to sell whatever toxic assets to whichever unsuspecting clients was not "clean and proper". They, as we know now, hurt shareholders' interest. Along the way such tactics violated various checks and balances by SEC or other regulatory agencies which these agencies had failed to implement.

It is just mind-boggling to see the government trying to work with Wall Street with the same wrecking crews responsible for excessive payment checks as well as selling toxics.

This proposal to restrict salaries on Wall Street which I doubt will come to pass sounds more like a PR tactic to placate the boiling resentment of taxpayers who see Wall Street obscene bonuses continue to rise while theirs are either cut or, for many, worse -- they are out of a job.

Economics of NeoCon!

Irving Kristol has died. Known popularly as the Father of Neo Conservatism in the US, Kristol's proteges including his famous son, William Kristol, have had a huge influence on the Bush Administration. Thanks to Professor Brad deLong's blog at his Berkeley campus, I was greatly amused by Mr Kristol's comments in his frank moments:

Irving Kristol explains where the economics articles he published in The Public Interest came from:

Among the core social scientists around The Public Interest there were no economists.... This explains my own rather cavalier attitude toward the budget deficit and other monetary or fiscal problems. The task, as I saw it, was to create a new majority, which evidently would mean a conservative majority, which came to mean, in turn, a Republican majority - so political effectiveness was the priority, not the accounting deficiencies of government...

Now it is clear. He and his influential neo conservative never gave 2 hoots about economic policies!

The State of Macro Economics 2

I forgot about this well-written article. Read here.

No American newspaper or magazine has done such a good job explaining economics to the lay public.


Two young students of economics who are only 20 years. They write well. A good read and a new discovery. Well done, fellas.

Click here.

Obama's Failure

I agree with this writer -- unfortunately. A sobering read. Click here.

The State of Macro Economics

Thanks to Paul Krugman, the entire economics profession is undergoing a rare soul searching that ranges from indignation to Krugman's criticism to reinforcing his argument with new criticisms.

The attached note written by one of the calmer academics tries to be analytical and fair. It is. Yet it has the unintended effect, at least to me, of confirming how utterly out-to-lunch the mainstream academics have been in connecting with the world in which we live in.

Yes, they supposedly study the economy we all help build every day, 365 days a year. But if you can decipher what they are saying in plain English about our economy of which we are a part, I am all ears.

I salute their tireless effort. Don't get me wrong. But I cannot help but feel they are on a different planet solving irrelevant problems using obscure language and mathematics that are really only interesting to their own "fraternity" unrelated to ours.

And that's why I quit wanting to be an academic economist many years ago. For the record my macro economics professors back then represented both fresh and saltwater varieties and I found both wanting.

Friday, September 18, 2009

Winners & Losers?

Typical slapdash mainstream journalism. Read Newsweek's facile report.

Missing among the Winners are: Bob Rubin, chair of Citicorp, ex chairman of Goldman Sachs, on whose watch Citicorp went wild with its derivatives and had to be rescued by Uncle Sam but he got away with a cool $500 million in cash compensation and stock options.

Alan Greenspan who kept interest rates low and lower fueling a hot bubble.

Hank Greenberg of AIG who poisoned the company's integrity by allowing creative accounting misrepresenting the truth financial conditions of the firm but paid only $15 million to SEC to settle his criminality.

Christopher Cox, former chair of SEC, who turned the other way while Wall Street and the Rating Agencies scratched each other's back misrepresenting the true nature of firms given AAA ratings.

John Mack, chairman of Morgan Stanley, who managed to squash a near certain verdict of wrong doings through his political connections.

You got the drift?

Team Obama Incompetence

Jon Stewart said it best.

"..Stewart pokes fun at President Obama's frustrating tendency to speak about the financial reform as work in progress. Namely, he quotes the President as saying "We've got to close the financial loopholes were at the heart of the crisis." Here's Stewart's response:

"We've got to close? We're going to close....We gave them $700 billion BEFORE we closed the loopholes?"

Read more at:

It is a sad commentary on US mainstream journalism for its lame performance during 8 years of Bush Administration that in a poll most Americans voted Jon Stewart, a comedian with his own daily "news" show, the most trusted "journalist".

The quote above is a gem that bested many "investigative" reporting.

Justice on Wall Street - 3?

A classic Wall Street question. If a talented trader and his division are capable of generating a billion dollar profits, shouldn't he and his staff be entitled to a percentage of that profits. Perhaps a $100 million a year? Sounds reasonable? Ask say Lloyd Blankfein, he would most likely say yes.

This is not a hypothetical situation. A trader at Citibank is expected to walk away with $100 million bonus because his trading division has been very profitable. Read this.

Spare a moment to think through this. A George Soros,, founder and owner of Soros Management who has generated many billions over the years starting from scratch with a two person office has earned his bonuses by proving to the world that he did it "his way", none others.

Citicorp, a giant corporation with a global reach, whose origin goes back to Citibank, founded in 1812, has access to more privileged information without much cost of gathering and at a speed unavailable to most of us. So a trader working for Citicorp would have an advantage that comes with the corporation he had done nothing to contribute.

To reward him with a $100 million without rewarding to many others in the same corporation to have helped gathered whatever information he needed, or who have given the trader insights to make a big profit for the company is simply mindless and unfair which was, indeed, symptomatic of the twisted values during a bubble.

By the way if he had bet wrong, the shareholders of Citicorp would have suffered, and indeed, many shareholders and clients of Wall Street firms have due to that very same reason.

But when he bet right, he and other traders would walk away with a prince ransom.

If Soros had bet wrong, his own personal pocket would have suffered along with his clients. The worse that could happen to the Andrew Halls of the world would be just their job.

