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.
Enjoy!
1) Professor David Laidler
2) Robert Gordon at Northwestern University
Friday, September 18, 2009
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.
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.
"...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 www.project-syndicate.org
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.
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?
...'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 $$, to get a decent return on taxpayers' de facto investments in saving Wall Street. That could only mean one thing -- Obama had to temporarily "nationalize" those needing public money. But he got bad advice and he got cold feet when the totally cynical and hypocritical Republican Party were labeling him a "Socialist". After all, the lackadaisical look-the-other-way Republicans allowed Wall Street to help create a giant bubble that caused havoc to all of us.
Paul Volcker, an advisor to Obama and former Fed Chairman, among others strongly recommended a temporary nationalization. It was known as the Swedish "model".
During a previous banking crisis, Sweden temporarily nationalized the banks and then re-privatized them after working out their balance sheet loan problems. Volcker and others were marginalized by Geithner/Summers. Geithner famously dimissed that suggestion on TV: "United States is not Sweden."
So the inevitable happens. Obama now needs Wall Street's cooperation more than the latter needs his. Why?
Elementary, Doctor.
Wall Street already cashed those hundreds of billions worth of checks.
Thank you Uncle Sam. We on Wall Street will call you to let you know how we plan to move forward.
But of course. He lost control at the beginning when he let Geithner and Summers write big checks to save Wall Street without at that time taking management control.
Was he so naive or did he trust the Geithner/Summers team too much.
Remember what his critics, including me, were saying. To reform Wall Street you need to put in proper control to safeguard taxpayers $$, 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.
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.
Efficiency.
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.
Stimulus
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 bloomberg.com 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.
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.
Efficiency.
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.
Stimulus
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 bloomberg.com 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 $$ US taxpayers had already shelled out to save Wall Street, or I should say, the small number of "masters of universe": -
..."Three times as much U.S. taxpayer money has gone into propping up a single firm, insurance giant American International Group, as the world spent a decade ago during the financial rescue of South Korea, then the world's 11th-largest economy. And the emergency bailout of financial firms that Congress approved last year has cost nearly as much as the first five years of the war in Iraq."...
To refresh your memory, a significant chunk of AIG rescue money went straight to Goldman Sachs to settle an AIG payable to that princely firm whose ex Chairman was the US Treasury Secretary when the AIG money was being handed out.
OK, mark me cynical. But fact is fact.
The latest report indicates a very big change is coming. Wall Street is going to change Washington. Read here.
If I knew my Wall Street smarts, plus the history of lobbies in DC, Wall Street will take DC -- through it, the taxpayers -- to the cleaners.
One paragraph caught my attention in particular. It provides a perspective of how much $$ 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.
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?
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.
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.
Source: GregMankiw.Blogspot.com
Source: GregMankiw.Blogspot.com
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:
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
Quagmire
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.
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
OP-ED COLUMNIST
From Baby-Sitting to Adoption
By THOMAS L. FRIEDMAN
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
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
OP-ED COLUMNIST
From Baby-Sitting to Adoption
By THOMAS L. FRIEDMAN
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.
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.
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.
Wednesday, September 02, 2009
Old Wine, Old Bottle -- Afghanistan
In Vietnam, the United States relied on superior air power, overwhelming fire power and "rapid" deployment of strike forces using helicopters. Chopper warfare was the largest in history of wars. In the end all failed because air power,, massive bombing did not differentiate sufficiently foes and friends. Millions of Vietnamese civilians were killed. Many would say indiscriminately. Back then the US was backing a regime, or a series of regimes, the south Vietnamese despised.
Read this latest Washington Post report and decide for yourself whether we are not again watching a very old movie with a predictable and a sad ending?
Read this latest Washington Post report and decide for yourself whether we are not again watching a very old movie with a predictable and a sad ending?
Friday, August 28, 2009
Afghanistan -- Quagmire Again?
"Afghanistan is not another Vietnam" a number of smart people told me whenever I raised that question. But signs are aplenty that it is one.
No two wars are identical, of course. Vietnam was divided into north and south with Hanoi receiving massive aids from Russia and China governing over a population that was loyal to the leadership.
Afghanistan is divided by centuries old tribal conflicts, shifting loyalties and with the Taliban an ally of sorts with Al Qaeda based more on convenience (enemy of my enemy is my friend of the moment) than on ideological convictions. Yet the government US backs, just as in the case of South Vietnam, is despised by the people.
The fundamental political realities are, therefore, similar between Vietnam and Afghanistan. In both cases the US or the "West" is backing a government that is corrupt and hated by the very people in whose name they govern.
The current Afghan leadership under Karzai is reportedly running the largest narcotics operation outside of Mexico/Colombia with the brother of the president being the drug king.
The current "democratic" election is as corrupt as any staged by former South Vietnamese leaders. Read this.
Unless Obama has a surprise exit strategy up his sleeves, Afghanistan will become a very bad nightmare for his administration. Yes, Afghanistan is becoming another Vietnam, though the scale of casualties will not be as large. But it is a black hole with no light at the end of the tunnel. Could the "West" negotiate a settlement with the Taliban? It may turn out to be the only exit strategy left, unfortunately.
No two wars are identical, of course. Vietnam was divided into north and south with Hanoi receiving massive aids from Russia and China governing over a population that was loyal to the leadership.
Afghanistan is divided by centuries old tribal conflicts, shifting loyalties and with the Taliban an ally of sorts with Al Qaeda based more on convenience (enemy of my enemy is my friend of the moment) than on ideological convictions. Yet the government US backs, just as in the case of South Vietnam, is despised by the people.
The fundamental political realities are, therefore, similar between Vietnam and Afghanistan. In both cases the US or the "West" is backing a government that is corrupt and hated by the very people in whose name they govern.
The current Afghan leadership under Karzai is reportedly running the largest narcotics operation outside of Mexico/Colombia with the brother of the president being the drug king.
The current "democratic" election is as corrupt as any staged by former South Vietnamese leaders. Read this.
Unless Obama has a surprise exit strategy up his sleeves, Afghanistan will become a very bad nightmare for his administration. Yes, Afghanistan is becoming another Vietnam, though the scale of casualties will not be as large. But it is a black hole with no light at the end of the tunnel. Could the "West" negotiate a settlement with the Taliban? It may turn out to be the only exit strategy left, unfortunately.
The Coming Boom
Markets have a way of humiliating the best and the brightest. Why this is so is a topic of endless erudite essays and books.
When prices are determined in the "market" by countless people making decisions as to where they are headed, there is no way of telling beforehand how a) the future turns out, and b) how those who have made the wrong bets in the first instance would just stampede into joining the "winning" side causing a boom or a bust.
