Law of the Bad Premise---Second Hand News

JANUARY 27, 2009

"Obama Rocks the Casbah" (also on Essay Blog)

One of the memorable moments for me of the 2008 election season was a barely noticed comment made by Sarah Palin during her debate with Biden. She was responding to Biden's election year anti-Iraq war conversion;

"Oh, yeah, it's so obvious I'm a Washington outsider. And someone just not used to the way you guys operate. Because here you voted for the war and now you oppose the war. You're one who says, as so many politicians do, I was for it before I was against it or vice- versa. Americans are craving that straight talk and just want to know, hey, if you voted for it, tell us why you voted for it and it was a war resolution. And you had supported John McCain's military strategies pretty adamantly until this race and you had opposed very adamantly Barack Obama's military strategy, including cutting off funding for the troops that attempt all through the primary.And I watched those debates, so I remember what those were all about"

Of course, Sarah Palin is such a lightweight, how can one possibly compare her to Obama?  Talk about no straight talk. "Straight talk" and his interview on Arab television are mutually exclusive terms. The media has been sitting around since the election wondering just what the heck Obama believes. His interview on Al-Arabiya TV did not help clarify matters at all, except to show how feckless this man really is. Maybe Obama was being ultra clever and nuanced when he Addressed the Muslim World On Arab Television. But his comments were disturbing if not outright despicable. On the one hand, he differentiated himself from Bush, in implied agreement with his interviewer, by inferring that somehow George Bush was an avowed enemy of "all Muslims" as opposed to just terrorists; on the other hand, he almost was strutting about how "nervous" bin Laden and others seem about Obama---until, that is, the interviewer called his bluff. The interviewer wondered why they should be "more nervous" about Obama than Bush.

"Question: How concerned are you and -- because people sense that you have a different political discourse. And I think, judging by (inaudible) and Zawahiri and Osama bin Laden and all these, you know -- a chorus --

THE PRESIDENT: Yes, I noticed this. They seem nervous.

Q They seem very nervous, exactly. Now, tell me why they should be more nervous?

THE PRESIDENT: Well, I think that when you look at the rhetoric that they've been using against me before I even took office --

Q I know, I know.

THE PRESIDENT: -- what that tells me is that their ideas are bankrupt. There's no actions that they've taken that say a child in the Muslim world is getting a better education because of them, or has better health care because of them.

They are more nervous of him because they know, that he knows, they have not provided "health care" for children? He could not even step up to the challenge put before him by the interviewer to say he was going to "kill or capture" bin Laden. So why was Obama bragging that bin Laden and Zawahiri are "nervous"? He thought that is what the interviewer wanted to hear--then he realized he was getting trapped into saying something he thought the audience did not want to hear. Yeah, I am sure bin Laden is extra nervous. But unlike Palin, I am sure Obama is nuanced, and bin Laden realizes Obama has his number on education and health care. That could even make Lindsay Graham nervous.

Then, Obama goes off on the interviewer led tangent implying Bush hated Muslims and Obama loves them.

"Question: President Bush framed the war on terror conceptually in a way that was very broad, "war on terror," and used sometimes certain terminology that the many people -- Islamic fascism. You've always framed it in a different way, specifically against one group called al Qaeda and their collaborators. And is this one way of --

THE PRESIDENT: I think that you're making a very important point. And that is that the language we use matters. And what we need to understand is, is that there are extremist organizations -- whether Muslim or any other faith in the past -- that will use faith as a justification for violence. We cannot paint with a broad brush a faith as a consequence of the violence that is done in that faith's name.

And so you will I think see our administration be very clear in distinguishing between organizations like al Qaeda -- that espouse violence, espouse terror and act on it -- and people who may disagree with my administration and certain actions, or may have a particular viewpoint in terms of how their countries should develop. We can have legitimate disagreements but still be respectful. I cannot respect terrorist organizations that would kill innocent civilians and we will hunt them down.

But to the broader Muslim world what we are going to be offering is a hand of friendship"

This is absurd. Language certainly does matter. George Bush bent over backwards to distinguish between terrorists and Muslims in general. What is wrong with the term "Islamofascist" when applied to the terrorists anyway?  How can Obama virtually brag about how "nervous" Osama bin Laden is now, since he himself took office. Is he? Isn't that a "cowboy" comment? If he is, is he more nervous than when Bush was president? And just to whom is that "hand of friendship" being extended that George Bush did not extend it to? To Syria, Iran, Hamas? It was Bush who was not stereotyping all Muslims, against bipartisan opposition, when he supported the Dubai Ports deal. Where did Obama stand on that one? No comment is where he stood. That sure is straight talking courageous manliness, isn't it? 

Just who with and how so will Obama be different than Bush? The Middle East clearly did not like us going into Iraq. But we did and won. And now Hussein is dead and gone. Is Obama going to apologize for that? The word "Iraq" never escaped his lips. The interviewer was almost keeling over wanting to get a question in on Iraq, but Obama "had to get back to dinner with his wife". Obama freakishly pined with the interviewer for the good old days of "20 to 30 years ago" when Arab American relations were apparently in their hey day. Like the hey day of 1993 when the first WTC bombing occurred; or the hey day of 1990 when Hussein marched into Kuwait; or the sunny skies over Lockerbie in 1988 when Pan Am flight 103 was blown up in the sky; or the good old days of 1986 when 246 marines were killed in their barracks in Beirut; or the uber great old days of 1979-1981 when Iranians took our embassy hostage under the immoral Jimmy Carter. Just what the hell was Obama talking about? 

(posted at 5:04 pm by Mike Rulle)

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Keynes is everywhere we look these days. Were it not only so for Hayek. Robert Shiller of Yale brings up Keynes' "animals spirits" as key to our recovery Animal Spirits Depend on Trust . He is only 4 months behind me on that one. But I have moved on. When I first brought it up in late September, I was referencing the now contorted TARP bailout bill. In my critique of the bill, I allowed for the possibility that in a pure financial crisis, comparable to a run on the bank, that it could stimulate confidence that the Government was on top of the situation, thus forestalling the "run" on mortgages. My point was they did not need to pass that bill to accomplish the same result. The problem, which became obvious quickly, is that TARP was overwhelmingly opposed by voters. The second problem is that Paulson/Bernanke did everything conceivable to ensure a complete lack of confidence in their actions. So it was hard to argue something that was so opposed would stir "animal spirits". Plus "animal spirits" and "confidence"  is everywhere we turn in writings. At this point, we may as well believe in Voo Doo. Animal spirits are not something the government can just turn on and off. Shiller apparently believes Obama can, however. The whole "animal spirirts" concept by Keynes is that it is spontaneous and mysterious; if anything it is a nod to his philosophical rival  Friedrich Hayek. Further, as Greg Mankiw states;

"Bob thinks that confidence would rise if the government borrowed more and spent more. Other economists think that confidence would rise if the government committed itself to, say, lower taxes on capital income. The sad truth is that we economists don't know very much about what drives the animal spirits of economic participants. Until we figure it out, it is best to be suspicious of any policy whose benefits are supposed to work through the amorphous channel of "confidence."