So, it would be interesting to see how the US Government is going to handle this case. The guy had a contract signed, of course, during the bubble years that, I guess, would bind Citi legally to pay him.

During those years Wall Street firms would sign any similar contracts to traders who they thought were geniuses. Those Wall Street leaders forgot and will continue to forget that in a bubble "everyone" is a genius, until the bubble bursts.

Remember those Rating Agencies?

Finally, the Securities & Exchange Commission (SEC) in the US seems to be doing something about the rating agencies that in my view had criminally helped pour oil on fire during the financial bubbles putting on knowingly high ratings on junk. Read this.

However, to send a clearer message to the agencies management, why not put them on trial for providing false information which would be against SEC regulations? Once some of those senior guys end up behind bars, these agencies, and yes, their respective negligent boards would then and only then behave differently.

Justice on Wall Street - 2?

The story i am posting here (click)is so revealing of the incompetence of Team Obama in charge of the rescue package to save Wall Street.

US government is finally taking more seriously how upset the taxpayers over the injustice of the package.

Belatedly, it is sending bureaucrats to help set salaries scale. This is nuts. It's too LATE. It will be a nightmare for everyone.

I may sound like a broken record, the proper time line would have been temporarily nationalizing those firms that needed bailout money. They should have long done the following:

1) replace the sitting managements by promoting from within those firms with a new mindset and a mandate to reform from with;

2) replace in whole or in parts the members of the boards that had failed miserably in their fiduciary duties because they had allowed the managements to run amok producing and selling toxic derivative products in a greater fools game that had blown up.

3) let the new boards and management retool compensation packages on their own. This must be done throughout Wall Street so that no retooled firms can implement an incentive package substantially more attractive than any others on the Street that would cause an exodus from one firm to another.

Right now to do what should have been done in like sticking fingers into holes of a dam already half collapsed. Imagine having to work this out with the same managements that had gone amok in the first place?! Nuts.

It is a mess.

How Did Economists Get It So Wrong? Act 3

Paul Krugman's "complaint" about macroeconomics in general and "freshwater" types in particular has generated an avalanche of response. I posted Krugman's article twice on this blog.

From the University of Chicago, the "cathedral" of Freshwater guys, Professor Cochrane returned the salvo with "How Did Paul Krugman..." You get the drift. I also posted that too.

To sort out the rights from the wrongs, you really need to have had Intermediate/advanced Macro plus a decent dose of history of economic thoughts in the 20th century.

Assuming you have that background, here are two longish, relatively technical articles by two respected economists that are relatively non-polemical for your long plane rides. Laidler's is less technical than Gordon's.

If you find them rough going, go back to your 201 Maccro textbook to revisit terms such as IS-LM curves, liquidity preference, liquidity trap, real business cycles and most importantly Rational Expectations Theory by Lucas. Of course it would help to have John Maynard Keynes' classic: General Theory of Employment, Interest and Money. Lucas has plenty of writings available online.


1) Professor David Laidler
2) Robert Gordon at Northwestern University

Justice on Wall Street - 1

Good news. Read here.

Since Washington DC dropped the ball when they were writing multibillion checks to Wall Street with near zero strings attached, it is now up to the Attorney General of New York State to do something to compensate for Washington's gross negligence.

I just hope Mr Cuomo does not stop with BoA to move on to Goldman Sachs, Morgan Stanley and other firms whose directors clearly, unambiguously neglected their fiduciary duties.

Wednesday, September 16, 2009

Green Power in China

Thomas Friedman, NY Times columnist and author, is big on green energy. He has been impressed by how fast Beijing has understood the need to GO GREEN. Here is an excerpt from his latest column:

"...O.K., so you don’t believe global warming is real. I do, but let’s assume it’s not. Here is what is indisputable: The world is on track to add another 2.5 billion people by 2050, and many will be aspiring to live American-like, high-energy lifestyles. In such a world, renewable energy — where the variable cost of your fuel, sun or wind, is zero — will be in huge demand.

China now understands that. It no longer believes it can pollute its way to prosperity because it would choke to death. That is the most important shift in the world in the last 18 months. China has decided that clean-tech is going to be the next great global industry and is now creating a massive domestic market for solar and wind, which will give it a great export platform..."

The full column is HERE.

On Chen Shui-bian in Taiwan

My article on the sentencing of ex Taiwan President Chen can be found here. In due time it will appear in 7 languages on

Conflict between Short vs Long Term profits?

Speaking at a conference in Hong Kong, outgoing chief of HK Monetary Authority said: "... large banking profits and staff bonuses led to lower financial efficiency and contributed to the financial crisis...

He said there was a conflict between the private, short term interest of financial groups to maximise profits and the public interest of effective financial intermediation that provided support to the economy. “This conflict has not been talked about much, if at all, even in central banking forums...”

Questions: 1) how does one distinguish between short versus long term profits in an investment bank that derives its income mainly through services and trading profits? 2) how does it lead to lower financial efficiency exactly; and 3) how does one differentiate between private and public interest in terms of what banks do?

Answer to:

1) It is impossible to different between short and long term profits for an investment bank whose principal activities by their nature are trading oriented.

2) Maximizing profits is what private firms do whether they are financial or manufacturing. Making a profit only leads to financial inefficiency if information is "asymmetrical" meaning the firm withholds information from its clients who buy financial products from it and if regulatory authorities do not enforce properly and if there are insufficient regulations on the book to ensure proprietary information is kept to an absolute minimum.

3) The differential between public and private interests can only be defined if prices do in fact reflect complete symmetry of information. In other words if one party knows more than the other, then prices are not optimally determined creating inefficiency in the economy. If a tire company keeps making faulty tires, it can only fool its customers some of the time, but not all. However, it is important that this tire company is not the only game in town.