We are very likely going to have a big boom again. It does not take a rocket scientist, so to speak, to make that prediction. The simple truth is Uncle Sam has been printing and spending money like it's going out of style to prevent a collapse of the US economy built on too much debt and too little productivity.
Well, the old saying is true: you can't fight the Fed. When so many trillions have been pushed into the "system" to save the mother ship, "something" will happen. Stock markets, commodity prices, housing prices, you name it, have been strong for just that reason.
About 9 months ago, a depressed former hedge fund manager was lamenting about the state of his portfolio. I told him to relax for every bear market is followed by a bull market. Since then his portfolio is up over 40% year to date.
We are going to have a bull market in 2010. However, I have no idea whether it will have a happy ending though.
All I can say to you is enjoy the ride while you can, but "here we go again". You are forewarned.
When prices are determined in the "market" by countless people making decisions as to where they are headed, there is no way of telling beforehand how a) the future turns out, and b) how those who have made the wrong bets in the first instance would just stampede into joining the "winning" side causing a boom or a bust.
We are very likely going to have a big boom again. It does not take a rocket scientist, so to speak, to make that prediction. The simple truth is Uncle Sam has been printing and spending money like it's going out of style to prevent a collapse of the US economy built on too much debt and too little productivity.
Well, the old saying is true: you can't fight the Fed. When so many trillions have been pushed into the "system" to save the mother ship, "something" will happen. Stock markets, commodity prices, housing prices, you name it, have been strong for just that reason.
About 9 months ago, a depressed former hedge fund manager was lamenting about the state of his portfolio. I told him to relax for every bear market is followed by a bull market. Since then his portfolio is up over 40% year to date.
We are going to have a bull market in 2010. However, I have no idea whether it will have a happy ending though.
All I can say to you is enjoy the ride while you can, but "here we go again". You are forewarned.
Thursday, August 27, 2009
Farewell My Concubine?
Why have one when you can have 2 or 3 or more? Welcome to the "new" China. Read here.
Sunday, August 23, 2009
"Depression" Political Economy
I want to own up that i have been depressed about the state of the world. Some write to reduce the frustration. I retreated into a cocoon. That's why I have not been writing much.
My first item on my "depression" agenda remains how the public's rescue money has been misallocated enabling a few on Wall Street to benefit unfairly. Let me be clear, I have no problem with the idea that a massive amount of public money was required to keep the system from sinking, but I have a very serious problem with the way that money has been spent or misspent. Let's not forget, Wall Street was an accessory to the disaster. Yet the "masters of universe" remain at their helms with no one at such firms as Goldman Sachs or Morgan Stanley getting the pink slip. Those who did were mere foot soldiers carrying out orders.
Paul Krugman, Joseph Stiglitz and a number of other writers have been very good in hammering on this issue. To no avail.
I read jumbo-size bonuses are being handed out on Wall Street. Uncle Sam appears willing to sell back to Wall Street various options at below market prices. If I didn't restrain myself, I would become mad.
I have written in the recent past that USA is becoming more like Thailand or Argentina in terms of lousy public governance with a small number of elite, in and outside of the government, often committing acts against public interest. I have not changed my view. And that depresses me.
I am also depressed by the state of US politics where the Republican Party has descended into a party of ignoramus, bigots and radicals. That party of Lincoln, Eisenhower, Rockefeller has been transformed beyond recognition. I am an independent, and I believe in checks and balance. That can only come about if there is an intelligent opposition.
I don't see that in the US and I don't see how GOP could get a total makeover to return to its former self.
And that depresses me.
I haven't even started on how badly the war in Afghanistan is going and how it will get worse with more lives wasted uselessly.
Soon, I keep telling myself, I need to write about the Republican Party. Soon.
My first item on my "depression" agenda remains how the public's rescue money has been misallocated enabling a few on Wall Street to benefit unfairly. Let me be clear, I have no problem with the idea that a massive amount of public money was required to keep the system from sinking, but I have a very serious problem with the way that money has been spent or misspent. Let's not forget, Wall Street was an accessory to the disaster. Yet the "masters of universe" remain at their helms with no one at such firms as Goldman Sachs or Morgan Stanley getting the pink slip. Those who did were mere foot soldiers carrying out orders.
Paul Krugman, Joseph Stiglitz and a number of other writers have been very good in hammering on this issue. To no avail.
I read jumbo-size bonuses are being handed out on Wall Street. Uncle Sam appears willing to sell back to Wall Street various options at below market prices. If I didn't restrain myself, I would become mad.
I have written in the recent past that USA is becoming more like Thailand or Argentina in terms of lousy public governance with a small number of elite, in and outside of the government, often committing acts against public interest. I have not changed my view. And that depresses me.
I am also depressed by the state of US politics where the Republican Party has descended into a party of ignoramus, bigots and radicals. That party of Lincoln, Eisenhower, Rockefeller has been transformed beyond recognition. I am an independent, and I believe in checks and balance. That can only come about if there is an intelligent opposition.
I don't see that in the US and I don't see how GOP could get a total makeover to return to its former self.
And that depresses me.
I haven't even started on how badly the war in Afghanistan is going and how it will get worse with more lives wasted uselessly.
Soon, I keep telling myself, I need to write about the Republican Party. Soon.
Tuesday, August 11, 2009
China's Bubble?
Is China manufacturing a huge bubble? This man thinks so and is worth a few minutes of your time. Read here:
Nothing is ever inevitable. A lot depends on how Beijing's leaders fine tune the economy to avoid the bubble described in that succinct analysis. I will be watching economic events in China more closely.
Nothing is ever inevitable. A lot depends on how Beijing's leaders fine tune the economy to avoid the bubble described in that succinct analysis. I will be watching economic events in China more closely.
Monday, August 10, 2009
AIG and Greenberg
Hank Greenberg at one point was considered a genius taking a small AIG founded by an American entrepreneur, C.V. Starr in 1919 and his Shanghai partner to become the largest global insurance company in the world. Not much is ever said about the Shanghai banker who helped Starr to build his business. Corporate mythology could only allow one hero. Chinese back in those days were considered lesser being.
Surprise. Greenberg turned out to be a crook. Strong word. Well, what do you call a person who produced false accounting numbers to hide the truth? Read Here.
I have a real problem with this story. This guy who made off billions from inflated share prices based on fake company earnings number between 2000-2005 he knew were false only paid $15 million for a fine to get off a suit that could put him behind bars for years? Isn't that a steal? How did he manage? Were those years the only years he faked his numbers?
Without trying to be a conspiracy nut, remember a lot of pubic bailout money sent over to AIG actually went to Goldman Sachs to settle a payable? And a lot more went to settle payables with other banks including an European bank?
Why did the money go straight out of AIG's door to other coffers? Wasn't the money meant only for AIG?