Professor Mankiw is a very gracious and polite person, which is one reason I like and respect him. He just politely called Shiller a circular reasoner. "If only we had confidence, we would be confident". A less polite person would use a more harsh term, like "idiot".

(posted at 1:30 pm by Mike Rulle)

 

"The Price of Everything" (also on Essay Blog)

Debate about the "stimulus" package will be with us for some time. The reason is that it will take years for the money to actually be spent. There will also be plenty of time to see who benefited from such action. It is possible the recession could end before most of the money gets spent. This will cause its supporters to say it worked. If we are not out of the recession, this will cause its supporters to say it was needed. This is one of those topics that has little consensus, and less ability to even measure precisely. An example is this debate between 2 well known economists Brad DeLong and Kevin Murphy. Murphy believes spending causes a contraction while DeLong estimates there will be some benefit (less than 1 for 1). Robert Barro of Harvard believes that each dollar spent causes zero growth Robert J. Barro: Government Spending Is No Free Lunch. The Obama administration is using a Keynesian multiplier of $1.5 for each dollar spent---obviously the very high end of all forecasts. Others have done studies that show tax cuts create $3 of growth for each $1 of taxes cut. The hard truth is it is very difficult to demonstrate the efficacy of these programs, in part because they are specific to time and place.

What should guide policymakers now when there is little or no agreement on economic policy?  This is a trick question as it really is largely a function of what one believes is fair, right or just, not analysis of what the real "multiplier" is. In a democratic system, politics determines that from a policy perspective. To me, much of the argument for and against stimulus has nothing to do with Keynesian multipliers and everything to do with what one believes the role of Government is. I am against this stimulus package because it limits freedom. I am also against it because there is obviously no agreement on what it does. "First, do no harm" should be a guiding principle. I also believe economies (mankind really) are far more complex than absurd theories of multipliers imply. We have all heard of the concept "no one can make a pencil". I recently read a book by Russell Roberts- GMU Economics Department called The Price of Everything. It is a book on microeconomics in novel form that describes the mystery of the so-called "invisible hand". It does so in a way that links "the market" to personal motivations, behavior and incentives.

Roberts personalizes economics in this book. It is definitely "Hayekian" in that it describes the magic of how markets are a mysterious mixture of self organizing order and chaos. There is no "pencil czar", yet we all can just go into any store and buy a pencil. Robert's actual description of the complexity of the real life "pencil system" is a marvel to read. I think if politicians reflected less on telling people what they need to do, and more on providing avenues for private incentives and personal freedom, we would be ahead of the game. The primary focus from a policy perspective, therefore, should be on how Government regulates and taxes its citizens. Philosophical bureaucrats like Obama and much of the left believe things are simpler than they are. As Thomas Sowell has often said, regulators look at only the first effects of things, not how any rule or regulation effects the "pencil system" as a whole. For me, there has to be compelling reasons to regulate and tax. We have far less compelling reasons than we do regulations and taxes today. Yet this has been the trend for years and it is debilitating for a society. Government intrusion is an enervating force. It is like a black hole which sucks all energy into itself. The US is not so far gone that the ebb and flow of the left and right will cause it to decline quickly. We may even reverse the trend at some point. But history shows us that civilizations eventually weaken and sometimes even die. My view is that civilizations begin the dieing process when its citizens cede increasing authority to central powers.

(posted at 9:33 am by Mike Rulle)

  

What the heck happened with Caroline Kennedy? That was strange. We learn from the Financial Times Kennedy ends her bid for seat in Senate that "Mr Obama was widely expected to reward Ms Kennedy for having boosted his primary campaign by encouraging Edward Kennedy to endorse him." Well, that didn't work out so well. Governor Paterson presumably did not expect such backlash both from within his own party as well as the voters. Kennedy's embarrassing public appearances put the nail in her coffin. It is hard for an outsider to know what was really going on behind the scenes, so one can just speculate. Cuomo was not chosen because his AG position would have given Speaker Sheldon Silver the power to put his own person in, something Paterson would not want. Also, Andrew Cuomo's divorce from Caroline's cousin does not exactly make them political allies. Cuomo will surely run in 2010, unless he has his own skeletons, so he wanted her out of the way. Apparently, much of the party did as well.

Representative Kirsten Gillibrand is a virtual unknown. She is a Democrat who represented a largely Republican District. Apparently she is for offshore drilling and also voted against the bailout. That is unusual for a House Democrat. She looks like a stand in, but in politics one never knows. Caroline Kennedy was effectively forced to withdraw, just as she tried to force her way in. Her opponents, which eventually included Patterson himself, were threatening all sorts of public revelations regarding taxes, "nanny problems", and her marriage. She did not have the charisma or savvy to pull it off. She has been so sheltered from reality she did not realize politics is a contact sport and actually believed being JFK's daughter was all that was required to succeed. Maybe 10 or 20 years ago that was true, but not now.  The Kennedy magic has been eclipsed, as there is a new magician in town. The Kennedys are now officially "history". Joe Kennedy must be spinning in his grave.

(posted at 8:33 am by Mike Rulle)

  

That was close. For a while there I thought that we were going to miss out on getting Tim Geithner as Treasury Secretary Diminished Geithner Faces Mighty Tasks. Now all is safe again. Did any one watch him testify before Congress? Half if not more of a Treasury Secretary's effectiveness is the confidence he can inspire. Now we have a guy facing "mighty tasks" who cannot even own up to his own tax evasion tricks. This is what it has come to in Government. We are all "realists" now. No one heard of this guy until 2 months ago, but suddenly he is so indispensable that we must have him and him alone. Its a joke.

(posted at 8:20am by Mike Rulle)

 

It is peculiar that experts on the Environment should conflate smog and air pollution with global warming. In the NY Times article A Strong Signal on Global Warming several commentators discuss Obama's decision to allow California to once again set its own emission standards for automobiles. Ex-EPA head William Reilly, for example, asserts this will help set stricter "air pollution" standards by limiting carbon dioxide emissions, "the largest contributor to global warming". First of all, those who believe in man induced global warming also believe that even the most severe auto emission restrictions will hardly put a dent in their forecasts. Secondly, the evidence linking CO2 with global warming is weak to non-existent. So what is the meaning of Obama's reversal of Bush's policy? Not much, other than California for all practical purposes, once again gets to set emission standards on cars for much of the country. Their standards are hardly different than what was already passed by Congress last year. What is different is they get to impose how those standards are implemented by type of vehicle.

(posted at 8:09 am by Mike Rulle)
 

JANUARY 20, 2009

Reagan came into office in 1981 declaring the Government is the problem not the solution. Compare this Ronald Reagan: First Inaugural Address with this Text of President Barack Obama's inaugural address. They both entered office in troubled economic times but gave polar opposite messages. Different they are and we have gone a long way backward. Obama comes into office declaring, implicitly, that Government is the solution to our problems. Investors also get to vote. While markets learned nothing new today--except perhaps forecasts like Roubini's that the US Banking System alone will eventually report $3.5 trillion of losses (global losses equal about $ 1trillion so far) U.S. Banking System Insolvent, Another $2.5T of Losses--today's record inaugural market decline line does tell us what we presumably already know.

