iCount

Professor Peter Morici points to the U.S. trade deficit as an enormous drag on the U.S. economy:

Simply, money spent on Middle East oil, Chinese televisions and coffee markers, Japanese and Korean cars can’t be spent on U.S. made goods and services, unless offset by a comparable amount of exports. Since U.S. imports exceed exports by about five percent of GDP, the trade deficit creates an enormous drag on demand for U.S.-made goods and services. Along with the credit crisis and resulting slowdown in new housing and commercial construction, the trade deficit is driving up unemployment.



Since 2001, the trade deficit has increased about $350 billion, and 3.9 million manufacturing jobs have been lost. China and other major Asian exporters of manufacturers subsidize their sales in U.S. markets by suppressing the exchange rates for their currencies against the dollar by intervening in foreign exchange markets. Were this problem resolved, the trade deficit could likely be cut in half, GDP would rise by $300 billion and about 2 million manufacturing jobs could be restored.

While I agree that "suppressing the exchange rates" does account for some of the problem, I would posit that it is not all the problem. Would allowing a free float in the exchange rates really make up for the difference in wage costs?

by Stormy (noreply@blogger.com) on October 11, 2008 01:44 PM

Tax Prof Blog notes the following about Gov. Palin's tax returns:

Tax Profs Agree: Gov. Palin's Tax Returns Are Wrong



Jack Bogdanski (Lewis & Clark) & Bryan Camp (Texas Tech) have independently reviewed the tax issues raised by the release of Gov. Palin's 2006 and 2007 tax returns and financial disclosure form, as well as the remarkable opinion letter issued from Washington D.C. tax lawyer Roger M. Olsen. Jack and Bryan conclude that there are serious errors in Gov. Palin's returns as filed and that she and her husband owe tens of thousands of dollars in additional taxes.

Jack Bogdanski, There's No Debate: Palins Owe Thousands in Back Taxes:

There is no serious debate (at least, none that has been brought to our attention) about the fact that at least the amounts paid for the children's travel -- $24,728.83 in 2007, according to the Washington Post -- are taxable. The campaign's tax lawyer has got at least that much of the law, and perhaps more, wrong. ... The Palins, who had their tax returns done by HR Block, simply got it wrong. And the fact that the state payroll office got it wrong, too, doesn't erase the Palins' unpaid tax liability.

Bryan Camp, A Brief Analysis of Governor Palin's Tax Returns for 2006 and 2007:

The release of an opinion letter by attorney Roger M. Olsen dated September 30, 2008, has stirred up the pot once again about the accuracy of Sarah and Todd Palin’s 2006 and 2007 tax returns. Not only that, but Mr. Olsen’s letter raises a couple of new issues.

This paper focuses on five problems: three raised in the tax returns and two new ones raised by Mr. Olsen’s letter. Here’s a summary of the five problems and my conclusions, for those who want to cut to the chase. My analysis will follow.

The Palins did not report as income some $17,000 that Governor Palin’s employer (the State of Alaska) paid her as an “allowance” for her travel. Can they do that? Yes, most likely.

The Palins did not report as income some $43,000 that the State of Alaska paid the Governor as an “allowance” for her husband and children’s travel. Can they do that? No, most likely not.

The Palins deducted $9,000 on their 2007 return, claiming it was a loss from Mr. Palin’s snow machine racing activity. Can they do that? Most likely not, but more info could make the deduction OK. If any of the above issues goes against the Palins they then risk getting hit with the section 6662 penalty for “negligence or disregard of rules or regulations.”

Can the Palins avoid the section 6662 negligence penalty by claiming that they reasonably relied either (a) on the W-2’s sent to them by their employer, which did not reflect either the $17,000 or the $43,000, or (b) on their tax return preparer H&R Block, or (c) on Mr. Olsen’s opinion letter dated September 30, 2008? The three reliance defenses are unlikely to succeed, but more info may make the (b) defense a good one.

Does Mr. Olsen have any exposure to sanctions by the IRS because of his letter? I believe Mr. Olsen’s letter probably violates 31 C.F.R. section 10.35. If so, he would be exposed to possible sanctions from the IRS Office of Professional Responsibility.

There is more from Tax Prof in other areas...it will be worth pointing out other posts.



ataxingmatter carries a thorough discussion with plentyof links to other sources.

by rdan (noreply@blogger.com) on October 11, 2008 09:21 AM

rdan



From the Toledo Blade:

It was an overlooked bombshell in breaking news cycles preoccupied with financial crisis, rescue plans, presidential politics, and a vice-presidential debate.



But what the Justice Department's exhaustive investigation and blistering report concluded about the enormous damage done to the department through improper politicization is far more troubling than even Sarah Palin in disjointed attack mode.



Investigators from both the department's Office of Inspector General and Office of Professional Responsibility found that political pressure did indeed drive the dismissal action against at least three of the nine federal prosecutors abruptly fired. At the time, then-Attorney General Alberto Gonzales insisted the individuals were all dismissed for inadequate performance, or failure to implement the President's law enforcement agenda.



But it appears the longtime pal and adviser to President Bush was lying through his teeth. Turns out the real reason some of the top federal lawyers were removed from the job, according to the Justice Department report, was that either the U.S. attorneys had the audacity to prosecute Republicans or because they failed to aggressively prosecute Democrats.



Either way, their behavior ticked off well-connected GOP politicians who had come to expect a politically loyal Justice Department. A couple of calls from powerful New Mexico Republican officeholders helped push former U.S. attorney David Iglesias out of a job. Evidently, the top New Mexico prosecutor was remiss in his duty to produce criminal charges against Democrats in the run-up to the 2006 election.