Elementary. Wall Street works on connections and relationships. In Chinese lexicon, that is known as "guanxi" a word at one time was derogatory intended to show how corrupt the Chinese communism was and still is on the mainland.
Greenberg is not just another crook. He is a well connected crook. Madoff, the crook, is behind bars. He is not well connected. $15 million to buy off a jail sentence? That's small change by Wall Street standards and by what Greenberg had made off from inflated share prices that also boosted his stock options, bonuses and other compensations. So much for American justice.
Surprise. Greenberg turned out to be a crook. Strong word. Well, what do you call a person who produced false accounting numbers to hide the truth? Read Here.
I have a real problem with this story. This guy who made off billions from inflated share prices based on fake company earnings number between 2000-2005 he knew were false only paid $15 million for a fine to get off a suit that could put him behind bars for years? Isn't that a steal? How did he manage? Were those years the only years he faked his numbers?
Without trying to be a conspiracy nut, remember a lot of pubic bailout money sent over to AIG actually went to Goldman Sachs to settle a payable? And a lot more went to settle payables with other banks including an European bank?
Why did the money go straight out of AIG's door to other coffers? Wasn't the money meant only for AIG?
Elementary. Wall Street works on connections and relationships. In Chinese lexicon, that is known as "guanxi" a word at one time was derogatory intended to show how corrupt the Chinese communism was and still is on the mainland.
Greenberg is not just another crook. He is a well connected crook. Madoff, the crook, is behind bars. He is not well connected. $15 million to buy off a jail sentence? That's small change by Wall Street standards and by what Greenberg had made off from inflated share prices that also boosted his stock options, bonuses and other compensations. So much for American justice.
Monday, August 03, 2009
Whither Capitalism?
Up until, say, the beginning of 2008 this question of "Whither Capitalism?" might have seemed appropriate in a dry academic classroom. No more.
A few statitics to start the day. 9 major banks, including Goldman Sachs and Morgan Stanley, in the US received $175 billion in bailout money from Joe Public, so far. They have repaid $50 billion. The same 9 banks are to pay out $32.6 billion bonuses to their staffs with the senior executives receiving disproportionately larger shares.
During August 2008 when a number of banks could fold due to a collapse in confidence as well as in their over-leveraged balance sheets, then Secretary of Treasury, Hank Paulson, former chairman of Goldman Sachs had over 2 dozen conversations with his successor at Goldman, Mr Lloyd Blankfein.
This fact by itself should have been considered perfectly "normal". The top financial official should have his fingers on the pulse on Wall Street. Goldman Sachs was and remains a most important player.
Wait. During the same month, he talked only 4 times with Jamie Dimon, Chairman of JPMorgan Chase, 2 times with John Thain, then chairman of Merrill Lynch and 6 times with Fuld, then chairman of Lehman Brothers the collapse of which nearly brought down the entire financial industry of the US.
So why was Goldman Sachs receiving, at least on surface, more TLC, then others, one could legitimately ask.
Actually, silly question. Anyone familiar with the culture of Wall Street, especially at a firm like Goldman where "team work", "corporate loyalty" followed by multimillion bonuses know if there ever arose a conflict between private and public interest, barring blatant criminal acts, private (read Goldman) interest would take precedence. Paulson was a product of Goldman which made him not only Chairman but also one of the richest men on this planet. Few men, especially those from the money industry where money is the be-all-and-end-all objective, could rise above private concerns.
And that is at the heart of the question as to whether Capitalism can survive consistent partisan and parochial manipulation that is a by-product of maximizing private profit, the ultimate goal of the Wall Street culture.
Today's column in NY Times by Frank Rich points out a much larger issue regarding how the political process in DC is now increasingly in the hands of Money. Read here.
I will be writing on this and related political issues in due time.
A few statitics to start the day. 9 major banks, including Goldman Sachs and Morgan Stanley, in the US received $175 billion in bailout money from Joe Public, so far. They have repaid $50 billion. The same 9 banks are to pay out $32.6 billion bonuses to their staffs with the senior executives receiving disproportionately larger shares.
During August 2008 when a number of banks could fold due to a collapse in confidence as well as in their over-leveraged balance sheets, then Secretary of Treasury, Hank Paulson, former chairman of Goldman Sachs had over 2 dozen conversations with his successor at Goldman, Mr Lloyd Blankfein.
This fact by itself should have been considered perfectly "normal". The top financial official should have his fingers on the pulse on Wall Street. Goldman Sachs was and remains a most important player.
Wait. During the same month, he talked only 4 times with Jamie Dimon, Chairman of JPMorgan Chase, 2 times with John Thain, then chairman of Merrill Lynch and 6 times with Fuld, then chairman of Lehman Brothers the collapse of which nearly brought down the entire financial industry of the US.
So why was Goldman Sachs receiving, at least on surface, more TLC, then others, one could legitimately ask.
Actually, silly question. Anyone familiar with the culture of Wall Street, especially at a firm like Goldman where "team work", "corporate loyalty" followed by multimillion bonuses know if there ever arose a conflict between private and public interest, barring blatant criminal acts, private (read Goldman) interest would take precedence. Paulson was a product of Goldman which made him not only Chairman but also one of the richest men on this planet. Few men, especially those from the money industry where money is the be-all-and-end-all objective, could rise above private concerns.
And that is at the heart of the question as to whether Capitalism can survive consistent partisan and parochial manipulation that is a by-product of maximizing private profit, the ultimate goal of the Wall Street culture.
Today's column in NY Times by Frank Rich points out a much larger issue regarding how the political process in DC is now increasingly in the hands of Money. Read here.
I will be writing on this and related political issues in due time.
Saturday, August 01, 2009
Wall Street Mystique
I started this blog because I, a former denizen of "Wall Street", was offended by the blatant disregard of anything remotely resembling business ethics and political morality in Washington's rescue process.
Before I write further, let me declare. I love $$ as much, if not more, than the next investment banker. However, I also believe $$ ain't the be-all-and-end all for us to be human. Nor should it be the only defining value of what constitutes a useful, happy, productive life. By morality I don't mean I am on the side of angels. What I do mean is a society, any society, needs "balance". A society that allows certain groups, companies, individuals to influence a public policy to its own benefits without checks and balance is a society waiting for a disaster to happen.
What has been happening in Wall Street is more than about $$. It is about how one industry has managed to write the public policy for its own benefit -- with some key Washington public officials as cohorts.
I have over the past months written on this topic. I do not wish to bore you more.
The latest NY Times report on bonuses on Wall Street is just another reminder that democracy has to be safeguarded from any person, any company, any industry that can safely ignore public interests. Read here re how ineffective, how incompetent, or perhaps how inter-connected the economics team of the Obama administration is to Wall Street. What has Democracy got to do with bonuses on Wall Street?
