J. Bradford DeLong's Blog, page 196

Comment of the Day: Tracy Lightcap: "Well, it had to happ...

Comment of the Day: Tracy Lightcap: "Well, it had to happen sooner or later. Someone would resurrect Enoch Powell. Just to remind folks what people thought when he was still around: http://www.private-eye.co.uk/covers/cover-182. Yep. An unrepentant racist and a constant figure of fun for everyone with a head on their shoulders and anything resembling civic virtue...

#commentoftheday

Comment of the Day: Once again RJW is the first... and, I...

Comment of the Day: Once again RJW is the first... and, I fear, perhaps the only... person on the internet to understand me: Robert Waldmann: Fascism: "'weapon-or-strong' should be 'weapon-our-strong'. Also great hyphenated fascism there. But then I read the Scruton quote. Ugh. Please don't do that again...

#commentoftheday

TED Talks: "'My question to you is, is this what you want...

TED Talks: "'My question to you is, is this what you want? Is this how you want history to remember you? As the handmaidens to authoritarianism?"' Watch as @carolecadwalla calls out the 'gods of Silicon Valley' for being on the wrong side of history: http://t.ted.com/OuxHYs3...

#noted

Lori Hinnant: Shock, Sadness, But No Panic: Minutes that ...

Lori Hinnant: Shock, Sadness, But No Panic: Minutes that Saved Notre Dame: "The first alarm sounded at 6:20 p.m.... For twenty-three minutes, it seemed like a false alarm. Then at 6:43 p.m. a second smoke detector went off and the fire showed its face, flickering in the wooden timbers and visible to anyone who happened to look north from Paris��� Left Bank.... At 7:49 p.m., the 19th-century spire that was the architectural masterpiece of Eug��ne Emmanuel Viollet-le-Duc and his post-Revolutionary restoration broke apart and fell through the nave. The bronze weathercock tumbled, taking with it three relics sealed inside in 1935. It had been 66 minutes since the first flames were spotted. The sky above the cathedral flamed orange, and the fire lurched toward Notre Dame���s iconic towers, then slipped inside. As darkness fell, 20 firefighters climbed inside the two towers 'at great risk to their lives, to attack the fire from the inside and save the building', said Laurent Nunez, deputy interior minister.... The 20 firefighters struggled on in the towers. Red-hot embers floated down from the glowing hole where the spire once stood, settling on the blackened marble floor and the pile of debris that was all that was left of the spire.... At 11:23 p.m., the fire chief said the rest of the structure, including the cathedral���s twin bell towers, had been saved. It had been within 30 minutes of collapse...

#noted

Jonathan Portes sends us to choice quotes from a friend o...

Jonathan Portes sends us to choice quotes from a friend of Hungarian wannabe dictator Victor Urban: Roger Scruton. This is the guy whom Niall Ferguson lines up with, against George Soros and the Central European University; the rest of us rootless cosmopolites who believe in liberal virtues, the open society, and promoting and rewarding the talented whether they come with a white skin or not; and Britain's Tory government. Lots of times these days authoritarians claim to be the real liberals in the tradition of John Stuart Mill, rather than we-are-a-bundle-of-sticks-tied-with-thongs-and-thus-a-brutal-weapon-or-strong-leader-can-use-to-beat-his-enemies people.

But sometimes the mask drops:

Roger Scruton (2010): The Roger Scruton Reader: "The Cumaean Sybil... is foreseeing the troubles that come from immigration.... The immigrant... travels... at the head of a determined retinue, carrying his household gods and a divine right of residence. His intention to settle is not to be brooked.... Modern immigrants don't, on the whole, behave so badly. They don't need to. They come as the heads of families, and even if the family might comprise four wives and twenty children, it arrives to a red carpet of legal privileges, eagerly unrolled by publicly funded lawyers, and to a welcome trough of welfare benefits that few indigenous citizens can claim, however much they have contributed to the common fund.... Our immigrants come... with an unbrookable intention to make a home for themselves. And if their gods dislike the indigenous rivals, they will soon make this fact known. Such predictions as [Enoch] Powell made in his speech, concerning the tipping of the demographic balance, the ghettoization of our industrial cities, and the growth of resentment among the indigenous working class have been fulfilled...

...Only the sibylline prophecy has fallen short of the mark. Even so, the Madrid and London bombings and the murder of Theo van Gogh are viewed by many Europeans as a foretaste of things to come. It is now evident to everyone that, in the debate over immigration, in those last remaining days when it could still have made a difference, [Enoch] Powell was far nearer the truth than those who instantly drove him from office, and who ensured that the issue was henceforth to be discussed, if at all, only by way of condemning the 'racism' and 'xenophobia' of those who thought like Powell. As for the racism and xenophobia of the incomers, it was indiscernible to the liberal conscience, which has never been able to understand that liberalism is an unusual state of mind...

#noted

The extremely sharp Jeremy Stein is correct here: we shou...