Dow	7,949.09	-332.13	-4.01%

That whatever it is we are in, there is no confidence that anyone has the answer to get us out. The implicit justification for big and bigger Government in President Obama's inauguration speech (by declaring "big" or "small" is not the issue when it comes to Government, but "does it work?") clearly did not raise hopes either. The time for unspecified hope and change has come and gone. We now know hope and change means we have come to look collectively toward Government for solutions. But Governments cannot provide solutions to the kinds of problems we have. A few hundred thousand Government employees spreading other peoples' money around through randomly generated spending programs cannot possibly accomplish anything (see below as well). Yet, beginning with Bush in September, we have mysteriously raised our desire for Government based action by an "order of magnitude".  That message was kept alive and well today by the strangely similar Obama. This new anti-Reagan message is: "I believe in free markets but..........". It is astonishing really. This expectation of giant federal bailouts and "stimulus spending to the rescue" causes investors, i.e., us, to "wait". "Wait" to invest; "wait" to take risks; "wait" to see what the Government will really do. We keep being promised massive and then even more massive action by the Feds. What makes it even worse, is nothing actually is done. So we wait, and wait some more. Waiting simply means that the problems will continue to get worse. Instead of tens of millions of people acting, we wait for these over hyped, over promised and undeliverable actions by Government. It cannot work. We have it exactly backwards. The incentives have to come from the bottom up, not from the top down. That is what Reagan meant. So he cut marginal taxes in half and supported Volker in his quest to stop inflation knowing it would temporarily deepen the recession. The Reagan message is so far gone from where we are today, it is almost impossible to discuss rationally. We have even conflated the good feeling of the first African American president with the reality of his policies. If somehow Obama pulls this economic recovery off, I will be happily shocked. But it will not happen given what he proposes. Unless he changes his proposals to a simpler more "tried and true" method, thus reversing the Bush travesty, he will be challenged in his own party as well as by a reemergant Conservative movement in 2012.

(posted at 4:30 pm by Mike Rulle)

Finally, its over. The waiting that is. Also having to read about the dual presidency day in and day out. To not have to read about all this dramatic anticipation will be a national relief. Just let Obama and the new administration get on with it. We will have one guy in charge and hopefully the other one can just go home and be forgotten. Although if Conyers and Pelosi are serious, which is truly hard to believe, we will not be forgetting about Bush and Cheney anytime soon House Speaker Pelosi wants Congress to investigate Bush. If Obama holds true to recent form, he will attempt to squash this. It is not clear yet, however, what the left wing of the Democratic party is going to get from the president. They have not yet even been tossed a bone. But do Pelosi and company really want to go down the investigation path to assuage the left?  My guess is they make a fake move in that direction and then it dies on the vine. The other good thing about the inauguration being behind us, is that "hope and change" can become "here and now". This seems to have been the longest anticipation period for a president in our lifetime.

The three policy issues that concern me most under a Obama administration are; 1) the deficit spending proposals; 2) the latent energy proposals that have been mostly under the radar, and; 3) Universal Health Care. Deficit "stimulus" spending theory comes from John Maynard Keynes. It is embedded in every text about Macroeconomics and its validity had gone almost unquestioned for years. But there is no consensus on what deficit spending accomplishes. Greg Mankiw has performed a public service on this question. His website recently has been almost completely devoted to the scientific and non-scientific opinions surrounding this issue. He is easy to read and I recommend it.The bottom line is there really is no evidence to support the efficacy of "stimulus" spending. Yet we borrow aggressively from our young to......what?  My second concern is policies to address "climate change" (see below). This will have the effect of raising the cost of everything we do---for no good purpose. McCain and Obama both supported CO2 restrictions during the campaign but Obama has been silent on this since election day. "Universal Health Care" is also a disturbing possibility. What is meant by that is Government mandated health care. In every country that has tried this we get rationing. The reason is obvious. When you artificially lower the cost to buy something, you get more demand for it. When you simultaneously lower the price one can charge for something, you get less supply of it. Since these are both features of "Universal Health Care", the result is rationing. Rationing means someone else is determining how you treat yourself medically--the Government. 

Obama is likely to maintain Bush's foreign policy. Any dreams of the left on this will be shattered. But this should be apparent to anyone who has looked at the behavior of past presidents. Wilson and FDR were both "peace" candidates but war presidents. It is the nature of the job.

(posted at 10:21 am by Mike Rulle)

  

It is hard to believe the public is really as excited about Obama's inauguration as the media pretends it is 67% - Plan to Watch the Inauguration. I have never watched an inauguration ceremony before. Its not that I am against pomp and ceremony. In fact, it is very important we treat the transfer of power in this manner. Nor does the spending for the party concern me, although its exaggerated celebrity focus is distasteful. But the tradition of a celebration as we inaugurate a president is a good thing for our society. This was why I found the NY Times finger pointing at Bush back in 2005 so disgraceful The New York Times--For Inauguration in Wartime. Still, I have never been interested enough to watch one. Apart from the aforementioned pomp, it is just another political speech. Additionally, the inevitable repetitive, cloying, cheesy, cornball coverage this time around, instead of the dreary drab barely concealed scolding of 2005, will be too much to take.

(posted at 9:34 am by Mike Rulle)

  

Henry Paulson's unprecedented forced equity purchases was the single most radical domestic policy ever initiated by a US administration not in a war. It far outstrips Nixon's wage and price controls and even the delinking of gold with the dollar. It initiated an anything goes mentality for the federal government. We now have the new administration almost promising record deficits (in absolute and percentage terms) and the public some how gives it an 80% approval rating. The "intelligentsia" should at least know the facts, even if the public does not. We all know that trying to spend an extra $1 trillion per year is like forcing a snake to eat its food fast. It just will not happen Much in Obama stimulus bill won't hit economy soon. As also mentioned on this site before, there is no empirical evidence that stimulus spending "works". The little evidence that exists in Macroeconomics is that it does not work. But stimulus spending is like Global Warming. No lack of evidence can dissuade its adherents from pursuing the most extreme implementation.

(posted at 9:13 am by Mike Rulle)

  

The NY Times runs a creepy survey asking people what their "hopes and dreams" are for the Obama administration I Hope So Too. The answers, which you can hear spoken, are remarkably similar to their editorial page opinions. The respondents sound desperate to me, as if their one shot at having a god like figure in the White House will go unfulfilled. They remind me of the old Twilight Zone episode of Aliens coming to "serve" man YouTube - "Twilight Zone" promo for "To Serve Man. The public was in worshipful mode until they found out the Aliens' special book on "serving" man was really a cook book. Let's hope it does not get to that extreme before the media drops this cult fetish.

