J. Bradford DeLong's Blog, page 2069

Matthew Yglesias Reads Simon Johnsons TARP Testimony

I have not yet gotten to it, alas! But Matthew Y has thoughts:

Yglesias » Simon Johnson’s TARP Testimony: I recommend reading in full Simon Johnson’s congressional testimony on TARP from about ten days ago. It starts with some Real Talk for bailout haters:

5) There is no question that passing the TARP was the right thing to do. In some countries, the government has the authority to provide fiscal resources directly to the banking system on a huge scale, but in the United States this requires congressional approval. In other countries, foreign loans can be used to bridge any shortfall in domestic financing for the banking system, but the U.S. is too large to ever contemplate borrowing from the IMF or anyone else.

That’s important to keep in mind. I know some serious people on the left (Dean Baker) and the right (Scott Sumner) who think this analysis is wrong and that the Fed could/should have prevented economic collapse without this intervention. But some conventional wisdom has emerged among activists that only corrupt capture by the banking establishment can explain belief in the necessity of TARP. Simon Johnson is not, I think, corruptly captured by the banking establishment.

Now the key implementation problems:

10) Seen in this context, TARP was badly mismanaged. In its initial implementation, the signals were mixed – particularly as the Bush administration sought to provide support to essentially insolvent banks without taking them over. Standard FDIC-type procedures, which are best practice internationally, were applied to small- and medium-banks, but studiously avoided for large banks. As a result, there was a great deal of confusion in financial markets about what exactly was the Bush/Paulson policy that lay behind various ad hoc deals.

11) The Obama administration, after some initial hesitation, used “stress tests” to signal unconditional support for the largest financial institutions. By determining officially that these firms did not lack capital – on a forward looking basis – the administration effectively communicated that it was pursuing a strategy of “regulatory forbearance” (much as the US did after the Latin American debt crisis of 1982). The existence of TARP, in that context, made the approach credible – but the availability of unconditional loans from the Federal Reserve remains the bedrock of the strategy.

I think point 11 remains unduly appreciated. Note that one reason the Obama administration chose this approach is that the alternatives to regulatory forbearance and recapitalization through profits would involve higher not lower fiscal costs than was involved with the grossly unpopular TARP (whose fiscal costs have actually been extremely low). The alternative to regulatory forbearance would have required the taxpayers to step up with additional capital in a way that would have played in the press as “giving even more money to the big banks.” But failing to pony up the cash ended up being even more favorable to the bankers:

14) Exacerbating this issue, TARP funds supported not only troubled banks, but also the executives who ran those institutions into the ground. The banking system had to be saved, but specific banks could have wound down and leading bankers could and should have lost their jobs. Keeping these people and their management systems in place serious trouble for the future.

15) The implementation of TARP exacerbated the perception (and the reality) that some financial institutions are “Too Big to Fail.” This lowers their funding costs, probably by around 50 basis points (0.5 percentage points), enabling them to borrow more and to take more risk with higher leverage.

Not only the institutions, but the specific actors managing the institutions have been largely sheltered from downside risk.

As I have said, the Bagehot Rule for dealing with a financial crisis--a century and a half old and still state-of-the-art--is that in a crisis the government should lend freely to institutions in trouble but needs to do so at a penalty rate so that the defalcators don't profit from the systemic risk that they have created. In the case of institutions that are not just illiquid but insolvent, lend freely at a penalty rate means take equity and nationalize.

Why Oh Why Can't We Have a Better Press Corps?

James Lalinde of Vanity Fair:

Larry Kudlow Devalues Human Life With Japan Earthquake Freudian Slip: In these tough economic times, isn’t it nice to know that calamitous natural disasters needn't have an adverse affect on your investment portfolio? After the 8.9-magnitude earthquake in Japan failed to induce a market nosedive, CNBC’s Larry Kudlow expressed his relief in terms that seemed to appall even his fellow cheerleaders for capitalism: “The human toll here,” he declared, “looks to be much worse than the economic toll and we can be grateful for that.

Architects of the Recovery Act, Continued

Had John McCain won the 2008 election, Mark Zandi would be in ne of the hot seats. But how does a Republican economist get to be described as the architect of Obama's ARRA fiscal stimulus? Zandi is puzzled. He emails David Weigel:

Weigel: The Zandi Misfits: "I think the stimulus efforts were a success. They were designed to end the free fall in the economy, and they did that," Zandi told me in an e-mail. "Not sure how I became the chief architect."

Lori Montgomery of the Washington Post, who repeatedly describes Zandi as an architect of the ARRA, doubles down and emails:

[Zandi] was on the team of economists who were advising pelosi during that period, and his research helped shape the package. don't you remember all those photo ops?

By that standard, the Recovery Act had at least 200 "architects," including me...

David Weigel on the Interesting Position of Mark Zandi

David Weigel:

Weigel : The Zandi Misfits: TThe battle over the credibility of Moody's Economy.com analyst Mark Zandi continued today, with dueling comments that happened in the Senate and the House GOP leadership's press conference at roughly the same time.