What is worrisome is Wall Street is now in fewer and fewer hands. So even if someone got burned by Goldman Sachs, say, as long as it remains the dominant player on Wall Street, customers, old or new, are likely to return to its fold thinking it possesses "insider" information that it could share with its clients.

Know what? That's exactly what happened. Favored clients did and continue to receive favorable treatment by getting more information sooner than the average client. It pays to be a big client. And that's the main problem Yam did not at all raise.

Mr Yam was nowhere near what are the central issues are.

Tuesday, September 15, 2009

People Are Upset 3

When the US judge Rakoff held up the BoA/SEC settlement he opined inter alia the following:

...'the proposed settlement "cannot remotely be called fair,".

Would the $15 million settlement be re-opened between SEC and Hank Greenberg, former chairman of AIG, found to have doctored financial statements misrepresenting the true conditions of the company whose shares were selling at inflated prices? Further, the company went belly up if not for Uncle Sam's multibillion rescue? He got off for a mere $15 million which he of course paid promptly! Is that "remotely fair" as well?

People are Upset 2

Across the political spectrum in the United States, from the traditionally liberal Left to the Right, you can notice lots of unhappiness over how Team Obama has allowed Wall Street to get away with "murder". Watch these.

People Are Upset

Team Obama's velvet Wall Street policy has upset many people. This recent development is just one manifestation of that unhappiness. By a judge no less. Read here.

Monday, September 14, 2009

Wall Street Won v3.0

President Obama, as this article reveals, is encountering problems on Wall Street in shaping his own policy.

But of course. He lost control at the beginning when he let Geithner and Summers write big checks to save Wall Street without at that time taking management control.

Was he so naive or did he trust the Geithner/Summers team too much.

Remember what his critics, including me, were saying. To reform Wall Street you need to put in proper control to safeguard taxpayers $$, to get a decent return on taxpayers' de facto investments in saving Wall Street. That could only mean one thing -- Obama had to temporarily "nationalize" those needing public money. But he got bad advice and he got cold feet when the totally cynical and hypocritical Republican Party were labeling him a "Socialist". After all, the lackadaisical look-the-other-way Republicans allowed Wall Street to help create a giant bubble that caused havoc to all of us.

Paul Volcker, an advisor to Obama and former Fed Chairman, among others strongly recommended a temporary nationalization. It was known as the Swedish "model".

During a previous banking crisis, Sweden temporarily nationalized the banks and then re-privatized them after working out their balance sheet loan problems. Volcker and others were marginalized by Geithner/Summers. Geithner famously dimissed that suggestion on TV: "United States is not Sweden."

So the inevitable happens. Obama now needs Wall Street's cooperation more than the latter needs his. Why?

Elementary, Doctor.

Wall Street already cashed those hundreds of billions worth of checks.

Thank you Uncle Sam. We on Wall Street will call you to let you know how we plan to move forward.

The Rise, Fall and Rise of Wall Street

This is fun. It is interactive. Enter here.

How Did Economists Get It So Wrong? Act 2

Paul Krugman's broadside against his own profession I first posted on September 6 (reproduced here again) has elicited the sort of take-no-prisoners, massive retaliation response seldom seen in normally rather sedate academic debates.

Exhibit one from Professor John Cochrane who hails from the Freshwater "Cathedral" of Laissez-faire ideology, the University of Chicago Economics/Business School.

I am quoting him in full below because he apparently has removed it from his own homepage.

It is not just the tone of the response that's interesting.

For those of us who still remember how the late Milton Friedman practically single-handedly resurrected laissez-faire to battle the then reigning Keynesian economics, one cannot but note that Cochrane's return fire will mark another decades long effort by the "Freshwater" types to reverse the current unapologetic Keynesian economic policy that is shaping the the present global economic landscape.

How did Paul Krugman get it so Wrong?

John H. Cochrane

Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “How did Economists get it so wrong?”

Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.

It gets worse. Krugman hints at dark conspiracies, claiming “dissenters are marginalized.” Most of the article is just a calumnious personal attack on an ever-growing enemies list, which now includes “new Keyenesians” such as Olivier Blanchard and Greg Mankiw. Rather than source professional writing, he plays gotcha with out-of-context second-hand quotes from media interviews. He makes stuff up, boldly putting words in people’s mouths that run contrary to their written opinions. Even this isn’t enough: he adds cartoons to try to make his “enemies” look silly, and puts them in false and embarrassing situations. He accuses us of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks.” It sounds a bit paranoid.

It’s annoying to the victims, but we’re big boys and girls. It’s a disservice to New York Times readers. They depend on Krugman to read real academic literature and digest it, and they get this attack instead. And it’s ineffective. Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.

That’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and advice to spend like a drunken sailor are pretty superficial compared to all the fascinating things economists are writing about it these days. How sad.

That’s what I think, but I don’t expect you the reader to be convinced by my opinion or my reference to professional consensus. Maybe he is right. Occasionally sciences, especially social sciences, do take a wrong turn for a decade or two. I thought Keynesian economics was such a wrong turn. So let’s take a quick look at the ideas.
Krugman’s attack has two goals. First, he thinks financial markets are “inefficient,” fundamentally due to “irrational” investors, and thus prey to excessive volatility which needs government control. Second, he likes the huge “fiscal stimulus” provided by multi-trillion dollar deficits.


It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer.

Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. This is a canard that Paul knows better than to pass on, no matter how rhetorically convenient. (I can overlook his mixing up the CAPM and Black-Scholes model, but not this.) There is nothing about “efficiency” that promises “stability.” “Stable” growth would in fact be a major violation of efficiency. Efficient markets did not need to wait for “the memory of 1929 … gradually receding,” nor did we fail to read the newspapers in 1987. Data from the great depression has been included in practically all the tests. In fact, the great “equity premium puzzle” is that if efficient, stock markets don’t seem risky enough to deter more people from investing! Gene Fama’s PhD thesis was on “fat tails” in stock returns.

It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time, and is lower in bad economic times. As Gene Fama pointed out in 1970, these are observationally equivalent explanations. Unless you are willing to elaborate your theory to the point that it can quantitatively describe how much and when risk premiums, or waves of “optimism” and “pessimism,” can vary, you know nothing. No theory is particularly good at that right now. Crying “bubble” is empty unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row.

But this difficulty is no surprise. It’s the central prediction of free-market economics, as crystallized by Hayek, that no academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what “fundamental” value is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism would have worked.

More deeply, the economist’s job is not to “explain” market fluctuations after the fact, to give a pleasant story on the evening news about why markets went up or down. Markets up? “A wave of positive sentiment.” Markets went down? “Irrational pessimism.” ( “The risk premium must have increased” is just as empty.) Our ancestors could do that. Really, is that an improvement on “Zeus had a fight with Apollo?” Good serious behavioral economists know this, and they are circumspect in their explanatory claims so far.

But this argument takes us away from the main point. The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse.

Krugman at bottom is arguing that the government should massively intervene in financial markets, and take charge of the allocation of capital. He can’t quite come out and say this, but he does say “Keynes considered it a very bad idea to let such markets…dictate important business decisions,” and “finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a `casino.’” Well, if markets can’t be trusted to allocate capital, we don’t have to connect too many dots to imagine who Paul has in mind.

To reach this conclusion, you need evidence, experience, or any realistic hope that the alternative will be better. Remember, the SEC couldn’t even find Bernie Madoff when he was handed to them on a silver platter. Think of the great job Fannie, Freddie, and Congress did in the mortgage market. Is this system going to regulate Citigroup, guide financial markets to the right price, replace the stock market, and tell our society which new products are worth investment? As David Wessel’s excellent In Fed We Trust makes perfectly clear, government regulators failed just as abysmally as private investors and economists to see the storm coming. And not from any lack of smarts.

In fact, the behavioral view gives us a new and stronger argument against regulation and control. Regulators are just as human and irrational as market participants. If bankers are, in Krugman’s words, “idiots,” then so must be the typical treasury secretary, fed chairman, and regulatory staff. They act alone or in committees, where behavioral biases are much better documented than in market settings. They are still easily captured by industries, and face politically distorted incentives.

Careful behavioralists know this, and do not quickly run from “the market got it wrong” to “the government can put it all right.” Even my most behavioral colleagues Richard Thaler and Cass Sunstein in their book “Nudge” go only so far as a light libertarian paternalism, suggesting good default options on our 401(k) accounts. (And even here they’re not very clear on how the Federal Nudging Agency is going to steer clear of industry capture.) They don’t even think of jumping from irrational markets, which they believe in deeply, to Federal control of stock and house prices and allocation of capital.


Most of all, Krugman likes fiscal stimulus. In this quest, he accuses us and the rest of the economics profession of “mistaking beauty for truth.” He’s not clear on what the “beauty” is that we all fell in love with, and why one should shun it, for good reason. The first siren of beauty is simple logical consistency. Paul’s Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income. The second siren is plausible assumptions about how people behave. Keynesian economics requires that the government is able to systematically fool people again and again. It presumes that people don’t think about the future in making decisions today. Logical consistency and plausible foundations are indeed “beautiful” but to me they are also basic preconditions for “truth.”

In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more. They will buy the new government debt and leave all spending decisions unaltered. Is this theorem true? It’s a logical connection from a set of “if” to a set of “therefore.” Not even Paul can object to the connection.

Therefore, we have to examine the “ifs.” And those ifs are, as usual, obviously not true. For example, the theorem presumes lump-sum taxes, not proportional income taxes. Alas, when you take this into account we are all made poorer by deficit spending, so the multiplier is most likely negative. The theorem (like most Keynesian economics) ignores the composition of output; but surely spending money on roads rather than cars can affect the overall level.

Economists have spent a generation tossing and turning the Ricardian equivalence theorem, and assessing the likely effects of fiscal stimulus in its light, generalizing the “ifs” and figuring out the likely “therefores.” This is exactly the right way to do things. The impact of Ricardian equivalence is not that this simple abstract benchmark is literally true. The impact is that in its wake, if you want to understand the effects of government spending, you have to specify why it is false. Doing so does not lead you anywhere near old-fashioned Keynesian economics. It leads you to consider distorting taxes, how much people care about their children, how many people would like to borrow more to finance today’s consumption and so on. And when you find “market failures” that might justify a multiplier, optimal-policy analysis suggests fixing the market failures, not their exploitation by fiscal multiplier. Most “New Keynesian” analyses that add frictions don’t produce big multipliers.

This is how real thinking about stimulus actually proceeds. Nobody ever “asserted that an increase in government spending cannot, under any circumstances, increase employment.” This is unsupportable by any serious review of professional writings, and Krugman knows it. (My own are perfectly clear on lots of possibilities for an answer that is not zero.) But thinking through this sort of thing and explaining it is much harder than just tarring your enemies with out-of-context quotes, ethical innuendo, or silly cartoons.

In fact, I propose that Krugman himself doesn’t really believe the Keynesian logic for that stimulus. I doubt he would follow that logic to its inevitable conclusions. Stimulus must have some other attraction to him.
If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he essentially borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.

