Random links

Part 1.  Meanwhile, back in the real world.

Krugman is assuring us that the new banking regulations will soon make our system as conservative as the Canadian system.  I must have missed the part about 20% down payments.  In any case, back in the real world things are going in the opposite direction.  The FHA is now trying to get into the housing speculation business.  This reminds me of gambling.  First the government bans the evil vice.  Then they set up their own numbers racket, and don’t allow any competition.

Both the FHA and the Fannie programs, while temporary, are designed to spur home buying and particularly buying of foreclosed properties. They also both add risk to the system, because any time you give a buyer more money upfront, that buyer will likely bite off that much more than they can probably chew. I’m not saying they’re bad programs, especially in these desperate times, but I continue to be concerned that many of these so-called “assistance” programs are opening the housing market up again to questionable buyers…which of course is how we got in this mess in the first place. Combine the Fannie assistance with the first time home buyer tax credit, and you’re giving homes away for little to no cash all over again.

Nick, is that how they do things in Canada?  BTW; In this old post I discuss Nick Rowe’s views on the Canadian system.  He doesn’t seem to agree with Krugman’s assertion that the Canadian system is much more regulated than the US system.  And unlike Krugman, Nick is actually a Canadian economist.  But who cares what you call it.  Krugman and I both favor swapping our banking system for the Canadian model.

Part 2.  DeLong criticizes Cochrane

Surprisingly I agree about 80% with DeLong on this one.  Cochrane argues the crash of late 2008 was partly caused by the panic associated with the government’s sudden withdrawal of its implicit “too big to fail” policy, which occurred when they allowed Lehman to fail.  Cochrane also noted that the direct losses from the subprime fiasco were simply too small to explain the financial meltdown:

The underlying decline in wealth from the housing bust was not that large…. Most estimates put subprime losses around $400 billion. The stock market absorbs losses like that in days…

DeLong agrees:

Cochrane makes the true and obvious but understressed point on the origins of our macroeconomic crisis that mortgage defaults in the desert between Los Angeles and Albuquerque are simply not large enough to justify the $25 trillion global fall in the value of financial assets that has hit our economies:

But in the end DeLong doesn’t buy Cochrane’s argument:

To see what is wrong Cochrane’s story, let’s start by summarizing it: It is that (i) the failure to rescue Lehman caused fears that the government would not rescue anybody, and so (ii) it was rational for everyone to panic and try to dump their risky assets. In Cochrane’s view, the problem is that asset prices collapsed when financiers realized that the government’s promise to bail-out too-big-to-fail banks was empty. That shock sent the real economy into a tailspin. And the solution is never to make any bail-out promises to begin with: if the promises aren’t made, then people cannot fear that the promises are empty, that fear cannot generate a sudden collapse in asset prices, and so the economy cannot be sent into a tailspin.

But remember what happened in the immediate aftermath of Lehman: the U.S. government nationalized AIG and settled its liabilities at 100¢ on the $; Hank Paulson got down on his knees before Nancy Pelosi; the Treasury was given $700 billion to spend to make sure that there were no more Lehmans. After the creation of the TARP, we were all much surer that the U.S. government would rescue Citi if it needed rescue than we had been in the months between Bear-Stearns and Lehman. In point of fact, the government’s promises to rescue too-big-to-fail banks weren’t empty: the government has lived up to them.

The logic of Cochrane’s argument implies that the passage of the TARP should have fixed the problem: the aftermath of Lehman saw “[no] secondary wave of creditors forced into bankruptcy by Lehman losses… [some] issues… easy to fix… Lehman’s failure did not carry any news about asset values…” and the passage of the TARP is good news for the likelihood of bailouts. So, Cochrane’s story leads us to think, everything should have been completely fine in the aftermath of the TARP: asset prices should have immediately bounced themselves back up to their pre-Lehman levels, and the storm clouds should have dissipated.

So why are we still in a deep recession?

I suppose Cochrane could contest some of this, but I have to side with DeLong on this one.  Only a sharp fall in expected NGDP could produce the financial meltdown we saw in late 2008.  That slowdown would be expected to do two things; produce a severe recession all across the economy (depressing asset prices), and also dramatically worsen the financial crisis.  And it did in fact do the two things it would be expected to do.

What caused NGDP to fall sharply?  I’d say a failure of monetary policy.  DeLong might say (and this is pure speculation) a sharp cutback in lending, a Minsky moment, a decline in consumer confidence, and all sorts of other factors.  In any case, one could argue that this sort of argument would be merely the other side of the coin from my argument.  Lots of stuff causing V to fall sharply; or the Fed not offsetting a sharp fall in V with a more expansionary policy.  Either way it comes to the same thing, a sharp fall in NGDP expectations.

