J. Bradford DeLong's Blog, page 1125
November 5, 2014
Over at Equitable Growth: Who Really Thinks Japan Is Argentina?: Daily Focus
Over at Equitable Growth: Paul Krugman: Japan on the Brink: "Japan’s current plan to hike consumption taxes a second time...
...has become... a sort of Rubicon for policy. And let me admit that people I respect--like Adam Posen, and some officials at international organizations--believe that Abe should go through with the hike. But I strongly disagree.... Right now, Japan is struggling to escape from a deflationary trap; it desperately needs to convince the private sector that from here on out prices will rise.... The pro-tax-hike side worries that if Japan doesn’t go through with the increase, it will lose fiscal credibility and... the bond vigilantes will attack. Why don’t I share that view? Partly because I don’t see how this supposed crisis of confidence is supposed to work.... READ MOAR
When a country borrows in its own currency and doesn’t face inflationary pressure (quite the contrary), it’s very hard to see how a Greek-style crisis is even possible. Short-term interest rates are controlled by the Bank of Japan; long-term rates mainly reflect expected short rates. Yes, investors could push the yen down, but that would be a good thing from Japan’s point of view. Posen says stocks could crash, but I guess I don’t see why if interest rates stay low and corporate Japan becomes more competitive thanks to a weaker yen. Seriously: tell me how this is supposed to work... [how a] fear that Japan might eventually monetize some of its debt--isn’t actually a positive development. Meanwhile, it seems to me that Japan should be very, very afraid of losing momentum in the fight against deflation.... Could I be wrong?... Of course.... But it’s all about weighing the risks. Right now, the risk of losing anti-deflation credibility looks much worse than the risk of losing fiscal credibility. Please, don’t hike those taxes!
Continuing to worry my head about our intellectual adversaries here--including the very sharp and serious Adam Posen, over their fear that unless Japan raises taxes to begin closing its (admittedly huge) current budget deficits it runs serious risks of becoming "Argentina".
I get that part of the argument is that Japan can hit the same nominal GDP growth target by pairing a looser monetary with a tighter fiscal policy, and should do so. And to the extent that that is what is at issue--a call for fiscal tightening coupled with even more aggressive monetary loosening to hit the same nominal GDP growth target, and that what is being advocated is not just an increase in taxes but an increase in taxes coupled with full monetary offset in the form of additional monetary goosing, I get the argument. I even agree with it.
But to the extent that it is more than that...
The basic model of the taxmongers is, I think, the following:
E(π) = π + δ(rD - σ) :: Inflation Expectations
π = E(π) + β(u* - u) :: Phillips Curve
r = r* + γ(u - u*) + θ(π - π*) :: Monetary Policy
That is:
Inflation Expectations: Expected inflation E(π) is equal to current inflation π plus some parameter times the difference between debt amortization rD and the expected primary surplus of the government σ.
Phillips Curve: Current inflation π is equal to expected inflation E(π) + a parameter times the difference between the natural rate of unemployment and the actual rate of unemployment.
Monetary Policy: The higher either the gap between the current inflation rate π and the central bank's target inflation rate π* or the higher the required gap between the natural rate of unemployment u* and the current unemployment rate u, the more the central bank must raise the interest rate r over the Wicksellian natural rate r* in order to achieve its monetary policy target--and then the higher is required debt amortization rD.
It then follows that the unemployment rate and the real interest rate will both be increasing functions of the fiscal financing gap rD-σ:
u = u* + (δ/β)(rD - σ)
r = r* + (γδ/β)(rD - σ) + θ(π - π*)
Taking differentials in response to a shock dr* to the Wicksellian natural rate r*, we get:
du = D(δ/β)dr
dr = dr* + D(γδ/β)dr
du = [(δ/β)D/(1 - D(γδ/β))]dr*
Which tells us that if the debt D grows so large that Dγδ/β approaches one, even a very small adverse shock to the Wicksellian natural rate of interest dr* could cause the unemployment rate u to explode--unless the central bank abandons its monetary policy of inflation control, that is, of non-permanent-monetization of the debt.
For a country that does not borrow in its own currency, it is very easy to see why it must seek to avoid even a whisper of debt monetization. Such a whisper is an upward shock to E(π), and to the extent that is transmitted through to the current inflation rate such transmission produces an immediate jump in required debt service which makes the situation much worse.