(posted at 8:34 am by Mike Rulle)

  

NASA's James Hansen: Man of Science, surely the kookiest of all Anthropogenic Global Warming advocates, claims we have 4 years to begin reducing CO2 emissions or we are doomed President Obama 'has four years to save Earth'. I have addressed AGW in detail before "Red Flags" Fly as Gore Raises Stakes so I won't repeat any of those points. While some of us cannot wait until this inauguration adulation is over, it does bring out interesting information. The NY Times did an open ended informal survey of the public's "hopes and dreams" for the Obama administration I Hope So Too. They categorized responses into 29 groups, and "Environment" was rated  second. This is a dangerous combination, popularity mixed with mystic voo doo, and calling itself "science".

(posted at 8:03 am by Mike Rulle)

JANUARY 16, 2009

The big news of the day, of course, is All 155 aboard survive crash of jetliner into icy NY river. This really is a remarkable story. My daughter called pretty soon after the crash to ask if I heard the news. Nothing was yet on my computer screen---Yahoo news must be slow on the uptake. She lives in Manhattan so I had a freak out moment as I was not sure what she was telling me. While on the phone I found the story and soon it became apparent no one died in the accident. My first thought, which remains of course, is the pilot was a genius. He had to make a decision and he made the correct one. Then he executed it perfectly. Runway to River in 3 minutes---shorter than it took me to write this paragraph. Then I watched the stories. I am not surprised by how quickly "responders" arrived. But I still am amazed. What I found most compelling were the passenger stories. The lack of panic, the quietness on the plane, the natural response of "women and children first", the reports of dignified prayer, the mutual help, the professional response of the crew who also feared death. Talk about "nothing to fear but fear itself". Well, they had plenty to fear, but fear was not going to be one of the things to cause more fear. Let's all imagine we were on that plane with them. And then move on with a greater appreciation and optimism about our own lives.

(posted at 10:00 am by Mike Rulle

  

Christina Romer, new CEA head for Obama, for Treasury Secretary. Lawrence Summers to CEA. Do small lies matter? Yes. Without trying to define "small" lets stipulate that if Timothy Geithner has fudged his response on lack of tax payments it is a "small" lie. Remember, the IRS reports to the Treasury Secretary. I will give the most favorable interpretation possible in what follows. He still fails the test, in my opinion. At the time of the Geithner appointment I was happy with the decision. Not that we knew much about him, but he seems like a competent and calm person. This struck me as what was needed in a Treasury Secretary versus the transparently uncalm Henry Paulson. The only new news we have about Geithner since his appointment is he fudged his taxes. It is risky to fudge taxes, knowingly at least. I do not think think there is some great moral obligation to pay them, but there is a legal obligation to pay them. Having the IRS after me is something I can live without. So I hire professionals to prepare my taxes. I have knowingly invested in tax shelters that have been reversed---costing me high borrowing costs from the Government. So at the end, I still paid and then some. Taxes at the rate we are required to pay them are immoral in my opinion, but we are legally required to pay them, so we pay them.

But back to small lies and Tim Geithner. Is it possible he did not know he should have paid those taxes back in 2001-2002? Yes. But that presents problems. What are we supposed to make of that? That he did not spend enough time filling them out because he had more important things to do? That he is not a detail guy? That tax returns are boring, so lets just get them over with? That he was not smart enough to figure it out? If it was ambiguous, he just chose not to ask anyone who has had a similar position? Do we get the benefit of a break when we engage in such sloppiness? No. So the man who would be boss of the IRS fails on that score. Most likely, he saw that there could be an interpretation in his favor and chose to take it. That is fine with me. But it is not a "common mistake", it is a position on the law he chose to take. That is fine with me too. But when it came down to his later years being audited for the same issue, he knew he owed the taxes. But he got lucky, apparently, as there seems to be a statute of limitations on his '01-'02 taxes. So he chose not to pay. That too is ok, by me at least. But apparently not by the Obama transition team who ordered him to pay the '01-'02 taxes. Fine. So it seems to me the correct description--at best by the way---should be described by Obama and Geithner as follows.

"I, Timothy Geithner, knowingly took an aggressive, but justifiable position on my tax returns in 2001-2002. I chose not to have this reviewed by outside tax accountants but did this myself. When in later years I used an accountant to review my 2003-2004 taxes, I was informed my prior position was wrong. I was legally required to adjust my tax bill in 2003-2004, but not so in the earlier years because of the statute of limitations. As it was my legal right to do so, I chose not to make the payments for 2001-2002 until I was requested to do so voluntarily prior to my nomination. Why? I preferred to keep the money myself and was justified by law in doing so. I would think most US taxpayers would act the same and I certainly support their right to do so as long as their actions are lawful. Given my position as Treasury Secretary, I certainly understand why paying the back taxes voluntarily is the correct thing to do---however, when I originally made the decision I was a private citizen and acted lawfully and appropriately as a private citizen. As a Treasury Secretary, of course, that standard is higher which is why I complied with the transition team's request".

Of course he will not say this. The reason is he might not be approved if he does so, although I would support him if he did. Most people will still see it as unfair. But to Tim Geithner I say, that's life. Better than being a petty liar. Not to him apparently. This, as mentioned, is the most favorable interpretation of the truth. A more venal interpretation is he knew all along which makes my following point even more correct. Instead, the administration, in trying to save his candidacy, chooses to lie to us. There are vague concepts of "honest mistake" and "complexities" and "did not know". Oh, it is all so complex. Where is Giethner's previous support for tax simplicity? There is none. You do not need to work for the IMF to have complexity. This is absurd. We are supposed to believe what morons like Lindsay Graham tell us that we should not play "gotcha politcs". Sorry Senator, but the world does not "need" Tim Geithner. I am sick of venal lies by officials of Government, because they mask the much larger lies which come later. I realize we might get the eccentric oddball Summers in his place---don't know why we should. I would rather have Christina Romer anyway.

(posted at 12:05 pm by Mike Rulle)

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Regarding the post right below, I found this on Greg Mankiw's web page from the Chicago Tribune:

"John Cochrane, a professor at the University of Chicago Booth School of Business, says that among academics over the last 30 years, the idea of fiscal stimulus has been discredited and in graduate courses, it is "taught only for its fallacies". New York University economist Thomas Sargent agrees: "The calculations that I have seen supporting the stimulus package are back-of-the-envelope ones that ignore what we have learned in the last 60 years of macroeconomic research." 

Yet principles the Economic's profession do know are routinely ignored. Incentives to produce are attacked and/or distorted by regulation and tax policies. This happens at many levels in our economy. Federal, state and local bureaucracies create laws and rules beyond what is reasonable by any common sense standard. We approach these cyclical economic problems using random "Macroeconomic" policies. Why doesn't Government approach these issues from the "bottom up" using non-discredited Microeconomic principles? Free up "animal spirits" by lightening the regulatory and tax load. What Government primarily does is create disincentives---it is their job--telling others and forcing others to do what they think should be done.

