Archive for February 2018


A very depressing interview

David Beckworth has an excellent interview with The President and VP of the Minneapolis Fed.  I did a post on the portion of the podcast that interviewed Neel Kashkari, over at Econlog.  Here I’ll address the part where David interviewed VP Ron Feldman, mostly on banking regulation.  I’ve always thought that eliminating moral hazard is the only way out of this mess.  Feldman says that’s politically impossible:

I think you just need to look at what happened with Fannie Mae and Freddie Mac. This was in a prior regime. People used to talk about what’s called subordinated debt, but it’s the same idea, that they would be forced to issue debt that would be very junior, so it would get converted, and there would be no problem.

Now, flash forward. You’re in a crisis, and what people are worried about is, am I going to lose my money? You’re in the middle of a crisis, and you’re telling me that the solution to making people feel comfortable, not freaking everybody out, is that you’re going to impose more losses on more people. It just seems implausible.

The only active creditor in the US where we have a record that we do impose losses on them is equity holders. We do treat equity holders differently from fixed income holders, depositors, or bond holders. I think CoCos and bail-in debt, it’s very elegant. If it worked, I think that would be great. But we have a record of it here.

I should just add, in Italy and other places, they’re using the same idea. Last year, they were confronted with this issue: what are they going to do about the bail-in debt of the Italian banks that are in trouble? They said, “We want a special exception. We’re going to need to protect those folks.”

I think that’s the history. We talked about, is the five-year delay credible? The thing that’s not credible is that in a crisis, a government is going to want to impose more losses on debt holders.

Just to be clear, I don’t think it would be a problem doing this in a technical sense.  Crisis or no crisis, there’s no reason why bonds can’t be converted to equity when a bank gets into trouble.  But I suspect he is right about the politics, at least in highly corrupt countries like Italy and the US.  (Perhaps it would work in the Nordic countries, or Canada.)

I find this to be profoundly depressing, and pushes me toward reluctantly supporting tighter bank regulation, especially higher capital requirements.  The Minneapolis Fed has developed a plan that calls for a 23.5% capital requirement for large banks:

We would require banks to fund themselves with equity that would be equal to 23.5 percent of their risk-weighted assets. Risk-weighted assets means there’s a bigger weight that’s put on something, an asset that’s risky, and a lower weight that’s put on something that’s safe, like a Treasury bill.

I actually think the main problem is reckless smaller banks.  That’s where our tax dollars go.  I’m much less worried about the bigger banks, where moral hazard is less of a problem.  Unfortunately, it seems like higher capital requirements are just as politically infeasible as reducing moral hazard through convertible bonds:

The capital ratio rose from 10.5% before the crisis to 12.7% after, but has since slipped back below 12%.  A 23.5% ratio sounds great, but only if applied to all banks, not just large banks.  Unfortunately there’s probably almost zero political support for doing some something like this.

As with healthcare reform, as with zoning reform, as with FAA privatization, as with a hundred other issues, there’s simply no interest in banking reform.  In either party.


Films of 2017

Let’s hope my life finally hit rock bottom in 2017. (At age 62, fat chance!) I’m looking forward to wrapping up my two book projects by mid-2018, and then starting to actually live again.  Reading books, buying CDs, figuring out how to watch films on the internet.  (BTW, is Netflix as awful as it looks, or am I missing something?  Their selection of good films seems virtually nil.  Where are the good films on the internet?)

Ross Douthat is a brilliant essayist who has a blind spot when it comes to sex.  His newest piece is titled:

Let’s Ban Porn

I’m trying to visualize how this would be implemented.  Perhaps Jeff Sessions will sit in a room all day, screening X-rated art films from France, Italy and Japan, trying to determine whether they are pornographic.  (I say yes, but in a good way.)  What would Jeffrey make of In the Realm of the Senses? There’s an amusing Atom Egoyan film that gets at the internal contradictions of censorship.  If watching porn really does turn us into bad people, as Douthat seems to think, then under his proposed regime the actual censorship decisions will be made by moral degenerates.

Despite the fact that the proposal is silly on many levels, it would not surprise me at all if Douthat wins in the long run.  The US is going downhill in so many different ways—why should this be any different?  [I’m striking a blow against the New Puritanism by topping my list with a film I was not allowed to see.  I liked the previews, and was really looking forward to it.]