As pointed out by any number of writers, including this one, the Goldman Sach's or the Morgan Stanely's could not have survived but for pubic money injected into them to bail them out.
To the rest of the nation, indeed to the world, it seems quite unseemly that high officials on Wall Street who had been a party to the bursting of the bubble are still getting paid humongous bonuses.
I only have this to say: "Very clever chaps, but remember your bonuses are from the savings of the poorer fellow citizens who have had to tighten their seat belts so that you can go aead and pay yourselves large bonuses.
I have only a small one: What exactly have you done to the country to warrant yet another round of super duper bonuses while the rest of the country continues to suffer?
Read this Ny Times article for illustration.
Before I write further, let me declare. I love $$ as much, if not more, than the next investment banker. However, I also believe $$ ain't the be-all-and-end all for us to be human. Nor should it be the only defining value of what constitutes a useful, happy, productive life. By morality I don't mean I am on the side of angels. What I do mean is a society, any society, needs "balance". A society that allows certain groups, companies, individuals to influence a public policy to its own benefits without checks and balance is a society waiting for a disaster to happen.
What has been happening in Wall Street is more than about $$. It is about how one industry has managed to write the public policy for its own benefit -- with some key Washington public officials as cohorts.
I have over the past months written on this topic. I do not wish to bore you more.
The latest NY Times report on bonuses on Wall Street is just another reminder that democracy has to be safeguarded from any person, any company, any industry that can safely ignore public interests. Read here re how ineffective, how incompetent, or perhaps how inter-connected the economics team of the Obama administration is to Wall Street. What has Democracy got to do with bonuses on Wall Street?
As pointed out by any number of writers, including this one, the Goldman Sach's or the Morgan Stanely's could not have survived but for pubic money injected into them to bail them out.
To the rest of the nation, indeed to the world, it seems quite unseemly that high officials on Wall Street who had been a party to the bursting of the bubble are still getting paid humongous bonuses.
I only have this to say: "Very clever chaps, but remember your bonuses are from the savings of the poorer fellow citizens who have had to tighten their seat belts so that you can go aead and pay yourselves large bonuses.
I have only a small one: What exactly have you done to the country to warrant yet another round of super duper bonuses while the rest of the country continues to suffer?
Read this Ny Times article for illustration.
Saturday, July 25, 2009
1 Child Policy Folly Down the Drain, Not a day too soon
It has been an article of faith of the Chinese Communist Party since 1949 that Chinese families should not have more than 1 child. The folly was based on the ignorant quasi-Malthusian theory that unchecked population growth would hamper growth.
I used to argue with my "handler" back in those days when foreigners needed to be chaperoned.
I said: "Hey, imagine every Chinese on the mainland was as productive as, say, a Chinese in Hong Kong or Taiwan [whose respective per capital was then and still is now multiples of China's], wouldn't you agree that you wanted MORE Chinese not less? And the way to up there was not to limit the size of the population but to increase its productivity by a) investing massively in education; and b) not suffocating China's talented citizens with mindless political mantras and thought control?"
I was, for sure, marked down as another ignorant "overseas" Chinese or, worse, a foreign agent attempting to spiritually pollute the minds of right thinking Chinese communists.
Well, guess what. The powers-that-be are realizing two things: quantity plus quality translates into 1 + 1 = 3; and second, the growing imbalance between young and old means that the aging population is putting on an increasing economic burden on the young to support it. China needs more young people. They have to be made not in a factory but by husbands and wives in families.
Hence, the following development. Read here.
Better late than never. Oh, a small footnote. The Communist royalty was never bound by the 1 child policy.
I used to argue with my "handler" back in those days when foreigners needed to be chaperoned.
I said: "Hey, imagine every Chinese on the mainland was as productive as, say, a Chinese in Hong Kong or Taiwan [whose respective per capital was then and still is now multiples of China's], wouldn't you agree that you wanted MORE Chinese not less? And the way to up there was not to limit the size of the population but to increase its productivity by a) investing massively in education; and b) not suffocating China's talented citizens with mindless political mantras and thought control?"
I was, for sure, marked down as another ignorant "overseas" Chinese or, worse, a foreign agent attempting to spiritually pollute the minds of right thinking Chinese communists.
Well, guess what. The powers-that-be are realizing two things: quantity plus quality translates into 1 + 1 = 3; and second, the growing imbalance between young and old means that the aging population is putting on an increasing economic burden on the young to support it. China needs more young people. They have to be made not in a factory but by husbands and wives in families.
Hence, the following development. Read here.
Better late than never. Oh, a small footnote. The Communist royalty was never bound by the 1 child policy.
Sunday, July 19, 2009
Robert McNamara - My last word
He died almost 2 weeks ago. Reams of obits have been published and now forgotten. A few bullet points stood out:
- A brilliant man. A "whiz" kid.
- Youngest Ford Motor Company President ever. Gave up $$ for public service summoned by JFK, head of the Camelot roundtable.
- Total confidence in quantitative method.
- Wanted to win in Vietnam.
- Lost faith in that policy but kept quiet and then years and years later said "I was wrong" and then tried to redeem himself at World Bank "fighting" world poverty.
Nearly all commentators left it at that personal level, implicitly giving him an absolution without exploring further the moral implications of what he had done. Afterall, he did say "sorry", didn't he, at least kind of? He actually never did say that.
Bob Herbert of the New York Times was closest to opening the pandora box in his sobering column. It should be read in full.
Here is one priceless excerpt:
"McNamara, it turns out, had realized early on that Vietnam was a lost cause, but he kept that crucial information close to his chest, like a gambler trying to bluff his way through a bad hand, as America continued to send tens of thousands to their doom. How in God’s name did he ever look at himself in a mirror"?
The word "God" was invoked.
The unexplored questions that jumped out of this paragraph are intuitively obvious: Was that war "just" in the eyes of God explored by Aristotle all the way down to St. Augustine and St. Thomas Aquinas?
If it was not a just war, as nearly everyone now believes it was not -- the war was based on the groundless thesis that if "We don't fight the war in Vietnam we will one day fight a billion Red Chinese in Los Angeles armed with nuclear weapons" in the immortal words of the then Secretary of State Dean Rusk -- then was it only McNamara who may not have been able to look at himself in a mirror?
If it was not a just war, would the precedent set by the US government in hanging WWII Japanese general Tomoyuki Yamashita for crimes committed by his troops in the Philippines apply to US leaders who prosecuted the war from JFK all the way to Richard Nixon?
Robert McNamara may have found peace with his God though many do not believe he ever did for reasons still unclear, how does one look in the eyes of those surviving family members who who lost over 4 million of their sons and daughters (adding up American and Vietnamese military and civilian lives) for mistakes made by a handful of American leaders? I am leaving out the "collateral" damage in Cambodia and Laos.