In the Senate, Barbara Boxer started a free-form speech about the need to be sober about spending cuts by citing "Republican economists -- Mark Zandi, who worked for John McCain in 2008."

Over at the RNC, Boehner confronted Zandi's analysis of GOP spending cuts -- specifically, by saying they could remove 700,000 jobs from the economy by 2013 -- by calling Zandi Nancy Pelosi's "pet economist."

Not much grappling there with the substance of what was a very short (six page!) analysis of the effect of spending cuts. That would at least be interesting, because neither of the things Boehner or Pelosi said are untrue. Zandi worked for McCain. Zandi is cited all the time by Democrats, and participated in conference calls when they were developing the stimulus. (The models they actually used to predict job gain/loss were similar to his but came from Christina Romer.)

I mentioned some of the political taffy-pulling to Zandi, who brushed it off.

"I think the stimulus efforts were a success. They were designed to end the free fall in the economy, and they did that," Zandi told me in an e-mail. "Not sure how I became the chief architect."

Ryan Avent: Why We Live in Cities

RA:

Economic geography: What are cities good for?: IN COMMENTS, Stephen Morris asks:

>

What is the evidence that cities are more efficient ways of organising economic activity? Specifically, how do we know that - in this day-and-age of telecommunications - the existence of cities arises from superior efficiency in organising economic activity, and not merely from superior efficiency in organising rent-seeking?

It's a good question. How do we know cities are productive and not just centres for rent-seeking? The answer is simple: because they export.

It's not hard to understand what Mr Morris might have in mind. Consider the San Francisco Bay area. It is, by most accounts, a very nice place to live. It's not too hot and not too cold. The city is full of rich entertainment and dining options. There are excellent universities. The scenery around the Bay is unparalleled. Wine country and top-notch snow skiing are within easy reach. The available amenities are impressive. So perhaps what we have here is a situation in which landowners collude, via zoning regulations, to restrict housing supply, thereby allowing themselves to charge and receive exorbitant sums in exchange for the right to live near these amenities. Meanwhile, the people living in the area will need to purchase goods and services. Because new construction is limited, existing businesses face little competition and can charge high rates. There's not enough cheap real estate to support free entry of, say, hairdressers, so the hairdressers that are already in business enjoy market power. The result is high wages and an apparently high level of output, all built around the simple fact of restricted access to desirable amenities.

But there's a problem with this line of argument. Lots and lots of Bay area firms produce goods and services for sale in other markets. In the city, there are financial and business service firms that cater to clients in other cities and countries. Down the peninsula, there are industrial concerns. In Silicon Valley there are companies producing software, hardware designs, search algorithms, and so on. These firms are interested in their bottom lines, and they're all too conscious of the cost of their location in California. Expensive land means expensive office space. Perhaps more important, expensive land means that firms must compensate employees for the price of housing. Otherwise, real wages for these workers would be ridiculously low, and they'd opt to work elsewhere. Why would a bottom-line oriented firm pay so much for land and labour? The only reasonable explanation is that they're getting something in return. There must be location-specific advantages that deliver productivity savings which compensate for higher costs....

We have a pretty good idea what happens when location-specific advantages disappear, as they sometimes do. When transportation costs were higher, there were huge advantages to industrial agglomeration. But as transportation costs fell, those advantages weakened. As a result, producers began doing just what we'd expect them to do: moving their operations to lower cost areas and undercutting the high-cost urban firms. This destroyed the high-cost industrial firms and the high-cost economy that had grown up around them, producing hollowed out cities across the American midwest and northern Britain and Europe. Only in those cases where another industry with different location-specific advantages arose did cities recover. These new "knowledge" industries may themselves prove vulnerable at some point in the future. For the moment, however, the exporting capacity of metropolitan firms suggests that economies are deriving huge benefits from their cities.

Why Oh Why Can't We Have a Better Press Corps? New York Times Department

Outsourced to Glenn Greenwald:

NYT and "torture": Searching for a justification: New York Times Executive Editor Bill Keller explaining why his newspaper won't describe Bush interrogation techniques as "torture":

[D]efenders of the practice of water-boarding, including senior officials of the Bush administration, insisted that it did not constitute torture.

New York Times Washington Bureau Editor Douglas Jehl on why his paper refuses to describe Bush's waterboarding program as "torture":

I have resisted using torture without qualification or to describe all the techniques. Exactly what constitutes torture continues to be a matter of debate and hasn’t been resolved by a court. This president and this attorney general say waterboarding is torture, but the previous president and attorney general said it is not. On what basis should a newspaper render its own verdict, short of charges being filed or a legal judgment rendered?

From the New York Times today:

As a hero of the French Resistance, Stéphane Hessel was in exile with Charles de Gaulle in London, imprisoned in concentration camps, waterboarded in Nazi torture sessions and saved from hanging by swapping identities with an inmate who had died of typhus. . . . Asked how he survived torture, he said, "The third time of waterboarding, I said, 'Now, I’ll tell you.' And I told them a lie of course." He added: "One survives torture. So many people unfortunately have been tortured. But it's not a thing to recommend."