In fairness to Douthat, I do see one silver lining in his proposal.  There was a time, way back in the 1960s, when lots of Americans did go to see foreign films.  Especially foreign art films.  That brief golden age occurred at the point in time when we’d liberalized enough to allow in “erotic” Swedish and France films, but not so much as to allow “porn” (Which I define as erotic art films for the working class. Yes, there’s a lot of class snobbery in the new puritanism.)  Once Americans were given access to their own home grown porn in the 1970s, they stopped going to see films by Godard, Bergman and Antonioni.  Wouldn’t it be funny if Douthat got his way, and Americans were once again forced to watch long boring art films, just to catch a glimpse of skin!

2017 Films

I Love You, Daddy.  (US)  4.0  I’m hoping this will be what Woody Allen films should be, but aren’t.  Something a bit more Kubrick-like.

Stalker (Russia, 1979) 4.0 Not just my favorite Tarkovsky, my all-time favorite European film. Geoff Dyer said it best:

it’s not enough to say that Stalker is a great film – it is the reason cinema was invented.

Twin Peaks Part II (US) 3.9 Not as good as part one, but then that was the best TV show of all time. Reminds me of “In the Mood For Love” in the way the director used the posture of actresses in a very evocative way. Check out the scene where Lynch and the two FBI women are out on the porch having a cigarette. Nothing is said for about 2 minutes, and it plays no role in the plot. But it’s stupendous filmmaking—an example of what makes cinema magical. And let’s not even talk about Naomi Watts, who is brilliant throughout the series.

I searched online and found someone else who liked the scene on the porch as much as I did:

The series is also a critique of the anti-cigarette hysteria on the rise in America.

Thelma (Norway) 3.7 A very enjoyable Norwegian film, very skillfully directed. Doesn’t break any new ground, but I was engrossed throughout the entire 2 hours.

After the Storm (Japan) 3.7 Another gem from Kore-eda, my favorite living Japanese director. This one is probably worth seeing twice, as there’s a lot going on right below the surface.

Sweet Bean (Japan, 2015) 3.6 Directed by Naomi Kawase, another great Japanese director that I had somehow overlooked. Reminds me a little bit of the style of Kore-eda. A beautiful understated film; the polar opposite of what gets produced in Hollywood these days. Now I need to find her earlier films.

Star Wars: The Last Jedi (US) 3.6 The best Star Wars film since the first two. They finally found a director who is more than just a corporate clone. It still fell short of what it might have been—Mark Hamill is not a good actor and the depictions of alien planets continue to be quite unimaginative.

Intimacies (Japan, 2012) 3.6 A nearly 4½ hour film by the director of Happy Hour. The first half shows people putting together a theatrical production and is pretty slow going. After intermission we see the play itself, which becomes increasingly engrossing. I have no interest in theatre, but I enjoy seeing filmed plays. This is a director to watch.

Full Metal Jacket (US, 1989) 3.6 This uneven Kubrick film is saved by the intense final battle.

The Square (Swedish) 3.6 A film that is full of ideas, and lots of sharp observation, although it doesn’t have the sustained artistic vision of something by Lars von Trier, Kubrick, Haneke, etc. It’s a tweener, but a pretty engrossing 2 ½ hours. In its defense, the satire of the art world and liberalism more broadly is not always as obvious as it might seem. Strongly recommended for people who (unlike me) like their cinema mixed with social commentary.

Brimstone and Glory (Mexican) 3.6 Documentary about a small town in Mexico that puts on a stupendous fireworks festival each year. Imagine the running of the bulls in Spain, except at night with dazzling fireworks.   Soon after the film was completed, many people in this town died in a fireworks accident.

Vanishing Time: A Boy Who Returned (Korea) 3.5 A charming Korean crowd pleaser, which I found myself enjoying more than I expected. The director (Tae-hwa Eom) is someone to watch.

Columbus (US) 3.5 I’m tempted to say that this film is not for people who have short attention spans. But then maybe it’s not about attention spans at all, but rather a question of interest—more specifically it’s for people with an interest in architecture. (The character I stole this line from was the most interesting person in the film, but he only had a small role.)

Blade Runner 2049 (US) 3.5 This is an outstanding film in many ways, especially the visual effects. So why do I rate it slightly below the original? I’m not quite sure. Maybe it’s just a question of originality—the first one had a fresh (and sublime) vision, and this one just recycled that vision. Originality seems especially important in sci-fi. Or perhaps it tried to do too much. The last half hour dragged on, and seemed somewhat pointless.

Lolita (US, 1962) 3.5 This uneven Kubrick film is saved by Peter Seller’s inspired performance. (A warm-up for Strangelove.)   It’s probably unfair to compare the film to the book. Kubrick and Nabokov are very different artists, and hence the film should not be anything like the book. And it isn’t.

David Lynch: The Art Life (US) 3.5 A very interesting documentary about David Lynch. He did not direct the film, but there are moments when it feels like he did. Lots of glimpses of his graphic art.