(posted at 10:31 am by Mike Rulle)

  

Yesterday, I experienced a personal lesson in economics and Microeconomics. Microeconomics is that branch of economics where we actually know things and is largely about incentives at the individual level. We also seem to ignore the simple and fairly obvious and powerful principles which derive from it. For some reason, policy makers prefer the more universal principles of Macroeconmics, the study of aggregate supply and demand and a field for which there is little agreement beyond some basic accounting identities, at least when it matters, like now. We had purchased a fairly expensive and complex computer from Dell in my office, the kind you have to swear you will not take out of the Country and to state for the record what its purpose is. The Dell technical support guy just could not get motivated enough to help out sufficiently, apparently used to more mundane problems. When the salesman was called, you know, the guy who gets the commission, and was told that we were returning the computer he called his technical guy. The latter called back shortly and in 45 minutes the problem was diagnosed and solved. That is Microeconomics in action. Government does much to encourage the technician's response and not enough to encourage the salesman's response.

(posted at 8:03 am by Mike Rulle)

Street smart, Hockey dad and blue collar". What image does that invoke? Someone who cannot have the wool pulled over his eyes. Yet, Madoff's `Street-Smart' Aide Frank DiPascali apparently heard no evil and saw no evil. He is not charged with anything according to reports, but if he truly knew nothing we can scratch the street smart.

(posted by at 8:43 am by Mike Rulle)

JANUARY 11, 2009

The following qualifies as "voo doo" analysis, but I will put it forth anyway. It is "voo doo" because there is no "hypothesis", or measured empirical analysis to back it up. It is completely impressionistic relying on my memory, (hopes?), and observations. This does not make it wrong, by the way. It just makes it "what it is". Usually when economic graphs (price changes, for example) change at an unusually fast rate, that is an indicator that there is an over reaction occurring which marks the beginning of the end of that "trend". An example might be the NASDAQ in 2000, or the change in Oil prices, up and down, in 2008, or the S&P 500 in October, 2008. The chart below is the NASDAQ from the beginning of 1999 until today. The spike began in the beginning of 2000 until mid-2000, then reversed itself. A full 70% of the price increase occurred within a 3 month period of a 10 year rally.

The following Chart shows the price of an Oil ETF. It reflects the actual percent move in the price of oil, so do not be mislead by the stated prices.

Again, as with the NASDAQ, an enormous percentage of the original price move happened in a short time. About 80% of the increase occurred in several months. That was wiped out even faster. It probably has reached something near a bottom but who knows.

The following Chart is on unemployment.

Bureau of Labor Statistics Data

 

 

The chart does have similarities to the Oil and NASDAQ. Of course it is not a security or a commodity, but it is a function of economic behavior. The "rally" in employment lasted almost 4 years as unemployment declined from 6.3% to 4.4% from peak to bottom. Those gains were wiped out in 1/4 of the time. What is my point? Not that the bear market in employment cannot continue, but that it will likely sputter out and flatten out at some number sooner than we think. That number may be 8%, 9%, 12% or something else. But it will occur before year end. Absent new "new bad" information, this will mark the beginning of the recovery in employment. As mentioned in The End of Financial Armageddon? equity prices recover faster than unemployment. Arguably, this process has already been happening. 

My observations on our collective behaviors in the current market must be similar to others. These are reflected in the National Statistics as well. Savings are increasing as we seek to save money by spending less. This is understood by business so they expect to produce less. Workers are let go. Our behavior causes this and even risks our own jobs when and if our employer lets us take a hike. But the likely result of this is we can only save so much. Unless there is some kind of mass ascetic movement about to happen, we will reach a floor on spending reductions. This floor will represent the bare minimum to maintain our current life style with all the fluff gone. At that point or sometime after that point unemployment will peak. This process is occurring very fast today which is why my voo doo proposition is this will peak soon. The extra savings will help provide a foundation for real future investment and growth.

The fly in the ointment is the Government. It is unclear to me what its actions will cause. My sense is its actions are, oddly, "off to the side"---at least as far as individual behavior is concerned. How much it will impact the behavior of financial institutions I do not know. My best case on the stimulus is that it is a negative return investment for the economy as a whole, measured in present value economic terms, but does not result in a complete wipe out of the money spent. Just wealth transfer predominantly from productive to non-productive uses on average. Opportunity costs and unfairness are the primary costs, which are very real, but not a total wipeout, I hope. 

(posted at 12:26 pm by Mike Rulle)

JANUARY 10, 2009

Complexity reigns----the question for political actors is how to simplify. Top Economist under 40 Daron Acemoglu, discusses the Economy and Economics. I recall having a similar thought a few years back, but structured differently in my mind, as Acemoglu:

"We believed that through astute policy or new technologies, including better methods of communication and inventory control, the business cycles were conquered. Our belief in a more benign economy made us more optimistic about the stock market and the housing market. If any contraction must be soft and short lived, then it becomes easier to believe that financial intermediaries, firms and consumers should not worry about large drops in asset values"

In other words, the "smoothness" of economic functions caused by global technology and global financial diversification creates the appearance of lower risk. It appears lower because we tend to think in terms of the continuity of things. But in reality cyclical risks never go away. They are omni-present. The "world", or certain parts of the economic world, effectively believed that more leverage, both operating and financial, could be absorbed because of this illusion. But since the cyclical risks of mankind's collective random behavior never really goes away, we instead just set ourselves up for what has occurred. While the following analogy is imperfect, imagine a gambling strategy of "doubling down". In a 50-50 game, it is impossible to win in the long run. But if one doubles one's bet after each loss, one can go an extended period of time "winning". But it is a virtual mathematical certainty this strategy will eventually lead to bankruptcy. Technology has "smoothed" out the cyclical nature of the economy, but only inside secular expansions. The real cycles themselves still exist. To ignore this was to court danger, as in a double down strategy. We were destined to fail.

(posted at 11:48 am by Mike Rulle)

  

This kind of reporting is really irritating to me. While the headline No Instruction Manual as Stimulus Bill Takes Shape leads the reader in the correct direction, it really is a fake out. The NY Times reporters believe there are only 2 questions "is the "stimulus" bill big enough; and is it being spent on the right things? In particular, tax cuts come in for attack. How about "is the stimulus bill too big?" as a third question. Or, as a fourth question, "should the entire "stimulus" package be tax cuts"? The NY Times knows, however, the answer always comes in the form of big government or bigger government.

(posted at 11:00 am by Mike Rulle)

    

I have always liked Haley Barbour and still do-- GOP Revival Will Start in the States . He puts his finger on the Republican party's primary problem which is:

"Right now a lot of people that have voted for us repeatedly are not so sure about free-market capitalism. They're scared. They don't know if they're going to have to work until they're 80, they don't know if they're going to send their children to college, they don't know if they're going to lose their business or job." So he fears that "right now the only answer they know is government. The only place they know to turn that can help them is government."