That's the question obit writers have missed or dismissed by design.
But that's really the only important relevant issue of moral responsibility. Do we need to wait for more years, decades, centuries for the future Aristotle's and Thomas Aquinas's to give it a proper airing before we can close the chapter on that war?
Oh, please don't even get me started on the Iraq war which, too, was based on premises that the war makers knew early on were untrue. Ah, yes, I can hear the same refrain: "If we don't fight them in Iraq, we will have to fight them in New York armed with nuclear weapons".
By the way, I absolutely love the folksy but crystal clear language Dean Rusk used to explain what the Domino Theory was. It put to shame those think tank types who wrote erudite books and learned articles justifying that Theory in obscure jargons.
- A brilliant man. A "whiz" kid.
- Youngest Ford Motor Company President ever. Gave up $$ for public service summoned by JFK, head of the Camelot roundtable.
- Total confidence in quantitative method.
- Wanted to win in Vietnam.
- Lost faith in that policy but kept quiet and then years and years later said "I was wrong" and then tried to redeem himself at World Bank "fighting" world poverty.
Nearly all commentators left it at that personal level, implicitly giving him an absolution without exploring further the moral implications of what he had done. Afterall, he did say "sorry", didn't he, at least kind of? He actually never did say that.
Bob Herbert of the New York Times was closest to opening the pandora box in his sobering column. It should be read in full.
Here is one priceless excerpt:
"McNamara, it turns out, had realized early on that Vietnam was a lost cause, but he kept that crucial information close to his chest, like a gambler trying to bluff his way through a bad hand, as America continued to send tens of thousands to their doom. How in God’s name did he ever look at himself in a mirror"?
The word "God" was invoked.
The unexplored questions that jumped out of this paragraph are intuitively obvious: Was that war "just" in the eyes of God explored by Aristotle all the way down to St. Augustine and St. Thomas Aquinas?
If it was not a just war, as nearly everyone now believes it was not -- the war was based on the groundless thesis that if "We don't fight the war in Vietnam we will one day fight a billion Red Chinese in Los Angeles armed with nuclear weapons" in the immortal words of the then Secretary of State Dean Rusk -- then was it only McNamara who may not have been able to look at himself in a mirror?
If it was not a just war, would the precedent set by the US government in hanging WWII Japanese general Tomoyuki Yamashita for crimes committed by his troops in the Philippines apply to US leaders who prosecuted the war from JFK all the way to Richard Nixon?
Robert McNamara may have found peace with his God though many do not believe he ever did for reasons still unclear, how does one look in the eyes of those surviving family members who who lost over 4 million of their sons and daughters (adding up American and Vietnamese military and civilian lives) for mistakes made by a handful of American leaders? I am leaving out the "collateral" damage in Cambodia and Laos.
That's the question obit writers have missed or dismissed by design.
But that's really the only important relevant issue of moral responsibility. Do we need to wait for more years, decades, centuries for the future Aristotle's and Thomas Aquinas's to give it a proper airing before we can close the chapter on that war?
Oh, please don't even get me started on the Iraq war which, too, was based on premises that the war makers knew early on were untrue. Ah, yes, I can hear the same refrain: "If we don't fight them in Iraq, we will have to fight them in New York armed with nuclear weapons".
By the way, I absolutely love the folksy but crystal clear language Dean Rusk used to explain what the Domino Theory was. It put to shame those think tank types who wrote erudite books and learned articles justifying that Theory in obscure jargons.
Saturday, July 18, 2009
Dollar Dominance & RMB
Any cursory reading of the news these days indicate that the Chinese authorities are not letting up on their to-your-face attacks of the dominance of the US$ as the global reserve currency.
The unspoken subtext is the time has come for China's own currency, RMB, to assume a role of a global reserve currency.
All professionals understand that it is premature for the RMB to take on such a role. Several well-known pre-conditions need to be met before the RMB could become a serious contender as a reserve currency.
They include high quality of governance of the banking system, transparency of monetary and economic policy making, rule of law not -- only in commercial but also in just about all other areas including criminal laws. The recent sudden arrests of 4 top Rio Tinto executives is one example of how commercial disputes could quickly morphed overnight into a state-to-state crisis. This is more the stuff of George Orwell than that of globalization.
And then the currency must be a totally convertible one before it can go global.
There is little doubt sometime in the future China would be able to meet those requirements.
The issue is not whether, but when. It is also clear "when" is not quite here yet. Not even close.
Yet there is another level on which the Chinese attack is entirely apropos.
The ability of the US to print any amount of money it wants -- as it has been doing since Vietnam where both guns and butter were considered ok -- without creating a classical "third world" currency crisis is because the US$ is the only reserve currency every country uses it as the basic unit of accounting and exchange.
If the US had had to watch out for current account deficits, like any "normal" country, it would not have been able to borrow its way out of financing unbounded consumer appetite for goods and for its leaders to finance overseas ventures mindlessly. The flooding of the US$ in the world economy has been the major source of financial instability the latest of which is still being played out.
China's attack on the US$ has a geopolitical dimension that has not been sufficiently aired in the public domain.
The unspoken subtext is the time has come for China's own currency, RMB, to assume a role of a global reserve currency.
All professionals understand that it is premature for the RMB to take on such a role. Several well-known pre-conditions need to be met before the RMB could become a serious contender as a reserve currency.
They include high quality of governance of the banking system, transparency of monetary and economic policy making, rule of law not -- only in commercial but also in just about all other areas including criminal laws. The recent sudden arrests of 4 top Rio Tinto executives is one example of how commercial disputes could quickly morphed overnight into a state-to-state crisis. This is more the stuff of George Orwell than that of globalization.
And then the currency must be a totally convertible one before it can go global.
There is little doubt sometime in the future China would be able to meet those requirements.
The issue is not whether, but when. It is also clear "when" is not quite here yet. Not even close.
Yet there is another level on which the Chinese attack is entirely apropos.
The ability of the US to print any amount of money it wants -- as it has been doing since Vietnam where both guns and butter were considered ok -- without creating a classical "third world" currency crisis is because the US$ is the only reserve currency every country uses it as the basic unit of accounting and exchange.
If the US had had to watch out for current account deficits, like any "normal" country, it would not have been able to borrow its way out of financing unbounded consumer appetite for goods and for its leaders to finance overseas ventures mindlessly. The flooding of the US$ in the world economy has been the major source of financial instability the latest of which is still being played out.
China's attack on the US$ has a geopolitical dimension that has not been sufficiently aired in the public domain.
Friday, July 17, 2009
Goldman Sachs - 2
Paul Krugman's latest column is devastating. Read here. However, Washington DC is not listening. Or if it was, the message is predictably falling on deaf ears for reasons by now well argued publicly by a large number of commentators from MIT's Simon Johnson to Columbia's Joseph Stiglitz.