If you believe the Keynesian argument for stimulus, you don’t care how the money is spent. All this puffery about “infrastructure,” monitoring, wise investment, jobs “created” and so on is pointless. Keynes thought the government should pay people to dig ditches and fill them up.

If you believe in Keynesian stimulus, you don’t even care if the government spending money is stolen. Actually, that would be better. Thieves have notoriously high propensities to consume.

The crash.

Krugman’s article is supposedly about how the crash and recession changed our thinking, and what economics has to say about it. The most amazing news in the whole article is that Paul Krugman has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward. He seems completely unaware of the large body of work by economists who actually do know something about the banking and financial system, and have been thinking about it productively for a generation.
Here’s all he has to say: “Irrationality” caused markets to go up and then down. “Spending” then declined, for unclear reasons, possibly “irrational” as well. The sum total of his policy recommendations is for the Federal Government to spend like a drunken sailor after the fact.

Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A generation of economists has thought really hard about these kinds of events. Look up Diamond, Rajan, Gorton, Kashyap, Stein, and so on. They’ve thought about why there is so much short term debt, why banks run, how deposit insurance and credit guarantees help, and how they give incentives for excessive risk taking.

If we want to think about events and policies, this seems like more than a minor detail. The hard and central policy debate over the last year was how to manage this financial crisis. Now it is how to set up the incentives of banks and other financial institutions so this mess doesn’t happen again. There’s lots of good and subtle economics here that New York Times readers might like to know about. What does Krugman have to say? Zero.
Krugman doesn’t even have anything to say about the Fed. Ben Bernanke did a lot more last year than set the funds rate to zero and then go off on vacation and wait for fiscal policy to do its magic. Leaving aside the string of bailouts, the Fed started term lending to securities dealers. Then, rather than buy treasuries in exchange for reserves, it essentially sold treasuries in exchange for private debt. Though the funds rate was near zero, the Fed noticed huge commercial paper and securitized debt spreads, and intervened in those markets. There is no “the” interest rate anymore, the Fed is attempting to manage them all. Recently the Fed has started buying massive quantities of mortgage-backed securities and long-term treasury debt.

Monetary policy now has little to do with “money” vs. “bonds” with all the latter lumped together. Monetary policy has become wide-ranging financial policy. Does any of this work? What are the dangers? Can the Fed stay independent in this new role? These are the questions of our time. What does Krugman have to say? Nothing.
Krugman is trying to say that a cabal of obvious crackpots bedazzled all of macroeconomics with the beauty of their mathematics, to the point of inducing policy paralysis. Alas, that won’t stick. The sad fact is that few in Washington pay the slightest attention to modern macroeconomic research, in particular anything with a serious intertemporal dimension. Paul’s simple Keynesianism has dominated policy analysis for decades and continues to do so. From the CEA to the Fed to the OMB and CBO, everyone just adds up consumer, investment and government “demand” to forecast output and uses simple Phillips curves to think about inflation. If a failure of ideas caused bad policy, it’s a simpleminded Keynesianism that failed.

The future of economics.

How should economics change? Krugman argues for three incompatible changes.
First, he argues for a future of economics that “recognizes flaws and frictions,” and incorporates alternative assumptions about behavior, especially towards risk-taking. To which I say, “Hello, Paul, where have you been for the last 30 years?” Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott’s 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking which Krugman does not mention has also been doing exactly the same.

Second, Krugman argues that “a more or less Keynesian view is the only plausible game in town,” and “Keynesian economics remains the best framework we have for making sense of recessions and depressions.” One thing is pretty clear by now, that when economics incorporates flaws and frictions, the result will not be to rehabilitate an 80-year-old book. As Paul bemoans, the “new Keynesians” who did just what he asks, putting Keynes inspired price-stickiness into logically coherent models, ended up with something that looked a lot more like monetarism. (Actually, though this is the consensus, my own work finds that new-Keynesian economics ended up with something much different and more radical than monetarism.) A science that moves forward almost never ends up back where it started. Einstein revises Newton, but does not send you back to Aristotle. At best you can play the fun game of hunting for inspirational quotes, but that doesn’t mean that you could have known the same thing by just reading Keynes once more.

Third, and most surprising, is Krugman’s Luddite attack on mathematics; “economists as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” Models are “gussied up with fancy equations.” I’m old enough to remember when Krugman was young, working out the interactions of game theory and increasing returns in international trade for which he won the Nobel Prize, and the old guard tut-tutted “nice recreational mathematics, but not real-world at all.” How quickly time passes.

Again, what is the alternative? Does Krugman really think we can make progress on his – and my – agenda for economic and financial research -- understanding frictions, imperfect markets, complex human behavior, institutional rigidities – by reverting to a literary style of exposition, and abandoning the attempt to compare theories quantitatively against data? Against the worldwide tide of quantification in all fields of human endeavor (read “Moneyball”) is there any real hope that this will work in economics?

No, the problem is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose. The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick. Frictions are just bloody hard with the mathematical tools we have now.

The insults.

The level of personal attack in this article, and fudging of the facts to achieve it, is simply amazing.
As one little example (ok, I’m a bit sensitive), take my quotation about carpenters in Nevada. I didn’t write this. It’s a quote, taken out of context, from a article written by a reporter who I spent about 10 hours with patiently trying to explain some basics. (It’s the last time I’ll do that!) I was trying to explain how sectoral shifts contribute to unemployment. Krugman follows it by a lie -- I never asserted that “it take mass unemployment across the whole nation to get carpenters to move out of Nevada.” You can’t even dredge up a quote for that monstrosity.

What’s the point? I don’t think Paul disagrees that sectoral shifts result in some unemployment, so the quote actually makes sense as economics. The only point is to make me, personally, seem heartless -- a pure, personal, calumnious attack, having nothing to do with economics.