Blade of the Immortal (Japan) 3.4 The 100th film by Takashi Miike. I’ve only seen two, which leaves 98 to go. Not my favorite genre (lots of blood) but it’s nice to see a real craftsman at work.

Youth (China) 3.3 The sort of film Spielberg would make if he had been born in China. Tries to do too much, but it’s fairly engrossing.  If I were Chinese I’d rate this lower–too emotionally manipulative.

March of Fools (Korea, 1975) 3.2 Interesting coming of age film from a director I had not seen before.

La La Land (US) 3.0 With all the talent in Hollywood, do they really have to rely on so many clichés? Her dream is living in Paris? Even Chinese directors use Prague.

Your Name (Japan) 3.0 This animated feature was a smash hit in Japan. It’s good, but I found it to be somewhat derivative.

The Swindlers (Korea) 2.9 This entertaining film is full of twists and double crosses, but in the end it didn’t make much sense (at least to me.)

Woman of Fire (Korea, 1971) 2.8 At times it’s one of those campy “so bad it’s good” films, at other times it’s somewhat engrossing. And sometimes it’s just bad. Might be of some interest to Tarantino fans.

Baby Driver (US) 2.8 Mildly entertaining, but also rather silly. I would have given it 3.0 rating if the film had ended with Dave Edmunds’ 1970s pop classic “Deborah” playing over the credits. (The two stars kept trying to think of a great pop song with “Deborah” in the title.)

Dreams That Money Can Buy (US, 1947) 2.5 Not very good, but interesting in what it tells us about progress in the cinema. While certain types of films (comedy, drama, noir, etc.) have made almost no progress since the 1940s, visionary film-making improved dramatically between 1947 and 1968, when 2001: A Space Odyssey came out (not to mention Tarkovsky). Here’s what Wikipedia says:

Dreams That Money Can Buy is a 1947 experimental feature color film written, produced, and directed by surrealist artist and dada film-theorist Hans Richter.

The film was produced by Kenneth Macpherson and Peggy Guggenheim.

Collaborators included Max ErnstMarcel DuchampMan RayAlexander CalderDarius Milhaud and Fernand Léger. The film won the Award for the Best Original Contribution to the Progress of Cinematography at the 1947 Venice Film Festival.

Saint Terrorist (Japan, 1980) 2.2 Nihilistic punk filmmaking from Japan. Not my cup of tea.

It’s not just about big government

The recent budget deal is even worse than I imagined.  Here’s Ravi Smith, from the previous comment section:

By repealing IPAB, which is essentially a cap on Medicare spending, the Republicans have massively increased the size of government. In the long run, that will probably be more important for sustainability than any of the tax changes or immediate spending items.

Conservatives used to try to argue that while the GOP would not cut spending, at least they would not increase it as fast as the Democrats.  But even that is no longer true, and the reason is that the GOP is no longer either a small government or a big government party; they are something much worse, the party of crony capitalism.  They are the party that forces the Pentagon to spend money on weapons that ever single military expert says are unneeded.  They are the party that wants to shovel more spending into the insatiable medical industrial complex, even when every health expert tells us the spending is utterly worthless.  They want to shovel more money to big agriculture, even though every economist will tell you it does nothing to prevent agriculture from becoming increasingly dominated by big farmers.

The Democrats also want to spend a lot of money on providing health care, but at least they have a slightly defensible reason, providing health coverage for the needy.  The GOP would rather double spending on Medicare and gut spending on Medicaid, as long as it enriched wealthy people in the healthcare industry (while denying coverage for the poor.)

One thing the left and right seem to agree on is that the GOP is the small government party.  That explains why the media are paying little attention to this fiasco.  But they are both wrong.  The GOP is the party of crony capitalism–small vs. big government plays no role in the modern political debate between the right and the left.  America has become a European country.  If it’s stupid bigots vs. stupid utilitarians, I’m with the stupid utilitarians.

The right used to mock the Democratic Party claims that high government spending does not hurt the economy.  Now I see conservatives engaging in “magical thinking” that would put 1960s-era liberals to shame.  All this orgy of spending is not a problem (we are told) because the GOP won’t pay for it with higher taxes.  Instead we’ll just borrow the money!  I’m not surprised that Trump thinks this way, he’s never had the slightest interest in reality.  But I am sort of surprised by the number of conservatives drinking the kool-aid.

So let me make it really simple.  There’s a pie.  The GOP is about to give the government sector a much bigger slice of that pie.  That means the private sector will get a smaller share of that pie.  And no amount of deficit spending will change that fact, unless you believe that pouring hundreds of billions of dollar into ships and airplanes with no military purpose, and into an out of control medical sector, will magically cause “the pie” to grow.