Thursday, July 16, 2009
Goldman Sachs (GS) has become a 2 letter word
GS maybe the most powerful financial institution on Wall Street, or what's left of it, but its leaders cannot be very comfortable in their privileged position. Even the Wall Street Journal, the symbol of capitalism, and a very unlikely protagonist, is pissing on them.
Read its July 16 editorial below.
Clearly the editors of the Journal wanted to be sure the world did not miss the message. Alongside its editorial, it printed a scathing and sarcastic op ed by a veteren Wall Street denizen, a former fedge fund manager, Andy Kessler.
Kessler piece is reprinted here following the WSJ editorial.
You may not agree with all the points in them but to see the "Goldman's" of the world criticized by the Journal is worth the time you spend reading. Enjoy
A Tale of Two Bailouts
Goldman's profits, CIT's trouble, and 'too big to fail.'
Yesterday saw one TARP recipient, Goldman Sachs, report $3.44 billion in profits even as another, CIT, teeters on the edge of either bankruptcy or another taxpayer bailout. Which way CIT will tip remained unclear as we went to press, but its very plight shows how the government's approach to systemic risk has created groups of financial "haves" and "have nots."
What the Goldmans of the world have in addition to profits is the widespread belief that they are too big to fail. Both Goldman and CIT converted into bank holding companies at the height of the financial panic last fall, which made them eligible for TARP injections. Goldman also benefited at a crucial moment from the Federal Reserve takeover of AIG, and it received the additional filip of FDIC-guaranteed debt issuance through the Temporary Liquidity Guarantee Program. CIT was excluded from the latter program on grounds that it didn't pose a systemic risk, even as larger competitors like General Electric were allowed in.
CIT's asset quality has since fallen further, and it now faces $2.7 billion in maturing debt this year that investors fear it will not be able to roll over. So it is seeking another taxpayer rescue, and officials at Treasury and Fed are sympathetic.
But if CIT -- a company one-tenth the size of Lehman Brothers -- can be bailed out long after the panic has passed, the word "systemic" has lost all meaning. CIT has long been a lender to subprime corporate borrowers, and this decade it took on even greater risks at precisely the wrong time. It has lost money for eight straight quarters. Its lending supports less than 1% of the total U.S. retail and manufacturing, and plenty of competitors could pick up its market share.
There's also a question of why the FDIC -- which is supposed to protect bank depositors -- should be the rescue agent. CIT's bank is only a small part of the company and is so far walled off from trouble. CIT executives want permission to stuff some of the company's assets into the bank so they can finance them with brokered deposits. But that would put the FDIC's deposit fund at greater risk just when it is stretched from other bank failures. The FDIC should also be winding down its debt guarantee program, not extending it to new and riskier companies. Taxpayers shouldn't be put at risk for further losses via the FDIC merely because Treasury and the Fed don't want to admit losses on their TARP investment.
Of course, if the feds do let CIT fail, this will only confirm that the only certain survivors in the current market are banks big enough that the government figures it must bail them out. Just ask the many small banks that have been rolled up by the FDIC at a rate of two a week since the beginning of the year, with eight so far in July alone. That can only strengthen the likes of Goldman, which apparently needs no help printing money anyway.
Goldman's traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman's own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.
Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it's not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.
We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business. Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail. But that is all but impossible now and for the foreseeable future. Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.
If there is a lesson in this week's tale of two banks, it's that it won't be enough to give the Federal Reserve a mandate to "monitor" systemic risk. Last fall's bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share. Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer's dime.
One policy response to the incentives created by last fall's bailout is simply to restrict the proprietary trading done by the subsidiaries of bank holding companies that enjoy both FDIC deposit insurance and an implicit government subsidy on their cost of capital. This is what Paul Volcker proposed, only to be overruled by Tim Geithner and Larry Summers. Another answer would be an FDIC-style bailout tax, perhaps tied to leverage ratios, for those in the too-big-to-fail camp. Developing a template to facilitate the seizure and orderly winding down of failing financial giants is also an essential element of whatever reform Congress cooks up.
* * *
No one welcomes the pain and dislocation if CIT files for bankruptcy. But U.S. policy toward financial companies cannot avoid all hardship, or the result will be a de facto cartelization of finance, with a resulting loss of competition and dynamism that have long been an American strength. The divergent fortunes of CIT and Goldman Sachs show how much we changed when we stepped in to save certain banks in the name of saving the system.
Andy Kessler
* OPINION
* JULY 16, 2009
The Bernanke Market
We won't get real growth until Congress and Treasury get policy right.
By ANDY KESSLER
I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.
Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.
[Commentary]
We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.
At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.
The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.
Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.
In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.
Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.
But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.
Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.
Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.
Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
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Read its July 16 editorial below.
Clearly the editors of the Journal wanted to be sure the world did not miss the message. Alongside its editorial, it printed a scathing and sarcastic op ed by a veteren Wall Street denizen, a former fedge fund manager, Andy Kessler.
Kessler piece is reprinted here following the WSJ editorial.
You may not agree with all the points in them but to see the "Goldman's" of the world criticized by the Journal is worth the time you spend reading. Enjoy
A Tale of Two Bailouts
Goldman's profits, CIT's trouble, and 'too big to fail.'
Yesterday saw one TARP recipient, Goldman Sachs, report $3.44 billion in profits even as another, CIT, teeters on the edge of either bankruptcy or another taxpayer bailout. Which way CIT will tip remained unclear as we went to press, but its very plight shows how the government's approach to systemic risk has created groups of financial "haves" and "have nots."
What the Goldmans of the world have in addition to profits is the widespread belief that they are too big to fail. Both Goldman and CIT converted into bank holding companies at the height of the financial panic last fall, which made them eligible for TARP injections. Goldman also benefited at a crucial moment from the Federal Reserve takeover of AIG, and it received the additional filip of FDIC-guaranteed debt issuance through the Temporary Liquidity Guarantee Program. CIT was excluded from the latter program on grounds that it didn't pose a systemic risk, even as larger competitors like General Electric were allowed in.
CIT's asset quality has since fallen further, and it now faces $2.7 billion in maturing debt this year that investors fear it will not be able to roll over. So it is seeking another taxpayer rescue, and officials at Treasury and Fed are sympathetic.
But if CIT -- a company one-tenth the size of Lehman Brothers -- can be bailed out long after the panic has passed, the word "systemic" has lost all meaning. CIT has long been a lender to subprime corporate borrowers, and this decade it took on even greater risks at precisely the wrong time. It has lost money for eight straight quarters. Its lending supports less than 1% of the total U.S. retail and manufacturing, and plenty of competitors could pick up its market share.