So according to The New York Times, it's journalistically improper to call waterboarding "torture" -- when done by the United States, but when Nazi Germany (or, more generally, China) does exactly the same thing, then it may be called "torture" repeatedly and without qualification. An organization which behaves this way may be called many things; "journalist" isn't one of them.

Three Cheers for Government-Mandated Time Zones!

Buce:

Underbelly: Alex Tabarrok Proves he is Just Another Cafeteria Libertarian: Ooh, this one ought to get him drummed out of the sodality: Alex Tabarrok shamefacedly admits that he is not that-all opposed to--no he actually likes--having the jackbooted thugs in Washington shackle us with the crime of daylight savings time.    In  a frantic rearguard attempt to retain his street cred, Alex does say he would have opposed it when first introduced but that kind of coulda woulda shoulda is hardly the sort of thing that will impress the pure in heart.

Alex fails to press the inquiry one more step, however, to ask: why should the gummint get its cotten pickin' hands on things like time-setting at all?  Why can't we perfectly well solve this problem by private agreement:  I'll meet you when the abscissa of the cosine of the shadow of my hoe handle touches 43" south latitude (as defined by the wholly voluntary recommended-south-latitude standards advisory committee)?

Liveblogging World War II: March 13, 1941

OKW:

Special Duties for the SS In "Operation Barbarossa" :

Staff Command Secret Document


Chief Only


Only Through Officer

High Command of the Wehrmacht


WFST [Armed Forces Operation Staff] Div. L (IV/Qu)


No. 44125/41 g.K.Chiefs

Orders for Special Areas in Connection with Directive No. 21

...b) Within the area of Army operations the Reichsfuehrer SS will be entrusted, on behalf of the Fuehrer, with special tasks for the preparation of the political administration tasks which derive from the decisive struggle that will have to be carried out between the two opposing political systems. Within the framework of these tasks, the Reichsfuehrer SS will act independently and on his own responsibility. Apart from this, the executive power vested in the Supreme Commander of the Army and in command levels acting under his orders will not be affected. The Reichsfuehrer SS will ensure that operations are not interfered with by the execution of his tasks. Details will be worked out directly between the High Command of the Army and the Reichsfuehrer SS....

Simon Johnson Calls One for Banking Policy Heavyweight and Bank of England Governor Mervyn King

Simon:

http://baselinescenario.com/2011/03/10/battle-of-the-banking-policy-heavyweights/ Battle Of The Banking Policy Heavyweights: Just when it seemed that the debate over banking was winding down – with overwhelming victories on almost all dimensions for the people who run the world’s largest cross-border financial institutions – two of the biggest name policy heavyweights have entered the arena.... Speaking on the side of greater reform for the biggest banks, Mervyn King – governor of the Bank of England – gave a forceful interview to the British newspaper The Telegraph at the end of last week:

Why do banks in general want to pay bonuses? It’s because they live in a ‘too big to fail’ world in which the state will bail them out on the downside.

In Mr. King’s view, casino-type banking caused the crisis of 2007-08:

Financial services don’t like the word ‘casino’, but instruments were created and traded only within the financial community. It was a zero sum game. No one knew which ones were winners when the crisis hit. Everyone became a suspect. Hence, no one would provide liquidity to any of those institutions.

We allowed a [banking] system to build up which contained the seeds of its own destruction.

And “reform” efforts so far do not amount to much:

We’ve not yet solved the ‘too big to fail’ or, as I prefer to call it, the ‘too important to fail’ problem. The concept of being too important to fail should have no place in a market economy...

Mark Kleiman Sees a Weak President

MK:

A weak President « The Reality-Based Community: Asked about the extraordinary conditions imposed on Bradley Manning and the even more extraordinary remarks of the State Department spokesman dumping on DoD for that mistreatment, Barack Obama sounds completely clueless: clueless at the Bush level:

I have actually asked the Pentagon whether or not the procedures that have been taken in terms of his confinement are appropriate and are meeting our basic standards. They assured me that they are. I can’t go into details about some of their concerns, but some of this has to do with Private Manning’s safety as well.

Surely the President knows as well as anyone else that asking people accused of maltreating a prisoner whether the prisoner is being properly treated is like asking a drunk how much he’s had to drink. Since Barack Obama is not a fool, this can only mean that he’s reluctant to countermand Gates and Gates’s subordinates. (Note that he didn’t say that he’d had the allegations checked out and found that they were false.)...

[I]f the Republicans ran a candidate who took a forthright stand against torture, even if that person were otherwise “conservative” in the degraded contemporary sense of that term – committed to making the poor poorer, the country more ignorant, and the planet less habitable – this issue alone would be a cogent reason to vote for that Republican.... But Charles Fried isn’t going to get the Republican nomination, and the context for the President’s display of weak knees on this issue is the drumfire of “soft on terror” charges from the GOP and its tame media...

And a strong Secretary of State:

“Ridiculous and counterproductive and stupid” « The Reality-Based Community: That’s State Department spokesman P.J. Crowley on the torture of Bradley Manning. I would have used stronger language, but I’m glad he said it. And I very much doubt that he would have said it if his boss hadn’t wanted it said.