Another U.S. attorney in Missouri lost his post over a petty complaint from Republican Sen. Christopher Bond, and still another was bumped to make room for a protÈgÈ of White House political adviser Karl Rove. There was a pervading culture of partisanship/loyalty-above-all-else in the department, recalled one of the fired attorneys.



ìNot only were my colleagues and I not insulated from politics - as we should have been in our jobs as prosecutors - but we were fired for the most partisan reasons,î Mr. Iglesias said.



But it mattered not to the Machiavellian Bush Administration that justice was compromised with appalling political interference. It operates under the premise that the ends always justify the means.



Look at the pattern.



The administration used fear about nonexistent WMDs as a means to justify the ends of invading Iraq. It outed a CIA operative to punish critics, eliminated civil rights under the misnamed Patriot Act to expand executive authority, crafted energy policy with energy companies to benefit the energy industry, and allowed the subprime mortgage mess to perpetuate to generate obscene wealth for a few.



And now there are official findings of fact about the politically charged dismissals of U.S. attorneys conducted to satisfy a White House agenda. Scandal-weary Americans may be inclined to dismiss yet another administration disgrace, but what happened at the Justice Department is too big a deal to ignore.



We're supposed to be a country that requires ìequal justice under the law,î not tainted justice under political consideration. But that's what we had under shameless administration zealots like Mr. Rove and Mr. Gonzalez.



The former administration officials allowed the most invaluable assets of the Justice Department - its integrity and independence - to be jeopardized for political ends. They permitted wholesale politicization of the department, as one commentary put it, ìby subjecting new hires and sitting U.S. attorneys to rigid ideological litmus tests.î



Even though new Attorney General Michael Mukasey has appointed a federal prosecutor to investigate whether criminal laws were violated all the way to the Oval Office, the administration may luck out again. As time runs out on its lamentable tenure, the injustice it perpetrated on a once-venerated institution may go unpunished.



But before the next administration takes over, Americans need firm assurance that the rule of law will be applied fairly by the Justice Department. Never again can there be partisan allegiance required of incoming professionals, or political criteria that outweigh the legal and ethical.



The impartial administration of justice in this nation, its very credibility, was nearly destroyed by the tyrannical ambitions of a few.



How's that for big news almost buried?

by rdan (noreply@blogger.com) on October 11, 2008 08:34 AM

by rdan (noreply@blogger.com) on October 10, 2008 10:41 PM

by rdan (noreply@blogger.com) on October 10, 2008 10:39 PM

Slate has a good rundown of why Fannie and Freddie are symptoms of the current financial meltdown, not the cause.

To borrow from publius’ summation: essentially, “it’s not risky to lend to minority families, it’s risky to lend to rich white people.”

Taste the snark:

I await the Krauthammer column in which he points out the specific provision of the Community Reinvestment Act that forced Bear Stearns to run with an absurd leverage ratio of 33 to 1, which instructed Bear Stearns hedge-fund managers to blow up hundreds of millions of their clients’ money, and that required its septuagenarian CEO to play bridge while his company ran into trouble. Perhaps Neil Cavuto knows which CRA clause required Lehman Bros. to borrow hundreds of billions of dollars in short-term debt in the capital markets and then buy tens of billions of dollars of commercial real estate at the top of the market. I can’t find it. Did AIG plunge into the credit-default-swaps business with abandon because Association of Community Organizations for Reform Now members picketed its offices? Please. How about the hundreds of billions of dollars of leveraged loans—loans banks committed to private-equity firms that wanted to conduct leveraged buyouts of retailers, restaurant companies, and industrial firms? Many of those are going bad now, too. Is that Bill Clinton’s fault?

Crossed everywhere.

by tgirsch on October 10, 2008 08:14 PM

Robert Waldmann



had a post entitled "How did Lehman manage That?" asking how Lehman's debt could sell for about ten cents on the dollar. A commenter told me I was confused and that Lehman's accountants would have warned investors if there was anything, along the line of the things I imagined, lurking in their detailed balance sheet. I claim that the argument must be that Lehman debt couldn't possible sell for 10 cents on the dollar as anything which can cut the value of assets by ten or increase the value of debts by ten (or one down root ten and one up root ten or whatever) would have been flagged. That is Lehman didn't do that.



Lehman managed that.



There was something lurking somewhere in their assets and their liabilities. I have no idea if it was self CD insurance (my fantasy). Whatever it was any competent and honest accountant should have flagged it. Now I don't blame any particular accounting firm (which you note as remained nameless) because I think that financial innovation has made responsible accounting impossible. No one is competent to audit the books of modern financial operators.

by Robert (noreply@blogger.com) on October 10, 2008 04:25 PM

By Stormy



Gary Lammert's prediction of a great crash may have been off by two plus years. Nonetheless, this economic fractalist, kept telling us to "expect the unexpected."



While he spoke of vast fractals about to culminate in one great macroeconomic implosion and while his fractals seemed strangely divorced from anything I could understand, when he departed from fractal-mania, he was absolutely on target regarding the problem: Debt, debt, debt.



Here is his latest:

This nonlinear transformation will correspond to and represent a sudden implosion of the money supply. It will correspond to the timing of a credit collapse of debt that cannot be repaid, cannot be rolled over, cannot be remedied by further federal government debt, and will correspond to the realization that state governmental services that can not be maintained in the face of collapsing property values and property taxes and in the face of a rapidly collapsing private sector of the real economy. 9/22-23/22-23 is the daily fractal decay sequence that will rapidly introduce a realization that the Word's greatest macroeconomic depression has arrived.

"Debt that cannot be repaid, cannot be rolled over, cannot be remedied by further federal government debt..."



I admire a good writer--and Gary's baroque, yet balanced phrasing, is always a delight. I must confess that I am partial to those who handle the language with exquisite precision--a mark of a fine mind, I always thought.