There's also a question of why the FDIC -- which is supposed to protect bank depositors -- should be the rescue agent. CIT's bank is only a small part of the company and is so far walled off from trouble. CIT executives want permission to stuff some of the company's assets into the bank so they can finance them with brokered deposits. But that would put the FDIC's deposit fund at greater risk just when it is stretched from other bank failures. The FDIC should also be winding down its debt guarantee program, not extending it to new and riskier companies. Taxpayers shouldn't be put at risk for further losses via the FDIC merely because Treasury and the Fed don't want to admit losses on their TARP investment.
Of course, if the feds do let CIT fail, this will only confirm that the only certain survivors in the current market are banks big enough that the government figures it must bail them out. Just ask the many small banks that have been rolled up by the FDIC at a rate of two a week since the beginning of the year, with eight so far in July alone. That can only strengthen the likes of Goldman, which apparently needs no help printing money anyway.
Goldman's traders profited in the second quarter from taking advantage of spreads left wide by the disappearance of some competitors (Lehman, Bear Stearns) and the risk aversion of others (Morgan Stanley). Meantime, Goldman's own credit spreads over Treasurys have narrowed as the market has priced in the likelihood that the government stands behind the risks it is taking in its proprietary trading books.
Goldman will surely deny that its risk-taking is subsidized by the taxpayer -- but then so did Fannie Mae and Freddie Mac, right up to the bitter end. An implicit government guarantee is only free until it's not, and when the bill comes due it tends to be huge. So for the moment, Goldman Sachs -- or should we say Goldie Mac? -- enjoys the best of both worlds: outsize profits for its traders and shareholders and a taxpayer backstop should anything go wrong.
We like profits as much as the next capitalist. But when those profits are supported by government guarantees or insured deposits, taxpayers have a special interest in how the companies conduct their business. Ideally we would shed those implicit guarantees altogether, along with the very notion of too big to fail. But that is all but impossible now and for the foreseeable future. Even if the Obama Administration and Fed were to declare with one voice that banks such as Goldman were on their own, no one would believe it.
If there is a lesson in this week's tale of two banks, it's that it won't be enough to give the Federal Reserve a mandate to "monitor" systemic risk. Last fall's bailouts are reverberating through the financial system in a way that is already distorting the competition for capital and financial market share. Banks that want to be successful will also want to be more like Goldman Sachs, creating an incentive for both larger size and more risk-taking on the taxpayer's dime.
One policy response to the incentives created by last fall's bailout is simply to restrict the proprietary trading done by the subsidiaries of bank holding companies that enjoy both FDIC deposit insurance and an implicit government subsidy on their cost of capital. This is what Paul Volcker proposed, only to be overruled by Tim Geithner and Larry Summers. Another answer would be an FDIC-style bailout tax, perhaps tied to leverage ratios, for those in the too-big-to-fail camp. Developing a template to facilitate the seizure and orderly winding down of failing financial giants is also an essential element of whatever reform Congress cooks up.
* * *
No one welcomes the pain and dislocation if CIT files for bankruptcy. But U.S. policy toward financial companies cannot avoid all hardship, or the result will be a de facto cartelization of finance, with a resulting loss of competition and dynamism that have long been an American strength. The divergent fortunes of CIT and Goldman Sachs show how much we changed when we stepped in to save certain banks in the name of saving the system.
Andy Kessler
* OPINION
* JULY 16, 2009
The Bernanke Market
We won't get real growth until Congress and Treasury get policy right.
By ANDY KESSLER
I remember once buying the stock of a small company and I couldn't believe my luck. Every time my fund bought more shares the stock would go up. So we bought even more and the stock kept climbing. When we finally built our full position and stopped buying the stock started dropping, ending up at a price below where we started buying it. We were the market.
Just about every policy move to right the U.S. economy after the subprime sinking of the banking system has been a bust. We saved Bear Stearns. We let Lehman Brothers go. We forced Merrill Lynch, Wachovia and Washington Mutual into the hands of others. We took control of Fannie and Freddie and AIG and even own a few car companies, pumping them with high-test transfusions. None of this really helped.
[Commentary]
We have a zero interest-rate policy. We guaranteed bank debt. We set up the Troubled Asset Relief Program (TARP) to buy toxic mortgage assets off bank balance sheets. But when banks refused to sell at fire sale prices, we just gave them the money instead. Dumb move. So we set up the Public-Private Investment Program to get private investors to buy these same toxic assets with government leverage, and still there are few sellers. Meanwhile, the $1 trillion federal deficit is crowding out private investment and the porky $787 billion stimulus hasn't translated into growth.
At the end of the day, only one thing has worked -- flooding the market with dollars. By buying U.S. Treasuries and mortgages to increase the monetary base by $1 trillion, Fed Chairman Ben Bernanke didn't put money directly into the stock market but he didn't have to. With nowhere else to go, except maybe commodities, inflows into the stock market have been on a tear. Stock and bond funds saw net inflows of close to $150 billion since January. The dollars he cranked out didn't go into the hard economy, but instead into tradable assets. In other words, Ben Bernanke has been the market.
The good news is that Mr. Bernanke got the major banks, except for Citigroup, recapitalized and with public money. June retail sales rose 0.6%. Housing starts jumped 17% month to month in May and will likely be flat for June. Second quarter GDP may be slightly up. And he was successful in spreading a "green shoots" psychology throughout the media. But the real question is, now what? Government interventions are only meant to light a fire under the real economy and unleash what John Maynard Keynes called our "animal spirits." But government dollars can't sustain growth.
Like it or not, the stock market is bigger than the Federal Reserve and the U.S. Treasury. The stock market anticipates only future profits and prosperity, not government-funded starter fluid. You can only fool it for so long. Unless there are real corporate profits from sustainable economic growth, the stock market is not going to play along. It's the ultimate Enforcer.
In mid-May, Mr. Bernanke's outlook seemed to change. Maybe he didn't approve of the sharp housing rebound -- like we need more houses! Maybe he saw inflation in commodity prices -- oil popping to $72 from $35. Or, more likely, he finally realized that he was the market and took his foot off the money accelerator, as evidenced in the contracting monetary base (see nearby chart). Sure enough, things rolled over -- the market dropped 7.5% from its peak, oil prices dropped almost 17%, and even gold has lost some of its luster. But in July, the Fed started buying again and the market rallied.
Can the U.S. economy stand on its own two feet without Mr. Bernanke's magic dollar dust? Eventually, but apparently not yet. Unemployment stubbornly hit 9.5% in June, according to the Bureau of Labor Statistics. Housing prices are still dropping, albeit at a slower pace, and foreclosures are still rampant.