I hate to see University of Chicago economists building explanations of the crisis that make the private economy seem very fragile.  The genius of Friedman and Schwartz’s Monetary History was that it showed the private economy is actually pretty robust, as long as the Fed keeps NGDP from falling.  What’s DeLong’s sarcastic remark?  Something like; “Where oh where is the old Chicago School?”  And keep in mind that on 90% of economics issues I agree with Cochrane and disagree with DeLong.  But conservatives need to come to grips with aggregate demand.  The failure to do so opens the door to much greater evils—like a national debt that is headed toward 80% of GDP.

[Oh wait, I forgot.  All the liberal bloggers are now saying conservatives don’t care about the national debt.  They are evil nihilists who want the country to fail.  And what makes this argument so persuasive is that conservative politicians actually don’t have any answers.  But I’m not a politician.  So I can advocate the Singapore system without fear of losing an election.]

Part 3:  Robin Hanson has a nice post on “uppity China.”

Part 4.  For one brief shining moment

It looked like the BOJ might actually be willing to stop the deflation:

THE situation has “completely changed,” says an ebullient Keisuke Tsumura, an elected official in the newish government’s Cabinet Office. The Bank of Japan (BoJ) “has redefined its understanding of price stability. Some market participants now regard it as de facto inflation-targeting.”

That would be something to get excited about. Since the start of Japan’s deflationary era in 1999, the BoJ has stoutly resisted calls to set an inflation target against which it can be judged””and by which it can be embarrassed if it misses. Its inflation objective is defined in the loosest terms, as a rate between zero and 2%, with no time-frame to achieve it and no penalty for failure.

But in November Naoto Kan, who has since become Japan’s finance minister, made what aides proudly call his “deflation declaration”, urging the BoJ to redouble its efforts to combat falling prices. Days later the BoJ offered ¥10 trillion ($112 billion) of virtually interest-free liquidity to the banking system to fight deflation. A few weeks after that it indicated it would not tolerate an inflation rate at or below zero. Was it setting a more explicit goal? Mr Kan and his aides clearly hoped so.

But it was all too good to be true:

The markets at first joined the celebratory mood. Foreign investors have long shunned Japanese stocks, but they sensed the possibility of a big rally if the BoJ stepped up its provision of liquidity, weakening the yen and boosting the earnings of exporters. As the yen came off its highs, investors piled into shares (see chart). But since then the yen has rebounded with barely a squeak from the BoJ. After its board met on January 26th, the bank made it clear it still sees consumer prices, excluding fresh food, falling until the end of the 2011 fiscal year (albeit at a slightly slower pace than it had predicted three months ago). Its growth projections were left largely unchanged.

Couldn’t the BOJ have given the Japanese people just a tiny taste of punch before taking away the punch bowl?  The GDP deflator is now about 15% below 1994 levels.  Back in 2007 the yen was 120 to the dollar, and I don’t recall any American complaints about the exchange rate; the focus was all on China.  Now the yen is 90 to the dollar.  Please . . . just one sip?

Part 5.  Looking for money in all the wrong places

Daniel Gross disproves the EMH at Davos.  I know I am going to be accused of being humorless and pedantic, but I just want to make sure that people realize the $100 bill on the sidewalk is a joke.  What the EMH actually says is that if you look at any given piece of sidewalk; don’t expect to find a $100 dollar bill lying there.  People do occasionally overhear takeover rumors on the NYC subway.  And once and a while people do find $100 bills on the sidewalk.

HT:  Alex Tabarrok

Part 6.  When you want moral indignation, call in Christopher Hitchens

No one does it better:

Here are the two most shattering facts about North Korea. First, when viewed by satellite photography at night, it is an area of unrelieved darkness. Barely a scintilla of light is visible even in the capital city. (See this famous photograph.) Second, a North Korean is on average six inches shorter than a South Korean. You may care to imagine how much surplus value has been wrung out of such a slave, and for how long, in order to feed and sustain the militarized crime family that completely owns both the country and its people.

But this is what proves Myers right. Unlike previous racist dictatorships, the North Korean one has actually succeeded in producing a sort of new species. Starving and stunted dwarves, living in the dark, kept in perpetual ignorance and fear, brainwashed into the hatred of others, regimented and coerced and inculcated with a death cult: This horror show is in our future, and is so ghastly that our own darling leaders dare not face it and can only peep through their fingers at what is coming.

George Orwell would have liked Hitchens.

Part 7.  Man bites dog

Obama wants to ax moon mission, privatize space travel.  Republicans favor big government bureaucracy status quo.