Whatever you think about fractals or whatever you think about Gary's making predictions two years too early, you should look carefully at his substance; forget the fractal-mania. Here is Gary three years ago:

The underperformance of the premiere summation American Index, the Wilshire 5000(TMWX), reflects the disproportionally negative integrative burden on the US macroeconomy of its valuation fractal determining elements - total quantitative personal, governmental, and corporate debt, the latter of which has become much more expensive to service under some behemoth's new junk bond status; unpayable private pension funds soon to assumed by American taxpayers- of formerly great, soon to be bankrupt, US corporations; expensive war cost which have historically withered every prior major overextended world power, record lack of US collective personal savings used as a base for fractional lending, exhausted consumer discretionary spending running up against near record energy costs; outsourced high paying jobs and current wages not maintaining pace with inflation and debt servicing; siren enticing and predatory unregulated lending practices leading to asset consumption by a new group of extremely marginal buyers; rising short term interest rates; the cresting of valuations of the US ATM - equivalent asset, i.e., housing overvaluation; and recent massive forward consumption of corporate profitless US automobiles akin to a python eating its semiannual one time big pig bolus meal.

I would be the first to say that his fractals need a lot of work if they are going to be really predictive. But what economist is ever predictive? Only God could write an equation accurately predicting economic events. Strip out the fractals.



In one mighty baroque sentence, each item in the series hanging delicately and clearly after the last and each appositive carefully crafted, he manages to collect almost all the issues that have now bubbled to the surface. Perhaps the very exercise of doing fractal economics gave him insight, however murky.



In December, 2005, he warned that a crash might be coming:

Macroeconomic turning points are not caused by changes in mass psychology. Rather mass psychology is a dependent variable that is causally changed by the transitioning major economic conditions that exist and characterize the asymptotic saturation level and the money creation peak area of the cyclical complex debt-money-asset macroeconomic system. It is at this peak transition saturation and inflection area that the collective ongoing wages of the masses of earners can no longer support additional debt load to acquire overvalued and overproduced assets. It is at this point that retrenchment and devaluation occurs. It is here where fractal growth levels off or reaches a zenith point ....and thereafter decays usually with an incipient nonlinear deflationary crash..... Mass psychology then follows the macroeconomic mechanistic debt liquidation - asset deflation optimal fractal decay evolution.

On April 21, 2006, he issued his first of what were to be the first many warning: "More Than Ever... Expect The,,,, Very Unexpected .... The Unbalanced Global Macroeconomy ...... And The US Long Term Debt Market."



Gary nailed the problem, put it up there for everyone to see.



Unfortunately, many suspected that Gary saw fractals as causative, not merely descriptive.



Commentators laughed at his warnings, scorned his fractals, and finally left him to work alone and undisturbed. Put a comment up on his website and you will get no reply. (He did change websites.)



Although he framed the picture perfectly, I think finally he himself had to question whether even fractals could be perfectly predictive. (Off by a couple of years...oops.) In truth, I am not sure what he privately thinks about the fractal science he relentlessly pursues.



If publicly he had omitted the fractals--kept them on his working bench, using them only as his private tools--and then offered more conventional rationales of why the big picture he saw was so dangerous, he might have done better.



Instead, he pushed the core argument back to fractals, a mistake, I think. In trying to prove a mathematical point, he failed to deliver his message. Sometimes I suspect he sees the world as one giant mechanism, rolling along fractally-governed, predetermined lines. While this may be true, that vast fractal has to be beyond comprehension.



Be all this as it may. I find him to be one of the most fascinating and most interesting minds on the Internet.



Too many of us sound like each other. Gary stands brilliantly apart. Unlike many of our leaders, I am sure recent events have not surprised him.

by Stormy (noreply@blogger.com) on October 10, 2008 03:36 PM

by Tom Bozzo



From my inbox this morning, Nouriel Roubini says, "The world is at severe risk of a global systemic financial meltdown and a severe global depression." (Tell me something I don't know.) Go and read the whole article, but here's Roubini's plan for immediate action. Is this 'listen to the guy who's basically been right all along' time?

• Another rapid round of policy rate cuts of the order of at least 150 basis points on average globally;
• a temporary blanket guarantee of all deposits while a triage between insolvent financial institutions that need to be shut down and distressed but solvent institutions that need to be partially nationalized with injections of public capital is made;
• a rapid reduction of the debt burden of insolvent households preceded by a temporary freeze on all foreclosures;
• massive and unlimited provision of liquidity to solvent financial institutions;
• public provision of credit to the solvent parts of the corporate sector to avoid a short-term debt refinancing crisis for solvent but illiquid corporations and small businesses;
• a massive direct government fiscal stimulus packages that includes public works, infrastructure spending, unemployment benefits, tax rebates to lower income households and provision of grants to strapped and crunched state and local government;
• a rapid resolution of the banking problems via triage, public recapitalization of financial institutions and reduction of the debt burden of distressed households and borrowers;
• an agreement between lender and creditor countries running current account surpluses and borrowing, and debtor countries running current account deficits to maintain an orderly financing of deficits and a recycling of the surpluses of creditors to avoid a disorderly adjustment of such imbalances.

by Tom Bozzo (noreply@blogger.com) on October 10, 2008 12:01 PM

One Salent Oversight notes:

-----------------

Summary:

-----------------

Low savings rates are the main cause of the current crisis. Moreover,

the previous recession caused by the tech boom was also a result of a

failure to save. The US economy (and others) have discouraged savings,

which has resulted in an overinvestment in high risk ventures (such as

asset price bubbles).



Had savings rates been higher from the early 1990s onwards, both the

tech boom and bust and the subprime bubble and current crisis would have

been averted.