Here’s the National Review:

Republican congressional leaders have announced a deal with Democrats to bust discretionary spending caps by nearly $300 billion over the next two years. Appropriations will rise by 13 percent this year. . . .

[That 13% growth is in contrast to NGDP, which will rise by about 4.5%.  Think slices of the pie.]

The Republican Congress that aggressively pushed President Clinton on spending then turned around and rubber-stamped President Bush’s domestic spending spree. Now the GOP Congress that admirably fought President Obama’s spending agenda is set to bust the budget caps under President Trump.

So let’s see, we only get spending restraint when we have a GOP Congress and a Democratic President.  Pity Hillary didn’t win. Seriously, I think things would actually be about the same if Hillary had won.  The GOP would have done a deal of no repeal of Obamacare and a massive domestic spending increase in exchange for corporate tax cuts.  (That was my prediction before the election, and I’m even more convinced today.)  The only difference is that we wouldn’t have an embarrassing buffoon in the White House, with his finger on the nuclear trigger.

Hey Tea Party, how’s your support for Trump working out?

Has fiscal policy been unsustainable for decades?

After the previous post, Carl made the following comment:

I have a hard time believing it’s because “fiscal policy is unsustainable”. It’s been unsustainable for decades.

Here’s the data for 1947-2007:

So no, fiscal policy has not been unsustainable for decades.  The debt ratio fell from 80% of GDP in 1947 to 35% of GDP in 2007.  That’s not to say that there were no long term fiscal challenges in 2007—the looming retirement of baby boomers was an issue that needed to be addressed.

However it is not true that a longer life expectancy creates major problems for fiscal policy.   Living longer need not cause health care costs to rise dramatically, if people are also healthier.  To some extent the costs simply occur later in life.  The much bigger problem is that we now spend far more on the same health problems that we spent less on in the past. Singapore does not.

And greater longevity need not increase the pension burden, as long as the retirement age reflects improvements in health.  Longer life spans may create a problem if we don’t handle them in a sensible way, but that’s up to us.  Thus we could set the Social Security retirement age equal to the average life expectancy in America, minus 12 years.

Today, the debt burden is nearly back up to 80% of GDP, and likely headed much higher.  The problem today is that fiscal policy is currently unsustainable—we are running massive and growing deficits late in an expansion.  It was certainly not unsustainable when we were rapidly reducing the ratio of debt to GDP under Bill Clinton.

PS.  My previous post title should not be taken as a prediction of recession.  I do not expect another recession in the near future.  I would emphasize that the level of stock prices is still pretty high, even after the recent drop.


I suppose I ought to say something about recent stock market turmoil, even though I don’t have any great insights.  (I recommend John Cochrane’s recent post.)

I generally divide shocks up into two types.  There are negative demand shocks, like 1929 and 2008.  Then there are real shocks, when the market crashes without any big drop in NGDP growth expectations.  That might have been the case in 1987 and 2000, although I’m not certain.

As far as I can tell, the recent market decline seems more like a real shock.  I don’t see any sign of slower NGDP growth expectations.  The Hypermind market is almost unchanged, and there’s not much change in nominal bond yields or TIPS spreads.  If anything, bond yields have risen, which is not reflective of declining NGDP growth expectations.

So if it’s a real shock, then what caused it?  Keep in mind that thus far the decline has been modest, less than 10%.  And that follows a huge stock price run-up.  So don’t look for a huge real shock, merely something that means investors are still quite optimistic, just a bit less optimistic than a week ago.  It’s all about levels.

One possible culprit is an increasing sense that things are “unsustainable”.  Here are a couple areas where that perception may be building:

1.  Perhaps RGDP growth is unsustainable.  Unemployment has fallen to 4.1%, the working age population is growing very slowly, immigration reform seems unlikely, and nominal wage growth is accelerating.  The recent 2.9% wage growth number seemed to hit stocks.

2. Perhaps fiscal policy is unsustainable.  The GOP passed a big tax cut (which will end up costing much more than estimated.)  After you do that, you are supposed to tighten up on spending if you are the small government party.  Instead they basically took off all the restraints on spending.  The deficit is about to get much worse.  And when the next recession hits?  Don’t even think about it.

[Remember when Blair and Brown enacted a big fiscal stimulus at a time when the UK was booming in the early 2000s?  And then there was no money for fiscal stimulus when the Great Recession hit.  That’s basically the current GOP.]

I don’t have a lot of confidence that fear of unsustainable trends is what caused the recent market setback, but I can’t see any other plausible culprits.  Have I missed anything?