Bob Lucas has written extensively on Keynesian and monetarist economics, sensibly and even-handedly. Krugman chooses to quote a joke, made back in 1980 at a lunch talk to some business school alumni. Really, this is on the level of the picture of Barack Obama with Bill Ayres that Sean Hannity likes to show on Fox News.

It goes on. Krugman asserts that I and others “believe” “that an increase in government spending cannot, under any circumstances, increase employment,” or that we “argued that price fluctuations and shocks to demand actually had nothing to do with the business cycle.” These are just gross distortions, unsupported by any documentation, let alone professional writing. And Krugman knows better. All economic models are simplified to exhibit one point; we all understand the real world is more complicated; and his job is supposed to be to explain that to lay readers. It would be no different than if someone were to look up Paul’s early work which assumed away transport costs and claim “Paul Krugman believes ocean shipping is free, how stupid” in the Wall Street Journal.

The idea that any of us do what we do because we’re paid off by fancy Wall Street salaries or cushy sabbaticals at Hoover is just ridiculous. (If Krugman knew anything about hedge funds he’d know that believing in efficient markets disqualifies you for employment. Nobody wants a guy who thinks you can’t make any money trading!) Given Krugman’s speaking fees, it’s a surprising first stone for him to cast.

Apparently, salacious prose, innuendo, calumny, and selective quotation from media aren’t enough: Krugman added cartoons to try to make opponents look silly. The Lucas-Blanchard-Bernanke conspiratorial cocktail party celebrating the end of recessions is a silly fiction. So is their despondent gloom on reading “recession” in the paper. Nobody at a conference looks like Dr. Pangloss with wild hair and a suit from the 1800s. (OK, Randy Wright has the hair, but not the suit.) Keynes did not reappear at the NBER to be booed as an “outsider.” Why are you allowed to make things up in pictures that wouldn’t pass even the Times’ weak fact-checking in words?
Well, perhaps we got off easy. This all was mild compared to Krugman’s vicious obituary of Milton Friedman in the New York Review of Books. But most of all, Paul isn’t doing his job. He’s supposed to read, explain, and criticize things economists write, and preferably real professional writing, not interviews, opeds and blog posts. At a minimum, this leads to the unavoidable conclusion that Krugman isn’t reading real economics anymore.

How did Krugman get it so wrong?

So what is Krugman up to? Why become a denier, a skeptic, an apologist for 70 year old ideas, replete with well-known logical fallacies, a pariah? Why publish an essentially personal attack on an ever-growing enemies list that now includes practically every professional economist? Why publish an incoherent vision for the future of economics?

The only explanation that makes sense to me is that Krugman isn’t trying to be an economist, he is trying to be a partisan, political opinion writer. This is not an insult. I read George Will, Charles Krauthnammer and Frank Rich with equal pleasure even when I disagree with them. Krugman wants to be Rush Limbaugh of the Left. I still want to be Milton Friedman, but each is a worthy calling.

Alas, to Krugman, as to far too many ex-economists in partisan debates, economics is not a quest for understanding. It is a set of debating points to argue for policies that one has adopted for partisan political purposes. “Stimulus” is just marketing to sell Congressmen and voters on a package of government spending priorities that you want for political reasons. It’s not a proposition to be explained, understood, taken seriously to its logical limits, or reflective of market failures that should be addressed directly.

Why argue for a nonsensical future for economics? Well, again, if you don’t regard economics as a science, a discipline that ought to result in quantitative matches to data, a discipline that requires crystal-clear logical connections between the “if” and the “then,” if the point of economics is merely to provide marketing and propaganda for politically-motivated policy, then his writing does make sense. It makes sense to appeal to some future economics – not yet worked out, even verbally – to disdain quantification and comparison to data, and to appeal to the authority of ancient books as interpreted you, their lone remaining apostle.

Most of all, this is the only reason I can come up with to understand why Krugman wants to write personal attacks on those who disagree with him. I like it when people disagree with me, and take time to read my work and criticize it. At worst I learn how to position it better. At best, I discover I was wrong and learn something. I send a polite thank you note.

Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence. Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.

This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.

Sunday, September 13, 2009

No change on Wall Street - 3? No, Big Change

I must amend (only slightly) the thesis that Wall Street is not mending its way. It is mending in a way that would make your jaws drop.

The latest report indicates a very big change is coming. Wall Street is going to change Washington. Read here.

If I knew my Wall Street smarts, plus the history of lobbies in DC, Wall Street will take DC -- through it, the taxpayers -- to the cleaners.

One paragraph caught my attention in particular. It provides a perspective of how much $$ US taxpayers had already shelled out to save Wall Street, or I should say, the small number of "masters of universe": -

..."Three times as much U.S. taxpayer money has gone into propping up a single firm, insurance giant American International Group, as the world spent a decade ago during the financial rescue of South Korea, then the world's 11th-largest economy. And the emergency bailout of financial firms that Congress approved last year has cost nearly as much as the first five years of the war in Iraq."...

To refresh your memory, a significant chunk of AIG rescue money went straight to Goldman Sachs to settle an AIG payable to that princely firm whose ex Chairman was the US Treasury Secretary when the AIG money was being handed out.

OK, mark me cynical. But fact is fact.

No change on Wall Street - 2

If you want to understand more why Wall Street has not changed much from its recent debacles, read this. Be forewarned. It has a lot of materials. But they provoke serious thinking.

Saturday, September 12, 2009

No Change on Wall Street

Is it really so surprising to find very little has changed on Wall Street as this New York Times report appears to have wondered? The article is here.

Financial capital likes high rates of return and speed. It likes to move like a supersonic cruise missile honed to hit a target and then it wants to move on to the next.