The best way to reward the market for saving is to have higher interest

rates. Ensuring that real interest rates remain positive at all times

and using monetary policy to ensure absolute price stability (neither

inflation nor deflation over the course of the business cycle) is the

best solution in my opinion.

-----------------

Quotes:

-----------------

America's (and the world's) economy created this crisis because

something within the system created the conditions that led to this

disaster. This is important to realise because, when the time comes to

stop reacting to daily crises and start examining why the failure

occurred, there will arise a series of solutions that will help prevent

a similar event occurring again.



It is not as though market capitalism has failed - as far as I am

concerned market capitalism fails all the time. Abandoning capitalism

for, say, Communism is about as judicious a decision as eating pebbles

to cure an infection that has developed a resistance to antibiotics.



Put simply, the current crisis was caused by people with lots of money

who invested it in the wrong thing. The people thought they were doing

the right thing because the numbers looked right, the ratings agencies

gave AAA ratings, the majority of respectable financial analysts said is

was the best thing to do and the Joneses next door were making a killing

from it. Herd behaviour? Yes. But herd behaviour that had careful

planning behind it.



The structural problem resulted in the market investing unwisely.

Investments were made in particular areas (shares, property) that seemed

wise at the time but ended up going bad. While we may expect high return

investments to be highly risky, the same could not be said for low

return investments - which are now in free-fall too.

-----------------

Cash ought to be the safest form of investment. There has to be some

sort of low or zero risk investment that people can make. It's not wrong

to invest in shares or property - it's just important that a percentage

of surplus cash remain in cash form.





Having money tied up in cash is not very sexy. The interest you gain on

it is nowhere near as potentially rewarding as a higher risk investment.

Yet the issue is not whether cash investments replace other investments

- but having a healthy mix of the two.



Cash investments are meant to be safe. They are not meant to reduce in

value. If you have $10,000 sitting in a cash management trust you are

not meant to watch it drop down to $9000. Any cash you have sitting in

an account that remains uninvested in anything else should, at the very

least, have the same value when you withdraw it as when you deposited it.



And cash - savings - is useful as a "safety net" when things go wrong.

Everyone knows the importance of having more cash flow available than

what you need normally because of the danger of unforeseen events. The

best place to access this cash flow is from interest-bearing accounts

that you have saved up over time (rather than, say, maxing out your

credit card).



Yet here is where the structural problems come in: Americans (and many

others) did not invest their cash surplus in savings but put them into

risky investments that have since lost money. This was not a moral

failure, but a practice that the entire economy encouraged.

-----------------

Had (positive real interest rates and absolute price stability) been the

Fed's policies from the early 1990s onwards, there would not have been

either the tech boom and bust nor the subprime mortgage crisis and

today's credit crunch. GDP growth during this period would have been

lower, certainly, but considering the potential cliff that GDP is likely

to plummet in the present, this would have been a better outcome.

Moreover, savings rates would have been high and credit market debt

would have been more sustainable.



I honestly don't know what is going to happen to the world economy over

the next day, month or even year. What I do know is that, once a

recovery is underway, new policies and paradigms will need to be

explored to prevent this financial horror story from occurring again.

Increasing household savings is one major step in this direction - and

this is best handled by using interest rates to affect broad market

behaviour rather than creating legislation to force people to save.

-----------------

by rdan (noreply@blogger.com) on October 10, 2008 09:03 AM

Robert Waldmann



What isn't going on in financial markets ?



There are various theories of the financial crisis which suggest simple solutions and have the only defect that they are fantasies.



1) The only problem is mark to market accounting.



Market prices for mortgage backed securities (MBS) are very low because of a panic. Banks are required to list assets on their balance sheet at market prices. Banks appear to have negative equity (debt greater than assets) because of this silly rule. This caused the crisis.



This seems to be the theory of a weird left right alliance including Rep Darrel Issa (R Calif.). It is based on the idea that ideologue Congress persons can price assets better than professionals. The assets include MBS but also debt and shares of banks. This is fairly clearly a wish fulfillment fantasy. The idea is that if we resolutely say everything is fine, everything will be fine.





2) The problem is adverse selection in the MBS market and mark to market accounting.



Here there is a theory better than "I know best" for why MBS market prices are below the average hold to maturity value of MBSs. MBSs are worth less than was thought a year ago, but some of them are worse than others. For one thing, the value depends on the standards of the initiator of the underlying mortgage e.g. are they liars' loans or normal loans. Owners of such MBSs know more about them than potential buyers. Therefore, the stuff that is for sale is the most toxic of the toxic securities. Therefore the market price is the price for the worst of the worst of MBSs. Therefore it would be irrational to sell anything which is only semi toxic. There is a separating equilibrium with low volume of trade and very low prices. Applying such prices to all MBSs understates their value.



Now without irrationality this shouldn't matter. People who know that the stuff for sale is the worst of the worst should also know that the other stuff is better no ? Here market participants are required to be sophisticated when they buy and sell MBSs and unsophisticated when they read balance sheets.



3) The problem is mark to market, adverse selection and capital controls.



Ah now a regulation which is definitely unsophisticated. The rule is that Assets minus debt divided by debt must be over some number. If this rule is applied along with the principle that assets are marked to market it can cause two equilibria one with high asset prices and non binding capital controls and one with low asset prices and binding capital controls.



Here the problem is that all entities must be equally exposed to MBS risk and initially equally close to the capital requirement. In the real world different entities have different capital requirements. In particular capital requirements for investment banks (set by the SEC and relaxed in 2004) are much looser than capital requirements for commercial banks. Also hedge funds' capital requirements are set by their counter-parties and are (if this is still true) about 2%. Plus Warren Buffet had $5 billion to spare. Note that the firms with the most flexible capital requirements are the ones that no longer exist. A problem for the theory.