But in a country that does borrow in its own currency and does control its own interest rates debt monetization and a resulting burst of inflation is no biggie: some of the debt is no-longer interest-bearing D that must be amortized but is money M. And to the extent that the rest of the debt has a duration greater than zero the increase in the price level reduces the value of the debt and thus the seriousness of the debt overhang problem.
Yes: I realize that this is arcana imperii. I do realize that I am not supposed to point out that reserve-currency issuing sovereigns with exorbitant privilege that thus control their own interest rates and borrow in their own currencies have a degree of freedom to use inflation as a tool of debt management that the Argentinas of the world do not. But an upward shift in expected inflation is what we are trying to generate here and now in Japan. And such an upward shift is only to be feared if Japan pretends that it is Argentina, and that it thus has no ability to monetize any of its debt.
If you are Argentina, then yes, sure: as Dγδ/β approaches one, you get into the territory where a small upward shock to interest rates will cause either a Great Depression or force a price-spiral that, absent a currency reform, turns into hyperinflation.
But who really thinks that Japan is Argentina?
The High Wingnuttery: Hoisted from the Archives from May, 2005
A correspondent chasing links emails me that the fever swamp that is National Review has thrown more of the links to its archives down the memory hole into the fire.
Indeed:
Neither "search" nor "find" appears on National Review's homepage these days--naughty, naughty!
So I am reduced to trying to find it via google, which directs me to: http://www.nationalreview.com/author/donald-l-luskin.
And then finally to the document--I like the attention to detail and typography in that interesting capitalization of the possessive "S" that nobody ever bothered to set right:
Donald Luskin: A Public Editor'S Parting Shot: "Ring up a win for the Krugman Truth Squad!...
It’s official: According to the New York Times itself, what we’ve been carefully documenting for more than two years is true.... [Danny] Okrent could have gone much, much further in blowing the whistle on America’s most dangerous liberal pundit. He could have cited the dozens upon dozens of partisan distortions, uncorrected errors, deliberate misquotations, and flat-out lies that we’ve caught Krugman making over the years.
For that matter he could have echoed what N. Gregory Mankiw, the universally respected former chairman of the Council of Economic Advisors, told Fortune in a recent interview--that Krugman ‘just make[s] stuff up.’ Okrent knows all these things. I know he knows them, because I’ve met with him and corresponded with him about just these matters since he became the Times’s ‘public editor’ 18 months ago. Our e-mail correspondence on Krugman totals almost 40,000 words (some of which was ‘off the record,’ so I’m using my judgment here in determining what portions are fair to reveal now that Okrent’s tenure as ‘public editor’ is over). Yes, I’m the one Okrent was talking about when he referred to ‘Krugman’s enemies.’ So why didn’t Okrent go further with his critique? And why, as the self-described ‘readers’ representative,’ did he feel it was necessary at the same time to take a gratuitous swipe at me — one of his readers?
I suspect, primarily, a fear of reprisal.... Last Friday Krugman told a lecture audience in Princeton that, essentially, Okrent had lost his marbles--that his ‘very peculiar blast’ was the result of ‘constant pressure’ from conservatives that had ‘built up a list of grievances in his mind.’ Let’s talk about ‘pressure.’ It so happens that, by sheer coincidence, I was in Princeton on business last Friday. But I decided it was best not to attend Krugman’s lecture, because the one time I did attend one of his many public appearances he proceeded to say on national television that I had stalked him. Okrent knows how the pressure game works. So he kept his ‘blast’ against Krugman modest and took out an insurance policy against charges of bias by slapping me a little bit, too.
Okrent wasn’t always afraid of pressure. When I first met him in early 2004 he was full of the burning zeal of the reformer, and eager for intellectual allies. His first words to me were, ‘You’re much better looking than Paul Krugman.’ He told me that the Times didn’t deserve to be called the ‘newspaper of record’ and vowed, ‘When I’m done with this assignment, I want everyone to know that.’ (Okrent later wrote on this theme.) We had a long discussion on accuracy and fairness on the op-ed page.... This was all very hopeful, as well as flattering. But I knew it wouldn’t last. Okrent ended our meeting by announcing that a limo was picking him up to take him to a dinner party with Times publisher Arthur O. Sulzberger, Jr., and executive editor Bill Keller. I wondered how long Okrent could maintain his independence as a reformer if he was getting sucked into the glittery social world of Times management. The pressure had begun.