Those who consistently hit targets achieving high rates of returns over time feel they are different from you and me. They think they are smarter and would always have a higher betting average.

To maintain high betting averages which translate into multi-million dollar bonuses and stock options, Wall Street bankers would not consider fixing the game in their favor entirely beneath them especially when regulatory institutions such as SEC or the Fed are under-staffed or run by people who share their views about financial capital. The ease with which Wall Street has shaped the regulatory thinking in Washington did not stop with the Bush Administration leaving DC.

The financial Team Obama shares the core values of Wall Street. They are cut from the same cloth. Super rich Wall Street "wizards" are admired by those who work in the government or in universities.

Wall Street rewards "winning" at any cost. If in that process a bubble here and there is a consequence, so be it. A bull market always follows a bear market. That pattern has never changed. Read the charts.

And that's why the financial rescue package has been tilted towards favoring Wall Street firms and that's why scant regulatory measures are reinforced to make it harder for Wall Street to help create another wasteful financial bubble.

Team Obama headed by Tim Geithner and Larry Summers, both beneficiaries of past Wall Street largesse, is planting the seeds of undermining President Obama's credibility as a fair and honest arbiter of a country in trouble.

Goldman Sachs being contrite?

Lloyd Blankfein, Chairman of Goldman Sachs, seemed apologetic over his company's role in creating the derivatives bubble on Wall Street admitting some of those derivates were "socially useless". Read this.

FT reported in the same issue that: "The firm has already earmarked $11.4bn to compensate employees for the first half of the year. If Goldman’s second-half earnings stay on track, it could pay out an average of $770,000 to each of its 29,400 employees. Its top executives stand to take home tens of millions of dollars in bonuses, as was the case in 2006 and 2007".

The firm has to keep generating huge profits to pay for "top talents" if it wants to keep them from jumping to its competitors.

Someone should have asked the chairman: "Would Goldman Sachs refrain from selling similarly risky and sociall useless derivatives in the future if that meant lower growth rates in company profits?"

But that would have been most impolite in the gentleman's world of banking, wouldn't it?

Friday, September 11, 2009

Justice is Served in Taiwan

Ex President of Taiwan, Chen Shui Bien (Ah Bien), got life sentence for corruption. Read this.

Thus ended a particularly cantankerous political period in modern Taiwan history for under Ah Bien's policy of falsely dividing the country into "local" (meaning in his mind those who were not from the mainland. Indeed not Chinese even) and "non local" (meaning those who were), Taiwan neglected to improve itself economically and indeed politically while its supposed enemy across the Taiwan Straits made great strife.

The division was false as there was no such thing as pure locals vs non-pure locals, or Non Chinese vs Chinese. Ah Bien's divide and conquer policy created an artificial ethnic conflict that was neither healthy nor was it based on any real contradictions between these two supposedly different groups.

The only "real" local group was the original Aboriginals who were there many thousands of years ago before any Chinese (including of course Ah Bien's ancestors) ever showed up.

As it turned out Ah Bien, a supposedly clean non corrupt politician, was a liar and a thief. He stole money from public coffers.

It would take a different group of "local" politicians under the banner of Democratic Progressive Party (DPP), an Independent Taiwan movement, to offer itself as a credible ruling party. Could it happen?

Never can tell. It depends hugely on whether the ruling KMT could reform its corrupt past as well.

The winner of the day is the judicial process in Taiwan.

A Good Graph Comparing US recessions

The US economic downturn right now is the third worst on record. However, final verdict is pending as unemployment rates keep climbing and the economy has yet to hit bottom.


Wednesday, September 09, 2009

Engineering Is Back in Vogue!

For too many years the best universities in the United States educated a large percentage of their students to feed into Wall Street.

A recent survey of Princeton graduates indicated that as much as 40% of their graduates in recent years chose the financial industry for their career. Financial rewards as we know have been off-the-chart. The Goldman Sachs's and the Morgan Stanley's got the lion share of those graduates.

Financial rewards may be changing especially given the recent debacles on Wall Street. Engineering, for decades, a neglected sector in the United States, is now paying more on average than non-engineering majors.

If incentives count as a magnet, perhaps fewer would get into the business of verbiage and more to doing something productive.

Read this:

Tuesday, September 08, 2009


The word "quagmire" invoking the failed US strategy and tactics in Vietnam is now appearing more frequently in the pages of the New York Times. Read here.

I do not derive any pleasure in finding knowledgeable folks like those NY Times reporters agreeing with what I have been saying for a long time. I do find it worrying that the US is once again pursuing a strategy that is more likely to fail than to succeed. Lives wasted. Money wasted. Hearts and minds not won but lost in Afghanistan. Supporting a regime tainted with drug trafficking and corruption seems to have become a habit among Washington leaders over the years.

And, by the way, I do very much blame the last Bush administration for diverting attention from capturing Osama to attacking Iraq for possessing non-existent weapons of mass destruction.

Mr. Bush even at one point said Osama was effectively irrelevant anymore. Such ignorance and arrogance. Now the US is paying for his mistakes.

Sunday, September 06, 2009

Why Afghanistan?

Remember it was initially to capture Osama Bin Laden. Experts say he was about to be captured but then Bush and company decided to go after Sadam Hussein diverting resources from Afghanistan to Iraq.

Meanwhile Osama managed to build a substantial infrastructure in Afghanistan. The defeated Taliban too managed to resurrect itself challenging once again the official Kabul government.