More importantly,

binding capital requirements should cause a flow of assets from the firms with binding requirements to the ones with some slack. This flow would, among other things, make markets thick, volume high, markets unfrozen and adverse selection drowned in the flood of liquidation by firms with binding capital requirements (note the argument works fine and the metaphor isn't even mixed). It is very hard to have a market frozen by adverse selection with market prices below the value of the average asset causing, via mark to market and regulations some firms to have to liquidate large amounts of assets. Firms that have to liquidate eliminate the separating only the worst of the worst is for sale equilibrium.



If agents are forced to sell assets at fire sale prices any agent who isn't in the same bind should be buying at fire sale prices. It's just not true that all entities in the world have binding capital controls. The explanation is nice in theory, but doesn't fit the facts.



Now all these theories would imply that the original Paulson plan could work without a huge transfer from the public to banks. However, they don't make sense.ù



Furthermore they are totally false for two more simple reasons which I put after the jump for no particular reason.









The theories assume that banks actually mark assets to market. They are supposed to, but they don't. Page 81 of the September 20-26th Economist notes that at the end of 2007 Bank of America, Citigroup, HSBC, JP Morgan, Lehman Brothers, Morgan Stanley and Merrill Lynch marked less than half of their assets to market (which UBS Credit Suisse, Duetsche Bank and Goldman Sachs market more than half of their assets to market with Goldman Sachs over 75%). Sorry no link. I am working from uhm ink on deceased trees. Note first that uhm not quite all assets are marked to market. Note also which investment banks are still independent firms.



Finally, if markets are frozen and the market price makes a huge difference to balance sheets, it is easy and almost legal to manipulate the market price. Bank A can tell bank B "we will buy 1% of your toxic sludge for twice the current price if you buy an equal amount of our toxic sludge." Then both can mark to that agreed price and make their balance sheets look fine (this is the favorite technique of Italian soccer teams who don't trade players. Each buys the contract of a player for the other and they state an absurdly high price. They sometimes run out of cash with fine looking balance sheets). Now transactions which count as the market to mark too are supposed to be arms length, but no one is going to be picky in the middle of a crisis.



In fact, such a transaction would work without fraud if adverse selection were really a problem. Bank A could say "I will buy some of your MBSs but I pick which ones (at random)" that way, the expected value would be the average value of MBSs not the value of the worst of the worst. Still not quite arms length, but not obviously fiddling the price, since it would be a sensible transaction even if balance sheets didn't matter.



Now some might think that the idea that fraudulent prices can be created when markets freeze is a fantasy. I think it has happened. The assets were long term calls options on European stock indices. Long Term Capital Management was short these assets. When it seemed fairly likely that LTCM would fail and be liquidated and when they had to liquidate to keep the balances of their REPO accounts above zero (they were excused from the 2% rule by counterparties) these assets suddenly became very risky and the market froze up. The market price became the list price chosen by brokers who knew that no one was buying or selling. The same brokers were LTCM counterparties. The list price of the options became absurdly huge. The counterparties were about to gain the right to seize the extremely valuable LTCM short positions (can seize when the mark to market value of LTCMs account at a bank is negative even if the hold for a month value is huge). It is alleged, without proof, that investment bank brokerages listed the absurd price then secretly traded at a reasonable price. Fact is that the market price was absurd and it was absurd in a direction helpful to the investment banks.



The crisis ended when the President of the New York Federal Reserve Bank, William McDonough told the investment banks to cut the crap and, in effect, divide up LTCM equally among them. It is very bad for an investment bank to anger the New York Fed. Bear Stearns was the only investment bank which refused to co-operate.

by Robert (noreply@blogger.com) on October 10, 2008 08:52 AM

rdan

(h/t reader Jack)



The NYT reports:

Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan

Multimedia



Punit Paranjpe/Reuters

A LINGERING GLOBAL INFLUENCE An interview with Alan Greenspan, nicknamed the Oracle, was shown live outside the Bombay Stock Exchange last month.





George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”



And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

More of this story coming in another post.

by rdan (noreply@blogger.com) on October 10, 2008 08:44 AM

So as I’m sure you’ve read elsewhere, it seems that McCain’s latest tactic is to try to hit Obama for his past association with William Ayers. I can understand why McCain wants to attack Obama, but I really don’t expect this to work. To explain, I’m going to crib heavily off Malcolm Gladwell’s excellent book The Tipping Point.

In order for the Ayers allegations to “tip” and become widely accepted and talked about, according to Gladwell, there are three aspects that need to be met:

1. The Law of the Few: Ideas and other social phenomena are largely spread by a very few people.
2. The Stickiness Factor: Whether or not something like this takes off depends on how “sticky” it is.
3. The Power of Context: Any idea won’t “tip” unless the context — social, political, geographic, or otherwise — is ripe for it to do so.

I think the Ayers allegations will fail to “tip” because they fail to meet at least the last two of those three criteria.

For starters, the idea just plain isn’t sticky. Despite the McCain camp’s attempts to paint Obama as an unknown commodity, he’s been in the news almost constantly for the last two years, and he showed up on the public’s radar as early as 2004. Thus, he’s pretty well known by the general public, at least as well as dozens of other political household names. By now, most people — even undecideds — have already formed a lot of opinions about him, so attempts to redefine him in the eyes of the general public are going to be very difficult to pull off, unless they fit in with those already-formed opinions. Along that vein, even if the association with Ayers were deeper than appears to be on the surface, to the casual observer it just won’t make sense. When Obama gives speeches in public or appears in debates, he just doesn’t come across to most people as some kind of anti-American radical. If there’s a problem with Obama’s demeanor, it’s that he’s level to the point of being almost boring. The context just isn’t there. To convince the general public that Obama “pals around with domestic terrorists,” they’re going to need a hell of a lot more evidence than what they have right now, and/or a serious assist (e.g., misstep) by Obama. I don’t expect they’re going to get either one. And almost as importantly, raise your hand if you had even heard of William Ayers before this hubbub hit the first time around. I know I didn’t (I was only vaguely aware of the Weather Underground), and I suspect that’s true of most Americans.