While author Moore believes Barbour over states the rejectionism of the American people, I think on the margin Barbour is correct. Barbour believes the Republican party must figure out how to appeal to the young Obama voter if it is going to survive. It is also a matter of persuading people that free market principles work. Barbour believes that message can best be communuicated at the state level. That probably means those of us in the Northeast will not see much of this "persuasion" directly. The top leaders at the state level are Mark Sanford of NC, Bobby Jindal of LA, and of course, Sarah Palin of AK. The key point is "persuasion". Easier said than done. After all, philosophical texts are written on this subject (Adam Smith was a social philosopher). If there really is a truth in the concept of free markets, it seems to me that internally we in some way "already understand it". But, if so, we still must be shown the way. This is not easy at all, but is worth the effort.

(posted at 10:45 am by Mike Rulle)

 

Speaking of political women (see below), what is happening with Caroline Kennedy?  Other than absurdly titled articles such as this from MSNBC Kennedy seen as model for re-entry women (admit it now, you are laughing) there has not been much news. Apparently Governor Paterson mulls NY Senate pick with little help  from the state's party. There really is resistance to her from all quarters. But I predict, when all is said and done, he will pick her. If Kennedy can learn to just eliminate her "you knows" Caroline Kennedy Says ‘You Know’ 138 Times she probably can even get re-elected in 2010. How does a Harvard College and Columbia Law School graduate not remember how to speak normally in public, you know?

(posted at 10:23 am by Mike Rulle)

 

WaPo blogger Chris Cillizza asks whether Sarah Palin is Crazy or Crazy Like a Fox?  In a discussion of the new John Ziegler documentary How Obama Got Elected, Cillizza discusses the 9 minute interview Palin gave Ziegler. I don't agree with the manner in which the "choice" in the question is presented, but his question is meant to be rhetorical. The implicit power of Palin is obvious. She will be the next Republican candidate if she wants to be. That does not mean she can win the presidency, that is dependent on many things, the most obvious being the success of the economy. There really has not been a candidate since Reagan who has generated such negative emotion and faux intellectual superority from the Left as has Palin. I would even say her support strengthens from the Right as resistence to her strengthens from the Left.

(posted at 9:52 am by Mike Rulle)

  

Michael Barone has an optimistic take on Barack Obama's plans for stimulating the economy Obama's Economic Strategy. Barone, a practical and honest reporter, sees signs that perhaps Obama's approach is also "practical and honest". Meaning, we know that we do not know, so lets try the best guesses of a variety of different proposals in a diversified approach. That is my take on Barone's interpretation. The one approach missing is "do nothing". Doing "nothing" is really a misnomer. The Government doing nothing does not mean we, the American people, will do nothing. We, in fact, will individually figure out what we each need to do. If we are a country built on free markets, and free markets have created the highest growth rates in the world, why can't we believe that free markets are also capable of self adjusting from its own negative outcomes? Cut taxes first, then do nothing. Of course the people will do what they will do. But will it be different because of Government action? I really don't know. It just seems obvious that printing money, borrowing from our own future, and spending it on Government directed projects is suboptimal at best.

(posted at 9:29 am by Mike Rulle)

JANUARY 9, 2009

Bush Redux. In September I wrote about the Paulson plan. While I opposed it, I did so on grounds there was no affirmative evidence that such an action (of buying mortgages) would cause any benefit. It just established a bad precedent of excessive Government interference in the private economy. Of course, they never did buy mortgages, but that is old news. But I also, naively I now believe, thought that maybe just any action at all could bring back "confidence" in the economy. If anything, the evidence is more consistent with the Paulson-Bush bailout causing a decrease in confidence. Now it is January 2009 and for me it is deja vu all over again. In David Brooks article in the NY Times today Brooks: Confidence Surplus he amazingly points to a study by Obama's own newly appointed head of the Council of Economic Advisors, Christine Romer, where she shows there is no evidence at all and never has been that "fiscal stimulus" can help an economy out of a recession. Romer's study states:

“Our central conclusion is that monetary policy alone is a sufficiently powerful and flexible tool to end recessions,” they wrote. Automatic spending policies like unemployment insurance have sometimes helped. Discretionary policies, like tax cuts and stimulus plans, have not been of much use. As they put it: “Discretionary fiscal policy, in contrast, does not appear to have had an important role in generating recoveries.”

So, clearly, the central political question of the day must be, "why is Obama proposing the single largest borrowing and money printing plan (as a percent of our total economy and of course in absolute terms) in the history of American peace time politics"? Brooks defaults to my hope back in September. While no economic breakthroughs regarding stimulus spending have been made since Romer's study, Obama will nevertheless move forward with his trillion dollar borrow and spend program. In the most literal way this is a "confidence game". But if it is all about "confidence", how can you create confidence if people know what you are proposing has no reason to work? Brooks has it right. The Obama gamble is he can release those Keynesian ghosts through sheer bravado. If he can pull it off, that is good. But if he can pull it off with confidence brimming, why borrow $1 trillion to rebuild "crumbling roads" and "make federal buildings more energy efficient"? One reason is his advisors and most economists are all in panic mode, like Paulson in September. Another reason is the time honored belief of Liberal politics that Government payoffs for favored policies (Obama spoke a lot about alternative energy in his speech yesterday) and favored constituents is a way to maintain power. Has anyone thought of the novel idea of "first, do no harm"?

(posted at 10:00 am by Mike Rulle)

JANUARY 7, 2009

We really are built for political debate. The more important question is what the legitimate boundaries for the debate are. If the boundaries for debate are too wide or too narrow we risk poor outcomes. An example of the former would be if Congress took up the question of allowing 65 year olds to be "euthanized" to save on medical costs (yes, I believe a modified more "reasonable" version of this is coming our way---after all, are not "right to die" laws on that path? What is the word most linked to "rights"? Responsibility). An example of "too narrow" is one party debate. Roger Simon in Unhappiness in Obamaland implicitly makes this point. He believes the debate in Congress will clearly exist among Democrats in many areas, just not the important ones, such as the "Stimulus Package", Nationalized medicine and others.

(posted at 10:08 am by Mike Rulle)

-

What is interesting about the political news of late, to me at least, is the repetitiveness of it all. This tends to deaden the emotions on certain issues. This can be both good and bad. For example, when Bobby Rush in Illinois tries to raise racial issues (when there really are none---the State's black Secretary of State is the person who won't "certify" "Blago's" choice of Roland Burris) in the seating of Roland Burris in the Senate (which I have stated from the outset should be allowed), my sense is everyone yawns Burris Circus and the Politics of Race. This is a good thing. When Americans of all races are bored with discussing race, that is a pretty good indicator race is less of an issue. However, when there are continued critiques on the proposed economic actions by Obama, which frankly most politicians on both sides seem to generally support, that too is beginning to generate yawns. This is not a good thing. The risks of "yawning" are  outlined by Charles Krauthammer in his recent column. The risks in most simple terms can be called "Socialism".