The extremely sharp Jeremy Stein is correct here: we should be talking about positive portfolio balance effects rather than negative reaching for risk effects, unless you have concrete evidence that the people reaching for risks are assuming positions they are unqualified to evaluate:

Olivier Blanchard: ���Have low interest rates led to excessive risk taking?���.... Jeremy Stein: ���It seems pretty clear that the low interest rates (plus QE) of the last several years have led to significant downward pressure on a variety of risk premiums. Of course, all of this is to be expected, and was explicitly intended to be part of the transmission mechanism for low rates--the so-called 'portfolio balance' channel, which is a nicer and more politically correct euphemism than the 'risk-taking' or 'reaching for yield' channel...

��

...But they are all the same thing, and indeed, we have been fortunate that monetary policy has these risk-taking effects, because this gives it more potency per unit of funds-rate-cut, which is a crucial benefit near the zero lower bound..."

"Portfolio balance" connotes organizations that understand the risks responding to changing spreads by... rebalancing their portfolios... in a sensible way...

"Reaching for yield" connotes organizations that find their old business models unsustainable taking on risks they do not really understand and cannot evaluate well...

"Risk-taking" is in the middle...

Lawrence_Summers: "I think this is a serious concern. Especially at a moment like present I think Olivier is wrong to blame low rate primarily on QE. Term structure is pretty flat. Stock of long term debt markets have to absorb is high by historical standards.... I���m less confident than Olivier that risk premiums are low. For equities his judgement relies on assumption that super high earnings will be highly persistent. Commercial real estate,c ovenant lite lending, and credit spreads are along w emerging markets more alarming. Even if Olivier is right that high asset prices are justified by low Long rates that does not mean they are not a source of risk..."

I suspect that the right way to make the accurate point that this line of discussion is hunting for is to focus not on the amount of risk but on, rather, who is bearing the risk...

Think of it this way:

Let me first outline what is the wrong focus���on the quantity of risk being carried: In the financial market there is a demand for risk-bearing capacity by firms and others who want to borrow but who cannot guarantee that they will be able to repay. The higher is the price of risk���the greater the risk premium interest rate spread over short-term Treasuries they must pay--the less they will borrow. There is also a supply of risk-bearing capacity by savers and financial intermediaries who want to lend, and are willing to accept and bear some risk in return from getting more than the short-term Treasury rate. The higher is the price of risk���the greater the risk premium interest rate spread over short-term Treasuries they must pay--the more they will be willing to lend.

When the Federal Reserve undertakes quantitative easing, it enters the market and takes some risk off the table, buying up some of the risky assets issued by the U.S. government and its tame mortgage GSEs and selling safe assets in exchange. The demand curve for risk-bearing capacity seen by the private market thus shifts inward, to the left: a bunch of risky Treasuries and GSEs are no longer out there, as the government is no longer in the business of soaking-up as much of the private-sector's risk-bearing capacity. And this leftward shift in the net demand to the rest of the market for risk-bearing capacity causes the price of risk to fall, and the quantity of risk-bearing capacity supplied to fall as well. Yes, financial intermediaries that had held Treasuries and thus carried duration risk take some of the cash they received by selling their risky long-term Treasuries to the Fed and go out and buy other risky stuff. But the net effect of quantitative easing is to leave investors and financial intermediaries holding less risky portfolios because they are supplying less risk-bearing capacity.

How do we know that they are holding not more but less risky portfolios? We know because we know that supply curves slope up, and if they were holding more risky portfolios in total���supplying more risk-bearing capacity to the market���the price of risk would have not fallen but risen, and interest rate risk spreads would be not lower but higher, wouldn't they? At least, that is the case as long as the supply curve for risk-bearing capacity slopes up, like a good supply curve should.

Perhaps those who claim that there are big risks to quantitative easing regroup. Perhaps they claim that financial intermediaries are perverted, and that the lower is the price of risk the greater is the amount of risk-bearing capacity they supply to the market because they lose their jobs if they don't make at least three cents on every dollar of assets in a normal year in which risk chickens come home to roost. But in that counterfactual world, the Federal Reserve's adoption of quantitative easing policies triggered an enormous expansion of the quantity of risk-bearing capacity demanded by firms and households and a huge private-sector lending boom as firms issued enormous tranches of risky bonds and as firms and households took out risky loans. In that counterfactual world, employment in bond underwriting tripled as 85billionamonthinQEwasmore���than���offsetbyanextra
120 billion a month in private-sector bond issues. In that counterfactual world, we saw a rapid recovery of housing construction and a thorough equipment investment boom as far across the U.S. as they eye could see.

That didn't happen. So what are the risks of QE, really?