And that “first time around” bit brings up another, even simpler way to know that the Ayers ploy isn’t going to work. It’s been tried already, by Hillary Clinton, and it has already failed. So in addition to not having much traction, it’s already yesterday’s news.

Now contrast that against some of the allegations made against John Kerry in 2004: that he was a “flip flopper” and a “war criminal.” Those smears stuck, because the context was already there for them to stick, and because Kerry himself helped make them stick. With respect to the “war criminal” allegation, there was already a good deal of resentment against Kerry, particularly among veterans, left over from his Winter Soldiers testimony and his activities with Vietnam Veterans Against the War. You had a ready-made army of foot soldiers out there willing to spread the message. And, of course, on the flip-flopper side, there was the infamous “I actually did vote for [it] before I voted against it” gaffe. Serious people, and anyone who knows how Congress works, knew what he meant, but he gave his detractors the perfect ammunition to make that attack stick. I just don’t see Obama making a similar mistake, and I don’t see that the context is already there among undecideds to make these attacks against him stick.

I expect that attacks over Reverend Wright would gain a bit more traction, but still would ultimately prove unsuccessful because, as mentioned above, it just doesn’t “fit.” To anybody who’s heard Obama’s speeches and seen him in the debates, he just doesn’t come across as a racist, anti-American radical. Guilt-by-associaton attacks really only work when the associations make sense to people, and to most, Obama seems nothing at all like the type of person who ascribes to the more fiery sermons of Rev. Wright.

Now that’s not to say that nobody’s going to buy into this stuff. Of course some will. But the overwhelming majority of those already weren’t going to vote for Obama under any circumstances anyway. So I just don’t see how this is going to help McCain. At this point, among the majority of Americans, he’s not going to be able to make it stick, and he’s just going to look desperate.

by tgirsch on October 10, 2008 04:37 AM

It’s hockey season, dammit, and the Leafs spoiled the Red Wings’ home opener. The Leafs are supposed to be in a down, rebuilding year, but they really took it to the Wings tonight. They were really aggressive, and never did the annoying “sit back and protect the lead” thing they were so famous for over the last two years.

Of course, it’s only one game, and if not for an outstanding performance by Toskala in net, the Wings probably win by three. But still, it’s nice to see the Leafs actually beat a quality team, and to do so with more than just luck. Here’s hoping they continue to surprise.

Tomorrow, it’s Kevin’s turn, and from the way all the analysts were singing the Blackhawks’ praises tonight, I fully expect them to be doomed.

(Oh, and the Phillies beat the Dodgers, but baseball was so last week…)

by tgirsch on October 10, 2008 04:02 AM

spencer

National debt now exceeds 10 trillion dollars







Update from rdan:

by spencer (noreply@blogger.com) on October 10, 2008 03:26 AM

Palin's accent past and present

by rdan (noreply@blogger.com) on October 10, 2008 01:39 AM

by reader Denis Drew



To over-price lower skilled labor or to under-price higher skilled labor -- is that the question?



Santa Fe’s minimum wage raise to $8.50/hr (now $9.50/hr, soon indexed) lost lower skilled workers a significant number of jobs (8.3%, adjusted for something – nominal employment rose) many to higher skilled replacements, according to a think tank committed to protecting the working poor from higher wages.



Could such pay/employment trade-offs lie in the future as America catches up wages with productivity growth?



Simple (ask any minimum wage earner) job/wage resolution:

1) If lower skilled workers lose a percentage of jobs to a higher minimum wage (or any broadband wage increase), they should earn more over a lifetime because they will earn more when they are working ($3.35/hr more in 2005 Santa Fe!) – which should be most of the time.

2) Higher skilled workers would be earning enough extra to pay a bit more in taxes to fund some cover for the lower skilled if needed.

******

Quick lopsided income tutorial:

At $186,000/yr, the average family income reported by the Census for top 20 percentile families may sound out of proportion – your typical primary care provider earning well below that these days – but it is about what we should expect if family income growth matched per capita income growth reported by the same Census: doubled since 1968, when $95,000/yr was the top 20 average.



What is out of proportion is the Census reporting 100% per capita income growth along with 67% (overall) family income growth since 1968 – a 33% family shortfall? The presumed missing 33% -- presumably hidden by the Census practice of “top coding” income over $1 million per family out of its survey -- would add $111,000 to the top quintile average – presuming family income grew exactly the same pace as per capita income since 1968.



Family income may have grown closer to 90% over those years: still leaving $85,000 hidden by the top code (not $111,000): still making for 185% top quintile growth (not 212%), still comparing lopsidedly to the 12%, 22%, 37% and 53% eked out by lower quintiles (much due to more members working more hours). If we add enough dollars to lower quintile 2007 incomes to bring them into line with 90% growth: the four lower additions total up to the lopsided dollop of top income, dollar for dollar (by mathematical definition).



If we could somehow throw a reset switch to share around 2007’s doubled personal income according to 1973's distribution, lower four quintile wage earners would remain in the same relative (skill/pay) bargaining positions vis-à-vis each other in the job market – making for little expectation of more unemployment -- ditto for shaved-income top earners: my “Chinese snake dance” theory of labor price and employment. :-)

******

It is not under-priced labor -- in the sense of people here and overseas willing to work for less -- that is dragging down American wages and causing whole-segment unemployment (see very many American born cab drivers or fast food workers lately?). It is the under-pricing of labor that is causing America's Great Wage Depression (my term covering both lost pay and lost jobs).