(posted at 9:45 am by Mike Rulle)

  

This is a useful "thought experiment" Would You Have Been A Nazi? Anyone who saw the Woody Allen comedy Zelig recalls the crazy funny images of "Zelig" inserted into Nazi propagandist Leni Riefenstahl's "newsreels". One of the many insights of this movie is the recognition that man is a social conforming species. A reason for this thought experiment's usefulness is it can help tone down the self-righteousness of much of our public discourse. I am not speaking of "civility". One can still be passionate about one's position. But recognize that you are considerably less than perfect.

(posted at 8:33 am by Mike Rulle)

  

Have you heard that "Senator" Al Franken has been banned by NBC from appearing on its Network?  Neither have I. But Ann Coulter apparently has Coulter v. The Counter-Coulter. How is it that Coulter keeps publishing best sellers yet is viewed in the media as a pariah?  The reason is she mixes comedic hard edged sarcasm with political critique---aimed at the left. The sarcasm is certainly no worse than we would see from liberal political comedians such as Lewis Black, who is funny; or the formerly funny "Senator" Al Franken. The answer to the Coulter question is obvious and Brent Bozell spells out why in his column.This kind of censorship is brought to you from the promoters of the ludicrously named Fairness Doctrine

(posted at 8:05 am by Mike Rulle)

International economists, Peter Boone and Simon Johnson, essentially argue for even greater deficit spending and greater monetary easing Obama Plan Is Bold, but Not Bold Enough. It is difficult to understand how a crisis which supposedly was created by an increase in total leverage can be solved by a massive further increase in total leverage. In Atlantic City this is called "doubling down".

(posted at 7:45 am by Mike Rulle)

JANUARY 2, 2009

Irony may not be the correct term. But it is disturbing that Governor Paterson is the successor of a scandal ridden Spitzer himself as he appoints, or appears about to, the entitled Caroline Kennedy. He can, of course, appoint whomever he wants. Governor Blagojevich of Illinois can also legally appoint whomever he wants. The Illinois Legislature will not impeach him and he is innocent until proven guilty.  But the US Senate say they will not seat his choice, Roland Burris. There are articles on his qualifications Burris Could Be Illinois’s Senator But Was He a Good AG? and one thing he has over Kennedy is he at least has run for elected office. As far as I know, he also did not offer to buy his seat. So why is Burris not being seated while Kennedy will be treated like a rock star?  Have we really looked into all the non-public discussions among Paterson, Kennedy and Bloomberg? Do you really believe there has been no "quid pro quo" somewhere? Why, among millions or more non-politicians, did Paterson happen to choose Kennedy?  Joe Biden also is making sure his former seat is being kept warm for his son upon his return from Iraq. But Beau Biden Did Not Accept Senate Appointment  even though he could have. He is expected to run for office in the next election while the seat is temporarily being filled. He also had been Attorney General in Delaware when his name was first "floated". Beau Biden demonstrates dignity for fulfilling his Iraq obligations and not taking an easy "freebie", unlike Kennedy, who apparently has no shame. What has Kennedy done to deserve to be Senator? The answer, of course, is nothing; and that's just the way it goes sometimes.

(posted at 12:30 pm by Mike Rulle)

  

We just keep on movin' on. It does sometimes feel like all is fear and loathing but the reality is better than that, as this Reason magazine article summarizes The Good News from a Bad Year

(posted at 10:49 am by Mike Rulle)

  

If you want to see a perspective 180 degrees from mine, read this post about how the Federal Reserve should buy stock (from Greg Mankiw's weblog) UCLA economist Roger Farmer suggests the Fed buy some stock. It is people like Robert Farmer that Robert Higgs had in mind who fail to understand how markets really work (see below).

(posted at 10:33 am by Mike Rulle)

I am probably overly attracted to the concept that the simple and mundane are what gets us every time (speculation in California housing, for example), not the "profound" (for example, a 50 year secular cycle of increasing leverage has finally caught up with us) . On the Financial Crisis and Recession weblog today's post discusses Consumption Surprise. Basically, real consumption is increasing, i.e., the amount of goods and services purchased went up in November as their charts show. In particular, the authors speculate that while it is too early to really know what this deflationary trend means, "(we) may get some grip on the question of how much of the drop in consumption was the reaction to the spike in oil prices during the summer and how much from the financial events of the fall". I like the more mundane concept that it was the price of gasoline. This also fits with the post right below that the sky is not falling.

(posted at 10:24 am by Mike Rulle)

Bryan Caplan discusses Robert Higgs in The Crisis Prophet Speaks. Higgs is highly critical of so called "free market economists" who basically have panicked over the last 3 months and abandoned their free market principles. He refers specifically to the "second" law of supply (and demand): "although we can expect markets to respond to price changes, we must recognize the responses take time; and the greater the time the greater the responses". In other words, when the market crashed and Bush went on TV to tell us markets were not functioning, he was ignoring the second law of supply and demand. You cannot expect a real estate collapse of that magnitude to be sorted out by markets in a week. It takes time. Meanwhile the Government engaged in actions which simply added confusion and further complexity to the market's analytical problem. Eventually, assuming we do not want to become the Soviet Union, we need to let markets adjust to reality. Remember, we all are part of the "markets". Markets may seem like something "out there" but all our individual actions, even choosing to buy a pair of shoes, is part of that market. Higgs adds, "we must appreciate the sky is not falling". As Caplan says, "I still can't believe it was FDR, not Higgs, who said "There is nothing to fear but fear itself." 

(posted at 9:58 am by Mike Rulle)

I believe something about physical science which probably appears eccentric if not out right stupid. If it can be imagined by mankind, it will be attempted and likely eventually succeed. Remember when the first Matrix movie came out in 1999? Many who saw it, myself included, had a hard time following it even after the fact. Yet the premise of it, that one's brain can be manipulated to simulate reality, is easily imagined today. For example, Brain-Computer Interfaces for Manipulating Dream and Monitoring and manipulating the human brain: new neuroscience provide a glimpse of what scientists are working on. The premise of The Matrix to me is now obvious. But scientists are already well ahead of such visions. One can spend 10 minutes or so and read about human genome "sequencer" Craig Venter in this article Craig Venter's Epic Voyage As one commentator put it he is working on artificial life forms "where your dog becomes your cat". And so forth.

(posted at 9:43 am by Mike Rulle)

   
In Lectures on Macroeconomics, No. 12 Arnold Kling points out what many have observed before in many contexts; mankind is a trend follower. John Bogle, founder of the Vanguard Funds, has pointed to this tendency in equity markets. The bottom line is we, as a group, tend to "buy high and sell low". This really is a phenomenon of sorts, but not that difficult to at least sympathize with, if not quite fully understand. When markets are rising we feel "richer" and more secure, so we "buy more" of everything. Conversely, when markets are falling we feel "poorer" and more insecure, so we feel protective and engage in less risky activity. The problem is when we all do this at the same time it over accentuates the things we fear and the things we desire at exactly the wrong time. This is fascinating and probably not something which can be changed. Interestingly, Keynesian policies of stimulus spending are designed to address this aspect of human nature. The problem is empirically it has never been proven to work.