And the pressure built as Times staff fought Okrent in his role as ‘readers’ representative.’ For example, financial reporter David Cay Johnston went so far as to organize other reporters into what Okrent called a ‘lynch mob’.... For the most part, corrections were not made.... When I couldn’t get Collins to even acknowledge my e-mails, I sent corrections to her under a false name, but she didn’t respond to those either. I learned that at one point Okrent went directly to Krugman himself for corrections, but the whole exercise soon proved worthless. Okrent apparently gave up on Collins and Krugman, and I gave up sending them corrections as well....
The pressure on Okrent from readers appeared to reach a peak just before last year’s bitter presidential election, when the Times had become increasingly partisan in both its editorials and its news stories. In a long-awaited October column on whether or not the Times’s campaign coverage was biased, Okrent cited views from readers on both the left and the right before asking,
Is The Times systematically biased toward either candidate? No.
What, you are no doubt wondering, could Okrent possibly have been thinking? Whatever it was, he wasn’t thinking about the Times’s coverage of the presidential campaign, which was self-evidently biased toward John Kerry to the point of self-parody. No doubt he was thinking about the hundreds of e-mails from the Angry Left that flooded his mailbox each day--for he concluded his column with this:
I do want you to know just how debased the level of discourse has become. When a reporter receives an e-mail message that says, ‘I hope your kid gets his head blown off in a Republican war,’ a limit has been passed. That’s what a coward named Steve Schwenk, from San Francisco, wrote to national political correspondent Adam Nagourney several days ago because Nagourney wrote something Schwenk considered (if such a person is capable of consideration) pro-Bush… As nasty as critics on the right can get (plenty nasty), the left seems to be winning the vileness derby this year…
With this, Okrent had not only succumbed to the pressure from the Left, he had cracked under it. Here we had the ‘readers’ representative’ using the mighty power of the New York Times to lash out at one of its own readers, naming that reader by name, calling him a ‘coward,’ and quoting him not only without his permission, but in defiance of his pleading not to be quoted.... I believe that in the end his allegiance was to the sacred institution of the New York Times--a ‘church,’ a ‘synagogue,’ a holy place, what Okrent called a ‘daily miracle’ in a column last December. Is that the kind of loyalty a couple of rides in a limousine can buy?
So, Okrent ends his 18-month term as the Times’s ‘public editor’ a broken man, having turned against the readers he was supposed to represent, having failed to institute a single significant reform and, worst of all, having acted as a fig-leaf behind which the paper has continued to do its partisan worst.
I still have no explanation from a whole bunch of people far outside the fever swamp of National Review--Fred Hiatt or Jonathan Weisman come immediately to mind--of just what they were thinking when they, for years in the 2000s, presented Donald Luskin as an authoritative voice on macroeconomic issues.
And I have asked.
November 4, 2014
Noted for Your Morning Procrastination for November 4, 2014
Over at Equitable Growth--The Equitablog
Discussion: Jeff Madrick, Ylan Mui, Josh Bivens, Brad DeLong: Lightly-Edited Transcript: Jeff Madrick EPI Event: How Mainstream Economic Thinking Imperils America: Focus - Washington Center for Equitable Growth
Blog You Should Read: Growth Economics: Tuesday Focus for November 4, 2014 - Washington Center for Equitable Growth:
Morning Must-Read: Mark Dow: The Second Wave of the Bubble Unwind is Upon Us - Washington Center for Equitable Growth
Morning Must-Read: Cathy O'Neil: “Hand To Mouth” and the Rationality of the Poor - Washington Center for Equitable Growth
Morning Must-Read: David Fiderer: A Review of Fragile By Design - Washington Center for Equitable Growth
Morning Must-Read: Richard Sutch: The Liquidity Trap, the Great Depression, and Unconventional Policy - Washington Center for Equitable Growth
Nick Bunker: Learning from the variation in the effectiveness of Head Start - Washington Center for Equitable Growth
Plus:
Things to Read on the Morning of November 4, 2014 - Washington Center for Equitable Growth
Must- and Shall-Reads:
Jeff Madrick: Inflation targeting--a singularly bad idea
Peter Temin and David Vines: Why Keynes is Important Today
Mark Dow: The Second Wave of the Bubble Unwind is Upon Us
Cathy O'Neil: “Hand To Mouth” and the rationality of the poor
David Fiderer: A Review of Fragile By Design
Richard Sutch: The Liquidity Trap, the Great Depression, and Unconventional Policy
Paul de Grauwe: The ECB should stop fearing the Germans | The Economist
Paul Krugman: Business vs. Economics
Anne Seith: Monetary Fallacy?: Deep Divisions Emerge over ECB Quantitative Easing Plans
Paul Krugman: Flattening Flattens
And Over Here:
Liveblogging World War II: November 4, 1944: Franklin D. Roosevelt (Brad DeLong's Grasping Reality...)