Let me now analyze what is the right focus::

Commercial banks traditionally accept deposits, put the deposits in long-term Treasuries or similar low-risk high duration assets, rely on the law of large numbers and on deposit insurance to allow them to always hold their long-term Treasuries or other low-risk high duration to maturity, and so have a profitable business model as long as they focus on what their core competence is: running a commercial banking business with branches, ATMs, and a well-collateralized loan portfolio.

When commercial banks cannot do this profitably, they need to find higher return assets to invest in. The problem is that they have no expertise in judging those higher return assets���hence they are highly likely to get adversely selected as they try to find them.

The result is that they are likely to lose money. And then somebody will have to eat the losses.

To the extent that organizations whose business models become unprofitable as a result of low rates and QE and so take on risks excessive for them because they have no expertise in judging such risks do so by investing government-insured deposits, this is not a source of systemic risk to the economy: it is only a source of financial risk to the Treasury.

To the extent that organizations whose business models become unprofitable as a result of low rates and QE and so take on risks excessive for them because they have no expertise in judging such risks do so by investing non-insured deposits, this could be a source of systemic risk to the economy depending on where the funds are coming from, and how highly leveraged the organizations that these funds are being drawn from are.

At least that is what I think a coherent and possibly accurate worry might be...

#econspark
#shouldread

As I have said, until there is a center-right that seriou...

As I have said, until there is a center-right that seriously intends to work to make people's lives better, there is no point to trying to construct a centrist coalition. Until, say, we have Republican policy economists who will not endorse a tax cut unless it will actually boost investment and economic growth, the baton is passed to the left:

Simon Wren Lewis: Triangulation or Bipartisanship Does Not Work When One Side Goes Off the Scale: "The lesson of Brexit and Trump is if you fight a culture war and lies with just well researched and targeted policy proposals, you lose. It is better to fight a culture war with an alternative vision and popular policy proposals, and a bit of class war too...

...I am not suggesting that you don���t have well researched and targeted policy proposals behind that: as DeLong says 'we are still here'. But this is the time for radicals on both sides.... I have said very little about policy divisions between the left and centre-left, and that is because in practice I don���t think they are very important. In both countries the left cannot implement much that the centre-left disagrees with, and much of what the left want to do the centre-left are prepared to accept.... The key question is whether the centre-left allows the left to lead when it needs to lead, or instead fights against the left and keeps the right in power...

#noted

Austan Goolsbee: You Never Know When a Recession Will Sne...

Austan Goolsbee: You Never Know When a Recession Will Sneak Up on You: "The 2001 recession developed when the internet bubble popped.... But... the internet accounted for, at most, about 2 percent of the economy then. If we use the logic we���ve been applying to trade wars and government shutdowns, it would seem that popping the internet bubble shouldn���t have been enough to cause a recession. But it did...

...The reason it did was that the pop freaked out people outside just the internet sector.... Virtually every recession in the last 40 years coincided with a signal of fear, like a significant drop in consumer confidence. Sometimes confidence fell and didn���t spiral into recession, but all recessions have started with a confidence spiral.... Let us all hope for excellent jobs numbers in the months to come, along with a rebound.... But it would be a mistake to be overconfident.... If something scares people enough, it can start a recession, and you probably won���t know until it���s too late.... The great pitcher Satchel Paige once advised: 'Don���t look back. Something might be gaining on you'. Had he been an economist, he might have added, 'And don���t start a trade war, either'...

#noted

Liz Hipple on where the labor market is failing���and on ...

Liz Hipple on where the labor market is failing���and on how we have learned about these failures from economic research, and could learn useful things about other market failures if only we spent more money getting ourselves better data:

Liz Hipple: U.S. Economic Policies That Are Pro-Work and Pro-Worker: "The Measuring Real Income Growth Act, introduced by Senate Minority Leader Chuck Schumer (D-NY), would allow policymakers to see which income segments, demographic groups, and geographic areas of the country are actually experiencing economic growth by disaggregating the Gross Domestic Product statistics that the federal government produces. This is a key first step to better measuring.... There are clearly ways that policy could be doing a better job.... Unpredictable schedules, the lack of paid leave, and monopsony power are all examples of areas where research shows that breakdowns in the market...

#noted

This is 100% correct: Narayana Kocherlakota: U.S. Economy...

This is 100% correct: Narayana Kocherlakota: U.S. Economy: Fed Needs to Start Fighting the Next Recession Now: "Its tools are limited, so the central��must��compensate by being aggressive: The Fed should be taking steps now to prepare.... Less firepower than in any previous recession.... What, then, can the Fed do? In my view, it needs to be much more aggressive.... If your medicine chest is nearly empty, you want to keep your patient as healthy as possible. That means cutting interest rates now to lower the unemployment rate even further.... A pre-commitment to strong growth could also help. In the last recession and ensuing slow recovery, the Fed treated its low-interest-rate policy largely as an emergency step that would be removed within the next year or two. Instead, the Fed should publicly commit now to maintain maximum stimulus after a recession... as long as the year-over-year core inflation rate remains below 2.5 percent...

#noted