If Australia had a 1000 mile land border with China – open, Mexican-American style – Australian labor would need powerful wage support legislation to maintain its native pay and employment at maximum levels: a solid minimum wage (1/2 the “real” average wage -- USA "real" meaning $25/hr; reported AWI up only 20% since 1968) plus the most up to date collective bargaining structure known as sector-wide labor agreements (not the card check attempt to wring one more drop of life out of dead law -- Australian could actually consider sector wide now that its once effective if eccentric wage support structure has badly eroded).



America's is the only modern OECD labor market facing the double whammy of globalization and yearly immigrating millions; and yet remains the only modern OECD market seriously devoid of legislative defenses against either outside low wage expectations or against the home grown race to the bottom (recently introducing whole-segment unemployment to middle class, would-have-been supermarket employees).

_____________



by reader Denis Drew



Update by Denis: re-write is pretty good...

by rdan (noreply@blogger.com) on October 10, 2008 12:24 AM

By Stormy



In a reply to a recent piece by Michael Mandelbaum on the Council on Foreign Relations website, I posted the following comment (which is still awaiting moderation):

How globalization has been structured is the issue.



In this case, with one debtor nation (the U.S.) depending primarily on its financial wizardry to carry it forward, while hollowing out its manufacturing center; and emerging nations taking up the slack in production of goods and services–all resulting in enormous disequilibria: trade/debt.



To keep the Western consumer buying and not producing has created fertile ground for the kind of disaster we are witnessing.



I strongly suggest that those who praise globalization regardless of how it is structure look more carefully at its crafting.

Mandelbaurm makes two points worthy of addressing:

1. Where some form of globalization exists, "there is no alternative."
   
   
2. The opponents of globalization will exploit "the most potent of all modern political ideas — nationalism"

Nationalism for Mandelbaum includes, I am sure, the raising of tariff barriers. So far, that has not happened, nor will it happen, I suspect.



In short, he makes no connection between the current crisis and globalization. Once the current crises is over, everyone can go back to business as usual. Frankly, there will be no "business as usual."



In addressing this point, I would like to examine IBM as a case study: its approach to offshoring and its recent quarterly report. IBM is doing well, with "ample cash flow from its operations and $9.8 billion in the corporate treasury." Third-quarter net income is up 22% with an expected 22% increase over 2007.



On first glance, it would seem that Mandelbaum is correct: There is no connection. Once the liquidity crisis is addressed, there will be business as usual. To understand how this may not be, in the long run, we should look at how IBM has positioned itself globally.



Like many multinationals, for the past four or five years has pursued an active and energetic policy of off shoring. While this has enabled it to weather the current storm for the short run--building up that sizable $9.8 billion corporate warchest--, it has done so at the expense of providing the American worker with the means to meet growing debt and growing cost of living and of providing America an economic engine to reconsitute itself once the financial crisis is settle.



And just how enegetic has off shoring been for the likes of IBM and other multinationals?



In 2003, IBM began moving 4,700 programming jobs overseas. Managers were instructed to move jobs to China, India, and elsewhere where technical talent was high and labor costs were low. In IT, IBM was but a tip of the iceberg. Other IT firms were following suit: Hewlitt Packard, Intel, Apple, to name but a few.



In 2003, IDC foresaw "a quadrupling to $46 billion by 2007, or 23 percent, of total tech spending. India, China and Russia stand to gain the most from the IT spending trend. Forrester Research projected that nearly 1 million U.S. IT jobs will move abroad in the next 15 years -- a forecast that greatly troubled union organizers and politicians with IT firms in their districts.



In 2006 and again in 2007, an IBM shareholders placed the following proposal on the stockholder meeting:

The stockholders request that the Board establish an independent committee to prepare a report evaluating the risk of damage to the Company’s brand name and reputation in the United States resulting from IBM’s offshoring initiative and make copies of the report available to shareholders of the Company upon request.

Both times, the IBM Board of Directors recommended a "No" vote on the proposal. Both times the proposal was defeated.



In 2003, the full scope of IBM's plans for off shoring were laid bare. I strongly recommend readers to use this link; for the rest, here are some snippets. Tom Lynch, Director of Global Employee Relations, made the following remarks:

[When]we saw trade barriers come down through things like NAFTA, we moved from the US to other countries a whole lot of manufacturing and from generally high-cost labor areas to lower cost labor areas. In the1990s that focus was primarily in the are of manufacturing.



...from now until the year 2010 and beyond; we're looking at an emerging trend now to move services offshore, in addition to manufacturing operations, some functions that would be included in those services would be engineering, Harry mentioned software development, certainly chip development as well. Services like accounting and financial services.



US workers or workers in a country where the work is being relocated from, will, in many cases, be asked to train their replacements.



If we're moving work to China, the Chinese management team and maybe some Chinese workers will have to come to affect the transfer of knowledge needed to do that. That's going to raise a lot of tensions as you're training someone to do a job that you know is no longer going to be yours at the end of some fixed period of time.

But, by 2003, the advantages of NAFTA had begun to wane.

Now Mexico doesn't look as cheap as, you know, some other labor markets, as well. So it's a real dynamic marketplace out there. Each of you, I would urge, work with your folks to see what makes the most sense in terms of your own businesses and your own needs. But clearly the dominant countries that are being talked about are India, China, and generally speaking, Eastern Europe.

Tom realized that governments might complain.

Government reaction? It is hard for me to imagine any country just sitting back and letting jobs go offshore without raising some level of concern and investigation, and I think we're going to see some of that in the countries where jobs are moving from.

It's hard to fight globalization. Governments, I think are going to find it is fairly limited as to what they can do so unionizing becomes an attractive option. And for a lot of reasons, there are indications that union organizing is going to become more aggressive over the coming months.