(posted at 9:22 am by Mike Rulle)

   

Have been saying this myself for years, as many have, but could not say it better myself UK official: man-made climate change is a con. One of the real tragedies of this, which Bjørn Lomborg has been most outspoken about Our priorities for saving the world, is the diversion of funds from more critical real global environmental problems and the restrictions on growth these global warming policies impose. It is a true travesty, not just of science, but of justice.

(posted at 8:22 am by Mike Rulle)

When I wrote Pinball Wizards, my intention was to also discuss Social Security and other unfunded "Ponzi" schemes the Government supports.  George Mason Economics Chair, Don Boudreaux of Cafe Hayek, writes the following in the NY Times

"Like many people, Ben Stein was assured that Bernard Madoff "never lost money" ("They Told Me That Madoff Never Lost Money," Dec. 28). Unlike many people, Ben Stein wisely understood this assurance to be nonsense. Americans should apply Mr. Stein's wisdom to the greatest Ponzi scheme going: Social Security.  Many pols and pundits assure us that this program is a great financial deal for ordinary Americans. But in principle Social Security is identical to Mr. Madoff's fraudulent scheme: rather than generate wealth through productive investments, both schemes transfer wealth from newer 'investors" to older "investors." As long as a sufficient number of newer "investors" keep coming aboard – either by being duped a la Mr. Madoff or by being coerced a la Social Security – such schemes appear brilliant. This appearance, however, is a dangerous apparition."

Imagine if your employer had an "employee savings" plan. You contributed 15% of your income. But you discover that instead of actually investing the money, he used it to pay operating expenses of the company. That is, you have no savings at all. You have just the "promise" that you will be paid at retirement. That is Social Security. The only way you can get paid is if the number of employees grow "ad infinitum" along with the company's ability to pay. The size of this problem is large. It also can be fixed. The media, however, calls Social Security the "third rail" of politics; touch it and you die.

(posted at 8:00 am by Mike Rulle)

   

Yesterday, I stated Greenspan Fed's monetary policy probably contributed to the housing bubble but was not the sole cause. Some think this is an obvious statement. Meaning, it is obvious he should have been more restrictive. If only we could know what is obvious now. Proof that there is no such thing as "obvious" is the complete lack of look forward consensus among economists today. People forget that there was a reasonably strong view we were about to enter a Japan like deflation back in 2002. The lack of consensus today exists not just among economists, but sometimes even within any particular economist's own ideas. If there had been more care taken on "teaser rates" and "credit quality" at 1) mortgage originators in the West like Countrywide, Washington Mutual, and Golden Gate; at 2) the rating agencies like Moody's and Fitch; at 3) the banks like Citi, Lehman, and Merrill; and 4) if there were more care taken at Fannie and Freddie on sub-prime guarantees, we would not now be discussing any of this. Greenspan is not the first Fed chairman to have pushed real rates negative and Bernanke proves he is not the last. "Woulda, coulda, shoulda"

(posted at 7:45 am by Mike Rulle)

JANUARY 1, 2009

To many, Alan Greenspan's tenure as Fed Chairman is the progenitor of the current financial crisis. An arrogant "deregulator" and free market proponent he created the unchecked cowboy financial environment for the housing collapse. This is a version espoused by many who believe in "more regulation". Another anti-Greenspan group believes he provided easy money through a de facto negative real interest rate policy. This created the asset bubble in housing. Yet another critique states he was an early proponent of "bailouts" in 1998 during the Long Term Capital collapse. Of these 3 critiques, which I do not think are "straw men", the second one has plausible validity, though it was not "the" root cause of the housing bubble but a component of such. The other two do not. I mentioned regulation in a comment yesterday. Regarding LTCM, one myth, as described by Brad Setser (and noted by Arnold Kling), is that Greenspan bailed out the banks and/or LTCM.  In fact, the banks were "bailed-in". The banks never relinquished their credit exposure to LTCM.  Greenspan encouraged banks to lend to LTCM in order to create an orderly liquidation of their assets. His view was they would be guaranteed to lose money if they did not. This settled the markets and the banks basically got out "whole". One could argue, if losses had occurred, the Fed would have bailed them out. But this would be merely conjecture. This, as Kling also notes, is what the policy should have been this time around. Why wouldn't we try what worked "last time" before we tried anything else, at least with regard to "inter-institutional" exposures? To repeat what I have written before, Paulson (who usurped Bernanke in power and was running the show) had enormous ethical conflicts of interest with Goldman Sachs. This clouded his objectivity to the extreme. This is the kindest way possible to state it. As also stated several times before, it not is a coincidence that financial crises under Greenspan never reached the current state. He got through the one-two punch of the Tech bubble collapse and 9/11, not easily, but effectively. We should have forced, as Kling states, "all of the creditors (firms who have obtained credit protection from counterparties such as AIG) to sit back and wait for the underlying bonds to default before taking action. Make them bear more risk, just as LTCM's creditors did, rather than reduce the choice to a government bailout or a bankruptcy".

(posted at 12:51 pm by Mike Rulle)

  

Another calendar year begins. This time of year, while containing its own stresses, is still an optimistic and hopeful time. So why am I thinking about "demographics"? Because George Will writes about health care and demographics in his syndicated column  If You Think Health Care is Expensive. The Census Bureau estimates there are 301 million people in America Excel (24k). The median age continues to grow annually; that is, we are getting older as a nation. Since 2000 alone our median age has increased 1.3 years to 36.6 years. By comparison, our median age in 1965 was about 28 years. One of the reasons is we are living longer, so presumably that is a good thing. I do mean "presumably" because I do not take that for granted in our society. Another reason is we are having less children as a percent of the population. Of the 301 million people, about 136 million are employed. "Full employment" as defined by Government statistics would increase the working to 140 million. About 89 million people are under the age of 24 and do not work (I assume 2/3rds of people between age 20-24 work--probably a high guess). That means at full employment about 73 million people over the age of 24 do not have a paid job; which is over 1/3rd of the "adult population" (ignoring "stay at home parents" which overstates the "non-working" by some number---this is a complicated economic issue---one cannot just add the stay at home parents "1 to 1" to the work force). 33% seems like a lot to me even though 27 of the 73 million people are over the age of 70. George Will notes that our unfunded Medicare costs are about $34 trillion over the next 75 years. My guess is in present value dollars it is about $6-10 trillion. This is the equivalent of a society wide loss equal to some multiple of the losses incurred in the current financial crisis. Except it is a loss based on a "promise" to be paid by "today's" young "tomorrow". Promises are made to be broken. This does not count Medicaid which may be comparable in size. It also does not count Social Security or unfunded state and federal pension plans which may be as large too. Ominously, Will also notes that 30% of all health costs happen in the last year of life. Of course, one only knows that after the fact. But do you think it is possible to come up with "models" which "on average" can "predict" death one year out, thus denying health care to those who fit the model? I do. If we do not address our dysfunctional health care system and if more adults do not enter the labor force, thus contributing to societal wealth, we will be reading about such "models" in the not too distant future.

(posted at 11:08 am by Mike Rulle)