* Over at Equitable Growth: Blog You Should Read: Growth Economics: Tuesday Focus for November 4, 2014 (Brad DeLong's Grasping Reality...)
* Over at Equitable Growth: Discussion: Jeff Madrick, Ylan Mui, Josh Bivens, Brad DeLong: Lightly-Edited Transcript: Jeff Madrick EPI Event: How Mainstream Economic Thinking Imperils America: Focus (Brad DeLong's Grasping Reality...)
* Kansas Governor Sam Brownback and His "Relentless Lies": Live from teh Roasterie (Brad DeLong's Grasping Reality...)
* Liveblogging World War II: November 3, 1944: Japanese POW Camps (Brad DeLong's Grasping Reality...)
* DeLong Smackdown Watch: "Talking Points" Edition... (Brad DeLong's Grasping Reality...)
Mark Dow: The Second Wave of the Bubble Unwind is Upon Us: "A pre-crisis boom in commodities lifted gold and silver.... Post-crisis monetary policy then turbo-charged it, as people feared rapid inflation, renewed systemic crisis, a dollar crash, and bond vigilantes. Macro tourists lined up to pile in. Big name guys wearing money halos. ETFs and electronic futures trading for the masses poured the gasoline. In short, they built a bubble. A bubble replete with charlatans hawking it on every medium.... The irony of the precious metals bubble is that it was the guys yelling ‘bubble’, bubbles of every stripe—bond, stock, credit—who sought refuge in the only asset class that was truly in a bubble. In other words, the fear of bubbles created its own bubble, trapping the bubblers. Karma really is running over dogma.... When I’m asked how far do I think gold can ultimately fall, my answer is I don’t know.... The statute of limitations on ‘not wrong, just early’ ran out a long time ago. By the time this is over only Peter Schiff, Zerohedge and Jim Grant will be waving their arms..."
Cathy O'Neil: “Hand To Mouth” and the rationality of the poor: "I’ve long thought that the ‘marshmallow’ experiment is nearly universally misunderstood: kids wait for the marshmallow for exactly as long as it makes sense to them to wait. If they’ve been brought up in an environment where delayed gratification pays off, and where the rules don’t change in the meantime, and where they trust a complete stranger to tell them the truth, they wait, and otherwise they don’t--why would they? But since the researchers grew up in places where it made sense to go to grad school, and where they respect authority and authority is watching out for them, and where the rules once explained didn’t change, they never think about those assumptions. They just conclude that these kids have no will power. Similarly, this GoodBooksRadio interview with Linda Tirado is excellent in explaining the rational behavior of poor people. Tirado just came out with a book called Hand To Mouth: Living in Bootstrap America and was discussing it with Dr. John Cook, who was a fantastic interviewer. You might have come across Tirado’s writing--her essay on poverty that went viral, or the backlash against that essay. She’s clearly a tough cookie, a great writer, and an articulate speaker. Among the things she explains is why poor people eat McDonalds food (it’s fast, cheap, and filling), why they don’t get much stuff done (their lives are filled with logistics), why they make bad decisions (stress), and, what’s possibly the most important, how much harder work it is to be poor than it is to be rich. She defines someone as ‘rich’ if they don’t lease their furniture.... As the Financial Times review says, ‘Hand to Mouth – written with scorching flair--should be read by every person lucky enough to have a disposable income.’"