But I think what really bothers the market is that the structural problems that got us into trouble in the first place still exist. We took the easy way out and, with the help of Treasury Secretary Tim Geithner's loose "stress tests," swept banking problems under the carpet. We waved off mark-to-market accounting and juiced bank stock prices to help them recapitalize, but all those toxic mortgage assets on bank balance sheets are still there as anchors on lending. All the pump priming and stock market flows didn't get rid of them.
Hats off to Mr. Bernanke for getting the worst behind us. He'll be pressured politically to keep pumping out dollars, but he should resist the urge. The stock market will ignore his dollars if it doesn't believe they'll turn into real profits. Green jobs and government health-care clerks do not make a productive, sustainable economy. That can only come from innovative companies with access to growth capital. The stock market won't turn bullish until it sees that type of economy.
Again, when it's clear that you are the market you have to stop buying and begin tackling the hard stuff. By not restructuring banks, by not getting bad loans off bank balance sheets, by not standing up to the massive increases in government debt crowding out private capital, the Fed and Treasury are holding back real economic growth.
Mr. Kessler, a former hedge-fund manager, is the author of "How We Got Here" (Collins, 2005).
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit
Thursday, July 09, 2009
California's IOU - 2
Well, guess what. No one it seems wants to accept Terminator's IOU's!
The Wall Street Journal reported in yesterday's edition that a group of large banks had announced it would not accept IOUs issued by the state of California. The group includes the four horsemen of the financial crisis: Citigroup, Bank of America/Merrill/Countrywide, JPMorgan Chase/Bear Stearns/WaMu, and Wells Fargo/Wachovia.
California, were it a country, would be the 6th largest. Sad. But what happens now not only in California but in other deficit ridden states?
Stay tuned.
The Wall Street Journal reported in yesterday's edition that a group of large banks had announced it would not accept IOUs issued by the state of California. The group includes the four horsemen of the financial crisis: Citigroup, Bank of America/Merrill/Countrywide, JPMorgan Chase/Bear Stearns/WaMu, and Wells Fargo/Wachovia.
California, were it a country, would be the 6th largest. Sad. But what happens now not only in California but in other deficit ridden states?
Stay tuned.
Tuesday, July 07, 2009
McNamara is Dead. Really?
"Every generation imagines itself to be more intelligent than the one that went before it, and wiser than the one that comes after it", wrote George Orwell, the noted author of 1984.
Robert Strange McNamara, the most controversial Secretary of Defense of USA before Donald Rumsfeld bungled his way into Baghdad died two days ago.
His arrogance in dismissing critics of the Vietnam War summed up the hubris of a nation so sure of its military, moral and geopolitical footings that it went to kill needlessly tens of thousands of people in countries it hardly knew.
Robert McNamara admitted so in his own writing in his 1995 memoire (“the war was wrong, terribly wrong.”) and in his celebrated interview in the must see 2003 documentary: The Fog of War produced by Errol Morgan.
One time he went to Harvard to give a speech. Students protesting against the Vietnam War surrounded his motorcade. He got on to the top of his limo and shouted at the students: “I am smarter and tougher than you.”
He later greatly regretted. At his farewell lunch at the Pentagon he wept to the horror of those present. He wept not over his leaving but over his mistakes in believing the war was just.
The lessons of McNamara’s over confidence in using “scientific”, quantitative methods in running wars and formulating foreign polices are well-documented.
Yet, events subsequent to the Vietnam war, now again in full display in Iraq and Afghanistan show each generation makes similar mistakes all the time thinking it is smarter than the one before.
Hubris is not an American monopoly. Every major power in history at one time or another acquired it.
Winning the hearts and minds of those one wish to “conquer” remains just a slogan. Each power thinks firepower alone can do it. Yes, perhaps for a while. But as Vietnam, Cuba, Afghanistan invaded by Russia, Eastern Europe under Soviet Union and many in earlier centuries show clearly, power comes from the barrel of the gun, as Mao so cleverly put it, is an illusion in the long run. Just ask the Chinese leaders who are having to deal with unhappiness in Xinjiang and in Tibet. How long can you keep an unhappy people down with guns?
McNamara in many of his post War writings and interviews kept saying: “We must see the world from the eyes of the other side.”
And of course each generation ignores the lessons of history.
Friday, July 03, 2009
California's IOU and Money Supply
I promised to write if something important happens while I am still on vacation. Something has.
California, deep in a fiscal hole, unable to get its State legislature to pass a budget, is issuing IOU's as a money substitute. Go to this link: http://www.nytimes.com/2009/07/03/us/03calif.html?_r=1&hp.
Why is this important?
Remember only the Fed can print money. If all the states in United States of America begin to print IOU's to finance their debt, then there is not just one printing press. There will be 50 of them.
Amigos, that's how Argentina got its world class financial crisis 7 years ago because the provinces began to do exactly what California is doing. The country lost its control of quantity of money issued.
Argentina's much ballyhooed 1 to 1 fixed peso to dollar link cracked under massive inflation and the debasement of its currency.
Paul Krugman, the noted Nobel laureate economist, tirelessly reminds readers in his NY Times columns that higher savings rate in the US would mean a firmer US dollar. That maybe so in normal times. Indeed, current higher savings rate is probably sustaining a dollar that should have been a lot lower given the massive amount of credit and money printed or committed by the Fed to pop up a variety of institutions.
However, the precedent set by California could be a game changer if the size of IOU's gets bigger and if other states follow the same practice.
Get ready to take your $ to the nearest bank and buy Euro or Australian dollar. So watch how thie IOU"s business evolves in the weeks and months ahead.
California, deep in a fiscal hole, unable to get its State legislature to pass a budget, is issuing IOU's as a money substitute. Go to this link: http://www.nytimes.com/2009/07/03/us/03calif.html?_r=1&hp.
Why is this important?
Remember only the Fed can print money. If all the states in United States of America begin to print IOU's to finance their debt, then there is not just one printing press. There will be 50 of them.
Amigos, that's how Argentina got its world class financial crisis 7 years ago because the provinces began to do exactly what California is doing. The country lost its control of quantity of money issued.
Argentina's much ballyhooed 1 to 1 fixed peso to dollar link cracked under massive inflation and the debasement of its currency.
Paul Krugman, the noted Nobel laureate economist, tirelessly reminds readers in his NY Times columns that higher savings rate in the US would mean a firmer US dollar. That maybe so in normal times. Indeed, current higher savings rate is probably sustaining a dollar that should have been a lot lower given the massive amount of credit and money printed or committed by the Fed to pop up a variety of institutions.
However, the precedent set by California could be a game changer if the size of IOU's gets bigger and if other states follow the same practice.
Get ready to take your $ to the nearest bank and buy Euro or Australian dollar. So watch how thie IOU"s business evolves in the weeks and months ahead.
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