Part 8.  Colin Marshall has no psychic power

This is from a discussion of the work of documentarian Errol Morris:

Note that Morris, despite his yen for documentation of his own trips into the small, fantastical psychological capsules of individuals, doesn’t consider himself any less intellectually imprisoned than his subjects. Small concession to make, you might say, not exempting himself from the human condition. But isn’t it all too rare for public thinkers not to declare or imply themselves cured of the malady with which they diagnose the rest of the world?

This is most visible by its unsubtlety in politics, especially political punditry. If you’ll indulge moment of ideological asymmetry here, I find it even more pervasive on the left than on the right. Think of the endlessly multiplying theorists who, ostensibly defending the interests of the downtrodden common man, operate on the premise that everyone has been hoodwinked by corporations, crooked politicians and the military-industrial complex “” everyone but them. But even outside this realm, certain types of claims set off my brain’s automatic find/replace:

  • “The Bush Regime plays the American public like a fiddle” = “I have psychic powers (to recognize and avoid the techniques of said fiddling)”
  • “That work of art is pretentious” = “I have psychic powers (to know the artist’s intention)”
  • “Most people are lazy” = “I have psychic powers (to know others’ willingness to work)”

This is why, when I hear someone I haven’t met described as “opinionated,” I tend to assume that means “dumb,” “delusional, “too insecure to not to have an opinion,” “believes themselves to possess superhuman brain abilities” or various permutations thereof. If only they’d just chill out a little bit. Maybe shoot a documentary or two. 

Pretty wise for a 25-year old.  Please remind me of this when I get too opinionated. I wonder what he thinks of the EMH?  Or perhaps I should put it this way; I wonder what he thinks of people who say, “Yes, the market values the asset at X, but I know its intrinsic value is Y”



12 Responses to “Random links”

  1. Gravatar of Doc Merlin Doc Merlin
    1. February 2010 at 23:04

    “Opinionated people are stupid/delusional/insecure. translates ” to I have psychic powers to know the innermost thoughts and reasons people do things.

    His own statements are foist on their own petard. He is guilty of the very thing he thinks he sees in others. He reminds me of nothing more than the people who say, “There are no absolutes.” Or make other ridiculously provably self referentially untrue statements.

    Unlike Colin, I have no self-delusions that I am not an opinionated bastard. However, I partially agree with you scott about “intrinsic value.” “Intrinsic value” is meaningless, there is no intrinsic value. There is only human desire, reason, and willingness to act.

    But… you of all people, Scott should know it is a good thing to spit in the collective’s eye and take a contrarian stand when you know you are right. This apples to market prices and not just to macroeconomic theories.

  2. Gravatar of Doc Merlin Doc Merlin
    1. February 2010 at 23:06

    I should clarify: Be opinionated Scott (and others on this blog). To hell with what Colin Marshal thinks.

  3. Gravatar of malavel malavel
    2. February 2010 at 05:46

    Doc Merlin, I couldn’t disagree more. Being opinionated is as stupid as it gets. This is so obviously true only the most dimwitted individual would even consider arguing against it. Duh!

  4. Gravatar of Master of None Master of None
    2. February 2010 at 06:11

    Re: opinionated psychics

    I tend to give Obama et al more credit than most, but one thing that really bugs me is the condescension that I hear in his speeches.

    In diagnosing what the “American people” need, he rarely includes himself in that category. He almost never uses the words “we” or “us”, preferring to take the role of the shepherd tending his flock. Bugs the hell out of me.

  5. Gravatar of scott sumner scott sumner
    2. February 2010 at 06:29

    Doc and malavel, I just can’t make up my mind which of you is right.

    Master of None, Yes, I agree. But I find all politicians do that, and unfortunately many people want to be treated like sheep. Oops, I’ve already done what Marshall told me not to do. Marshall’s right, but it’s really hard to stop doing.

  6. Gravatar of Philo Philo
    2. February 2010 at 08:27

    Scott, don’t deny you have psychic powers. That’s why we’re reading your blog!

  7. Gravatar of David Stinson David Stinson
    2. February 2010 at 09:17

    Hi Scott.

    You said:

    “conservatives need to come to grips with aggregate demand.”