David Fiderer: A Review of Fragile By Design: "Fragile By Design: The Political Origins of Banking Crises and Scarce Credit is a tour de force, and not in a good way.... The narrative... is highly selective and misleading. Worse, the section that covers U.S. banking over the past 25 years is a set of distortions and falsehoods.... Calomiris... and... Haber['s] familiar narrative [is] identified as 'The Big Lie' by Joe Nocera, Barry Ritholtz.... Calomiris and Haber embrace The Big Lie, and double down by tracing everything to Bill Clinton’s grand strategy of income redistribution as a response to economic inequality or as a sop to community activists at ACORN.... The lack of response to the critics of The Big Lie.... There is zero evidence that the loans described by Calomiris and Haber ever existed. From 2001 through 2006, GSE originations that had loan-to-value (LTV) ratios of 95 percent or higher and FICO scores of 639 or lower represented between 1 and 2 percent of total originations. According to GSE credit guidelines, those borrowers had characteristics that disallowed any kind of reduced documentation, much less no documentation or employment.... The amount of low-down-payment loans available in the marketplace was never decided by the GSEs. It was decided by private mortgage insurers, which were not regulated by the federal government.... Moreover, the financial meltdown of September 2008 was not triggered by bank failures; it was triggered by the failures of non-banks and by the unforeseen consequences of derivatives. The government had a clear legal path and precedent for dealing with bank failures like Wachovia, Washington Mutual, and IndyMac. But it had no clear path and no precedent for dealing with the imminent collapse of Lehman Brothers and AIG..."
Richard Sutch: The Liquidity Trap, the Great Depression, and Unconventional Policy: "John Maynard Keynes in The General Theory offered a rich analysis of the problems that appear at the zero lower bound and advocated the very same unconventional policies that are now being pursued. Keynes’s comments on these issues are rarely mentioned... because the subsequent simplifications and the bowdlerization of his model obliterated this detail.... This essay employs Keynes’s analysis to retell the economic history of the Great Depression in the United States. Keynes’s rationale for unconventional policies and his expectations of their effect remain surprisingly relevant today. I suggest that in both the Depression and the Great Recession the primary impact on interest rates was produced by lowering expectations about the future path of rates rather than by changing the risk premiums that attach to yields of different maturities. The long sustained period when short term rates were at the lower bound convinced investors that rates were likely to remain near zero for several more years. In both cases the treatment proved to be very slow to produce a significant response, requiring a sustained zero-rate policy for four years or longer."
Paul de Grauwe: The ECB should stop fearing the Germans | The Economist: "From 2012 to 2014 the Fed added $1 trillion to its balance sheet.... Exactly the opposite occurred in the euro zone.... There can be little doubt that the decision of the ECB to reduce the money base by 30% at a time when the euro zone had not recovered from the sovereign-debt crisis contributed to pushing the euro zone into a deflationary dynamic, out of which it still tries to extricate itself.... The American monetary authorities, correctly, understood that the crisis had led to a balance-sheet recession.... The ECB, on the other hand, was caught in a narrative that the problem came from... too many rigidities on the supply side. If these were fixed by structural reforms output would increase by itself.... Only by the beginning of 2014, the ECB started to recognise that this narrative did not fit the facts.... However, in the face of the fierce opposition of German economists and media the ECB was caught in a double bind. German opposition made it impossible for the ECB to use the technically easiest way to increase the money base, i.e. buying government bonds.... The question that arises now is what the ECB should do. At a minimum it should take its responsibility of keeping inflation close to 2% seriously.... By not acting forcefully today the ECB risks unleashing the rejection of the monetary union. This is a much higher risk than the risk of German ire against the use of an instrument, the purchase of government bonds that in the rest of the world is considered to be standard practice."
Paul Krugman: Business vs. Economics: "Business leaders often give remarkably bad economic advice, especially in troubled times.... Think of the hugely wealthy money managers who warned Ben Bernanke that the Fed’s efforts to boost the economy risked ‘currency debasement’; think of the many corporate chieftains who solemnly declared that budget deficits were the biggest threat facing America, and that fixing the debt would cause growth to soar.... And on the other side, the past few years have seen repeated vindication for policy makers who have never met a payroll, but do know a lot about economic theory and history. The Federal Reserve and the Bank of England have navigated their way through a once-in-three-generations economic crisis under the leadership of former college professors.... The answer... is that a country is not a company. National economic policy... needs to take into account kinds of feedback that rarely matter in business life.... A successful businessperson... sees the troubled economy as something like a troubled company, which needs to cut costs and become competitive.... And surely gimmicks like deficit spending or printing more money can’t solve what must be a fundamental problem.... In reality, however, cutting wages and spending in a depressed economy just aggravates the real problem, which is inadequate demand.... But how can this kind of logic be sold to business leaders, especially when it comes from pointy-headed academic types? The fate of the world economy may hinge on the answer..."