Often, though not always, it appears Al Qaeda and Taliban work on common objectives to get the US out of Afghanistan. The official Kabul government is as corrupt and rotten as any seen in a bad tiresome movie replayed on TV too many times. And so we are where are are. Read this in today's NY Times

September 6, 2009
From Baby-Sitting to Adoption


On Aug. 29, this newspaper carried a front-page headline that should make your blood boil: “Karzai Using Rift With U.S. to Gain Favor.” The article said that Obama officials were growing disenchanted with the Afghan president, Hamid Karzai, whose supporters allegedly stuffed ballot boxes in the recent elections, while Mr. Karzai struck deals with accused drug dealers and warlords, one of whom is his brother, for political gain. The article added, though, that in a feat of political shrewdness, Mr. Karzai “has surprised some in the Obama administration” by turning their anger with him “to an advantage, portraying himself at home as the only political candidate willing to stand up to the dictates of the United States.”

If this is how our “allies” are treating us in Afghanistan, after eight years, then one really has to ask not whether we can afford to lose there but whether we can afford to win there.

It would be one thing if the people we were fighting with and for represented everything the Taliban did not: decency, respect for women’s rights and education, respect for the rule of law and democratic values and rejection of drug-dealing. But they do not. Too many in this Kabul government are just a different kind of bad. This has become a war between light black — Karzai & Co. — and dark black — Taliban Inc. And light black is simply not good enough to ask Americans to pay for with blood or treasure.

This is the most important and troubling fact about Afghanistan today: After eight years of work there, we still do not have a reliable Afghan partner to hand off to. And it is not all our fault. Lord knows, Iraq still has problems. The outcome there remains uncertain. But the reason Iraq still has a chance for a decent future is because a critical mass of Kurds, Sunnis and Shiites were ready to take on their own extremists and hold reasonably fair elections. The surge in Iraq started with key Iraqi communities wanting to liberate themselves from their own radicals. Our troops helped them do that.

The strategy that our new — and impressive — commander in Afghanistan, Gen. Stanley McChrystal, is pursuing calls for additional troops to create something that does not now exist there — a reasonably noncorrupt Afghan state that will serve its people and partner with America in keeping Afghanistan free of drug lords, warlords, the Taliban and Al Qaeda. His plan calls for clearing areas of Taliban control, holding those areas and then building effective local, district and provincial governments — along with a bigger army, real courts, police and public services. Because only with all that can we hold the support of the Afghan people and avoid a Taliban victory and a return of Al Qaeda that could threaten us. That is the theory.

And it may, indeed, be the only way to go, but we should have no illusions: We’re talking State Building 101 in the most inhospitable terrain and in one of the poorest, most tribalized, countries in the world.

As the military expert Anthony Cordesman, who has advised the U.S. Army in Afghanistan, explained in The Washington Post recently, it requires “a significant number” of U.S. reinforcements and time to do what the Kabul government has failed to do, because it remains “a grossly overcentralized government that is corrupt, is often a tool of power brokers and narco-traffickers, and lacks basic capacity in virtually every ministry.”

To put it another way, we are not just adding more troops in Afghanistan. We are transforming our mission — from baby-sitting to adoption. We are going from a limited mission focused on baby-sitting Afghanistan — no matter how awful its government — in order to prevent an Al Qaeda return to adopting Afghanistan as our state-building project.

I recently looked back at Stephanie Sinclair’s stunning 2006 photograph in The Times of Ghulam Haider, an 11-year-old Afghan girl seated next to the bearded 40-year-old man she was about to be married off to. The article said Haider had hoped to be a teacher but was forced to quit her classes when she became engaged. The furtive sideways glance of her eyes at her future husband said she was terrified. The article said: “On the day she witnessed the engagement party. ... Sinclair discreetly took the girl aside. ‘What are you feeling today?’ the photographer asked. ‘Nothing,’ the bewildered girl answered. ‘I do not know this man. What am I supposed to feel?’ ”

That is the raw clay for our state-building. It may still be worth doing, but one thing I know for sure, it must be debated anew. This is a much bigger undertaking than we originally signed up for. Before we adopt a new baby — Afghanistan — we need to have a new national discussion about this project: what it will cost, how much time it could take, what U.S. interests make it compelling, and, most of all, who is going to oversee this policy?

I feel a vast and rising ambivalence about this in the American public today, and adopting a baby you are ambivalent about is a prescription for disaster.

Copyright 2009 The New York Times Company

Saturday, September 05, 2009

Did We Not Learn Anything in Vietnam?

Relying on airpower was thought to be an efficient way to win a war. You inflict maximum pain on your enemy with minimum troops. The problem was enemy and the local people were not so easily distinguishable. Hence, raining bombs from miles up ended up killing those whose hearts and minds you wanted to win. Result was you lost more hearts and minds.

So here we go again in Afghanistan. Read this.

Very sad.

Friday, September 04, 2009

How Did Economists Get It So Wrong!

Krugman has written a clear explanation of the poverty of the economics profession that has trained almost 3 generations of economists since the last World War. Read here.

To someone who long ago left that profession behind to join the "real world" I can only lament the many wasted hours in graduate school struggling with arcane mathematics to understand better how the world worked.

It took courage to realize what I was being taught had little to with that world. It had to do with what Krugman called a "beautiful" idea: a perfectly logical, mathematically solid argument based on a number of assertions (humans were perfectly rational, information was perfectly distributed and known to all and so on).

I know plenty of famous professors who have penned hundreds of scholarly papers and have written books how to "develop" the Third World and yet cannot explain in simple language how to solve any real world problems without starting with "suppose we had this and assuming we had that, then we might be able to....". And even then what they end up saying is rather common sensical that did not at all follow from their many mathematical models.

It took a major economic crisis to explode the myths of Nobel prizes in economics as self-evident proof that they are 'sages" whose words could be taken as truth. So many of them are more like the proverbial emperors without clothes.