    AD sounds Keynesian and that provokes a visceral response (I used to have it myself). I think to get past that one needs to recognize two things. First, in the short run at least, AD is the flipside of money demand. So, if you believe bad policy can affect the demand for money, presumably you must also believe bad policy can affect AD. Second, we tend to think of monetary policy in terms of “stimulus” or as “expansionary” or contractionary”, all of which sounds, at worst, like socialist or Keynesian economic direction or, at best, like what Arnold Kling (or others?) refer to as hydraulic macro or the notion that economics is really just a form of accounting or arithmetic (or something). I think the better way to think of monetary policy is the maintenance of some sort of desired relationship between money demand and money supply. In a free banking world, the adjustment of supply to demand would happen automatically through the market mechanism. If you don’t have free banking, then it falls to the central bank to manage the demand/supply relationship. So, to my mind, it’s not a question of “stimulus” at all, it’s simply the need for the central bank to (in an ideal case, I suppose) mimic the free banking result or at least attempt to proxy what free banking would otherwise do.

    “And once and a while people do find $100 bills on the sidewalk.”

    The anti-EMH crowd often talk as if probability distributions don’t have tails. As a side point, I think one of EMH’s biggest problems may be its name.

    “George Orwell would have liked Hitchens”

    Hitchens did an Econtalk about Orwell. I haven’t listened to it yet. It’s probably good, though.

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    2. February 2010 at 10:48

    The Christopher Hitchens post left me in stiches (I was unable to breath properly for some time afterwards).

    The satellite image of the Koreas reminded me of these contrasting satellite images (Figure 1) of Eastern Europe taken in 1992 and in 2002:


    As you can see Poland, Hungary and Romania grew brighter but Moldova and the Ukraine actually grew dimmer.

    I was in Poland in 1991 visiting with relatives. My half-uncle’s mother lived in rural central Poland (near Milejów, my father’s birthplace). She had no electricity, no indoor plumbing and everybody got around by horse and cart (actually I found the dearth of unnatural noises to be very relaxing). Just based on the more recent satellite images things have certainly changed a great deal.

  9. Gravatar of Marcus Nunes Marcus Nunes
    2. February 2010 at 11:06

    Since the “link” is random, this should fit in, especially since it covers a topic that you have discussed recently:
    Maybe Mish does not subscribe to NGDP targetting strategy… and NGDP growth in Australia is a bit below the long term average.

  10. Gravatar of Contemplationist Contemplationist
    2. February 2010 at 11:35


    I would bet that the blogosphere would love to nominate you to be the new face of Chicago – strident, extremely well-informed, can take on Krugman, and libertarian.

    I’m still hopelessly in the dark about Japan. I thought that monetary policy is only effective in the short term, and has 0 effect in the long term? I mean how long exactly is the Japanese ‘short term’ ? Isnt 20 years enough for market expectations to acclimate to mild deflation? What exactly is the problem?

  11. Gravatar of Doc Merlin Doc Merlin
    2. February 2010 at 11:48

    “I’m still hopelessly in the dark about Japan. I thought that monetary policy is only effective in the short term, and has 0 effect in the long term? I mean how long exactly is the Japanese ‘short term’ ? Isnt 20 years enough for market expectations to acclimate to mild deflation? What exactly is the problem?”

    Fiscal policy however does have long term effects. Also, subsidizing companies removes market micro incentives for them to improve themselves, and this causes serious long term harm (and short term help) to whatever industry you subsidize. In addition to subsidizing their industries, Japan is also dealing with a demographic crisis.

  12. Gravatar of ssumner ssumner
    3. February 2010 at 14:30

    Philo, I can see why other pundits fall into the trap of assuming they have psychic powers. It is very seductive.

    David Stinson, That’s very good point about how language can throw us off.

    Still, I think people would hate the EMH no matter what it is called. Some have argued that “rational expectations” should be called “consistent expectations” and I think they are right. I.e. the expectations you assume people have should be consistent with your model.

    Mark, Those are really interesting pictures. I showed the Korea picture to my class before we studied economic development. I said “this is why economic ideas matter.”

    Marcus, I wish I could live in a reality where I had that guy’s confidence at predicting the future.

    Contemplationist, That has come up before, and you are correct. Japan did fine from 2003-07. The problem is that Japan went from near zero inflation to sharp deflation again late last year. Some people get confused because even when Japan is doing fine it doesn’t grow as fast as the US, because its population is now falling. Also Japan has some supply-side problems that cannot be fixed by easy money. But if I was doing ths blog in 2007 I would not have been arguing tight money was reducing output in Japan.

    Sometimes I refer to the long run, and point out their GDP deflator is 15% below 1994. That relates to the distinction between level targeting and inflation rate targeting. When prices fall you want a catch up period, as that will create positive expectations next time you have a liquidity trap. But that is a separate issue.

    I appreciate your support, but realistically it is Becker/Posner/Mulligan etc., who are the face of Chicago in the blogosphere.

    Doc, Yes, and Japan has had a very wasteful fiscal stimulus.

Leave a Reply