Anne Seith: Monetary Fallacy?: Deep Divisions Emerge over ECB Quantitative Easing Plans: "Bundesbank President Jens Weidmann is opposed to most of these costly programs. They're the reason he and ECB President Mario Draghi are now completely at odds. Even with the latest approved measures not even implemented in full yet, experts at the ECB headquarters a few kilometers away are already devising the next monetary policy experiment: a large-scale bond buying program known among central bankers as quantitative easing.... It is a fundamental dispute that is becoming increasingly heated.... Is it important that the ECB adhere to tried-and-true principles in the crisis, as Weidmann argues? Or can it resort to unusual measures in an emergency situation, as Draghi is demanding?... 'Abenomics,' worked only briefly.... Businesses and private households were simply too far in debt to borrow even more, no matter how cheap the monetary watchdogs had made it.... 'For decades, the Japanese government did not institute the necessary structural reforms,' says Michael Heise, chief economist at German insurance giant Allianz..."
Paul Krugman: Flattening Flattens: "As I see it, ‘hyperglobalization’--the big increase in trade relative to GDP in the two decades after 1990--was a one-off affair, driven by trade liberalization in developing countries and the rise of containerization, which led to a breakup of the value chain, with labor-intensive segments of production moving to China and other emerging economies. There wasn’t any comparable boom in trade or abolition of distance between economies at similar wage levels; if anything, interregional trade and specialization within the US may have declined. The flattening out of flattening is neither good nor bad, it’s just what happens when a particular trend reaches its limits. What is important to realize, however, is that trends do tend to do that."
Should Be Aware of:
Elira Karaja: The Rule of Karlowitz: Fiscal Change and Institutional Persistence
Juliana Londono Velez: War and Progressive Income Taxation in the 20th Century
Marvin Suesse: Breaking the Unbreakable Union: Nationalism, Trade Disintegration and the Soviet Economic Collapse
Taras Kuzio: Muscovy Annexes Donbas but Loses Ukraine
Josh Marshall: Paulism Captured Perfectly: "In his on-going effort to appeal to DC elites as a different kind of Republican, Sen. Rand Paul (R-KY) says it's 'dumb' of Republicans to emphasize their support for voter ID laws which have been shown repeatedly to cut voting rates for minorities and poorer voters. He still they're awesome. But it's 'dumb' to make a big deal out of them because black voters can get the wrong impression. Watch."
Walter Scheidel: State revenue and expenditure in the Han and Roman empires: "Comparative analysis of the sources of income of the Han and Roman imperial states and of the ways in which these polities allocated state revenue reveals both similarities and differences. While it seems likely that the governments of both empires managed to capture a similar share of GDP, the Han state may have more heavily relied on direct taxation of agrarian output and people. By contrast, the mature Roman empire derived a large share of its income from domains and levies that concentrated on mining and trade. Collection of taxes on production probably fell far short of nominal rates. Hano fficialdom consistently absorbed more public spending than its Roman counterpart, whereas Roman rulers allocated a larger share of state revenue to agents drawn from the upper ruling class and to the military. This discrepancy was a function of different paths of state formation and may arguably have hadlong-term consequences beyond the fall of both empires."
Morning Must-Read: Mark Dow: The Second Wave of the Bubble Unwind is Upon Us
Mark Dow: The Second Wave of the Bubble Unwind is Upon Us: "A pre-crisis boom in commodities lifted gold and silver...
...Post-crisis monetary policy then turbo-charged it, as people feared rapid inflation, renewed systemic crisis, a dollar crash, and bond vigilantes. Macro tourists lined up to pile in. Big name guys wearing money halos. ETFs and electronic futures trading for the masses poured the gasoline. In short, they built a bubble. A bubble replete with charlatans hawking it on every medium.... The irony of the precious metals bubble is that it was the guys yelling ‘bubble’, bubbles of every stripe—bond, stock, credit—who sought refuge in the only asset class that was truly in a bubble. In other words, the fear of bubbles created its own bubble, trapping the bubblers. Karma really is running over dogma.... When I’m asked how far do I think gold can ultimately fall, my answer is I don’t know.... The statute of limitations on ‘not wrong, just early’ ran out a long time ago. By the time this is over only Peter Schiff, Zerohedge and Jim Grant will be waving their arms...
Morning Must-Read: Cathy O'Neil: “Hand To Mouth” and the Rationality of the Poor
Cathy O'Neil: “Hand To Mouth” and the rationality of the poor: "I’ve long thought that the ‘marshmallow’ experiment...
...is nearly universally misunderstood: kids wait for the marshmallow for exactly as long as it makes sense to them to wait. If they’ve been brought up in an environment where delayed gratification pays off, and where the rules don’t change in the meantime, and where they trust a complete stranger to tell them the truth, they wait, and otherwise they don’t--why would they? But since the researchers grew up in places where it made sense to go to grad school, and where they respect authority and authority is watching out for them, and where the rules once explained didn’t change, they never think about those assumptions. They just conclude that these kids have no will power. Similarly, this GoodBooksRadio interview with Linda Tirado is excellent in explaining the rational behavior of poor people. Tirado just came out with a book called Hand To Mouth: Living in Bootstrap America and was discussing it with Dr. John Cook, who was a fantastic interviewer. You might have come across Tirado’s writing--her essay on poverty that went viral, or the backlash against that essay. She’s clearly a tough cookie, a great writer, and an articulate speaker. Among the things she explains is why poor people eat McDonalds food (it’s fast, cheap, and filling), why they don’t get much stuff done (their lives are filled with logistics), why they make bad decisions (stress), and, what’s possibly the most important, how much harder work it is to be poor than it is to be rich. She defines someone as ‘rich’ if they don’t lease their furniture.... As the Financial Times review says, ‘Hand to Mouth – written with scorching flair--should be read by every person lucky enough to have a disposable income.’"
Morning Must-Read: David Fiderer: A Review of Fragile By Design
David Fiderer: A Review of Fragile By Design: "Fragile By Design: The Political Origins of Banking Crises and Scarce Credit is a tour de force, and not in a good way....
...The narrative... is highly selective and misleading. Worse, the section that covers U.S. banking over the past 25 years is a set of distortions and falsehoods.... Calomiris... and... Haber['s] familiar narrative [is] identified as 'The Big Lie' by Joe Nocera, Barry Ritholtz.... Calomiris and Haber embrace The Big Lie, and double down by tracing everything to Bill Clinton’s grand strategy of income redistribution as a response to economic inequality or as a sop to community activists at ACORN.... The lack of response to the critics of The Big Lie.... There is zero evidence that the loans described by Calomiris and Haber ever existed. From 2001 through 2006, GSE originations that had loan-to-value (LTV) ratios of 95 percent or higher and FICO scores of 639 or lower represented between 1 and 2 percent of total originations. According to GSE credit guidelines, those borrowers had characteristics that disallowed any kind of reduced documentation, much less no documentation or employment.... The amount of low-down-payment loans available in the marketplace was never decided by the GSEs. It was decided by private mortgage insurers, which were not regulated by the federal government.... Moreover, the financial meltdown of September 2008 was not triggered by bank failures; it was triggered by the failures of non-banks and by the unforeseen consequences of derivatives. The government had a clear legal path and precedent for dealing with bank failures like Wachovia, Washington Mutual, and IndyMac. But it had no clear path and no precedent for dealing with the imminent collapse of Lehman Brothers and AIG...
I must confess that I have not yet read Fragile by Design by the always-thoughtful Steve Haber and the very sharp Charlie Calamiris, but I have never understood how this line of argument is supposed to work:
The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations...
Granted that that last part, "consistent with safe and sound operations", has a tendency to become a dead letter under regulatory pressures, and that the depository institutions covered by the CRA come under pressure to make risky loans that they really should not. But that does not create risks of systemic distress or financial crisis. The depository institutions are insured by the FDIC, after all. You can complain that the CRA gets taxpayers onto the hook as insurers of loans that should not have been made. You cannot complain that the CRA forces overleveraged and undercapitalized systemically-important financial institutions to hold the lousy mortgages of low-income moochers--yet that, by all accounts, is what Haber and Calomiris's argument is.
I don't understand it. It just doesn't seem to add up, arithmetically...
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