Well, with NAFTA and the WTO strongly behind this kind of globalization, the cat was out of the bag, so speak. At this point, government or union intervention may be futile.



Tom put the matter succinctly when he said:

I think that we're at the stage, frankly, where for many of our managers, the answer is "offshoring—what is the question?" So we're really, the approach and the strategy here really has to crystallize as we decide what it is that is going to be moved, and what are the implications of doing so.

In this fashion was globalization structured. To say the least, the structuring of globalization, despite all its hoopla, was designed to benefit a select few. Corporations did not consider anything other than cheap labor. No, they did not think of the poor Chinese or the poor Russians. That kind of argument was window dressing for economists: How the world would be united through trade and poverty abolished.



How then do we make the leap to the current crisis? First, enormous wealth flowed out of the U.S. and into the private coffers of our multinationals. That flow was directly responsible for the obscene bonuses and incomes that CEO's earned, of which we now complain. That flow placed ever-greater strains on actual financial resources within the U.S. To compensate for stagnant wages, credit in every form--however leveraged or ill-designed--was extended. America had become a debtor nation of staggering proportions. As debt increased, so too did the trade deficit. Financial institutions, which already had made significant monies investing overseas, attempted to keep the party going at home through questionable lending practics.



But America already was in decline; the flow of jobs to third world emerging economies already was taking its toll on America. The flow of jobs sent unimaginable wealth, not only to corporate CEOs, corporate coffers, and to third world managers who oversaw third world labor but also to the coffers of third world governments, such as China The preponderance of that wealth did not go to lowly employees.



As long as labor was kept cheap, the game was on. In short, the disparity of wealth between those at the top and those at the bottom increased globally, here as well as in China and elsewhere.



What ruled the day? Managerial talent at the top that could exploit every niche in the structure of globalization.



And what happens when finally the credit game is over, when this finely honed corporate machine exhausts the consumer, when it has bankrupted us all? (By the "corporate machine" I mean not only producers of products and services to support those products but financial corporations as well.)



I have said it repeatedly, and I will say it again: How globalization was structured provided fertile ground for the present collapse. More care should have been taken. Instead the floodgates were completely and suddenly opened. Instead of a trickle that we all might handle, we were greeted with a torrential flood, from which there is now no escape.



Let me return to widen one Mandelbaum quotation, giving you its full context:

(World War II demonstrated that while manufacturing weapons can increase productive economic activity, actually using them has the opposite effect.) As Mrs. Thatcher might put it, where some form of globalization is concerned there is no alternative.

In Mandlebaum's view, any economic activity connected with globalization is worthwhile, as long as it increases "productive economic activity," even if that activity is manufacturing weapons.



Globalization however it is structured is a primary good, a good that transcends any questions of detail. This is the mantra we have endlessly heard.



To which I say: the HOW is everything. The race is not to the swiftest but to he who most carefully plans. Globalization is important. But avoiding sudden dislocations in wealth, trade, debt, and credit must be major considerations.



Maybe we will learn better the next time.

by Stormy (noreply@blogger.com) on October 09, 2008 07:03 PM

rdan



Hat tip K Harris for this link to National Public Radio and this thought as well regarding Tom's post below:

The issue at hand is that Treasury resisted the notion of equity in return for aid all the way along, and now is putting out the word that equity in return for aid is among the favored notions. Over the weekend, word was that lobbyists were toiling away to prevent the equity element from being used, but now the NYT characterizes equity for aid as among the favored notions on Wall Street.



The NYT is being used to announce a change in attitude toward this provision of the law. Treasury and banks are coming to realize that the strongest form of aid - new capital - is what is needed, since a very large dose of a lesser form of aid failed to work.



By the way, I gave youse guys a link on this on Sunday night. "This American Life" covered CDOs, CDSs, and equity infusion, and did a pretty good job. The point was that the authority was in the bill, but that banks were working hard to keep that authority from being used. That has now changed. That is why the NYT is being used to make this aspect of the bill better known. Treasury is about to use the equity authority.



By the way, the NYT keeps using the word "banks" but whatcha wanna bet an insurance firm or two gets some fresh equity?

k harris | | Email | 10.09.08 - 11:31 am | #

by rdan (noreply@blogger.com) on October 09, 2008 05:18 PM

by Tom Bozzo



Here's a funny thing about reporting on the bank-recapitalization approach to the TARP. This is (almost) the NYT lede:

Treasury officials say the just-passed $700 billion bailout bill gives them the authority to inject cash directly into banks that request it. [emphasis added]

The AP hears the same on explicit condition of anonymity:

An administration official, who spoke on condition of anonymity because no decision has been made, said the $700 billion rescue package passed by Congress last week allows the Treasury Department to inject fresh capital into financial institutions and get ownership shares in return.

Now I suppose any law is theoretically open to interpretation, but this is a little ridiculous. The more-or-less plain text of the law is that the main limitation is that whatever the Treasury does has to involve a Troubled Asset transaction. Here's section 113(d) of the Emergency Economic Stabilization Act of 2008:

(d) Conditions on Purchase Authority for Warrants and Debt Instruments-



(1) IN GENERAL- The Secretary may not purchase, or make any commitment to purchase, any troubled asset under the authority of this Act, unless the Secretary receives from the financial institution from which such assets are to be purchased--



(A) in the case of a financial institution, the securities of which are traded on a national securities exchange, a warrant giving the right to the Secretary to receive nonvoting common stock or preferred stock in such financial institution, or voting stock with respect to which, the Secretary agrees not to exercise voting power, as the Secretary determines appropriate; or



(B) in the case of any financial institution other than one described in subparagraph (A), a warrant for common or preferred stock, or a senior debt instrument from such financial institution, as described in paragraph (2)(C).



(2) TERMS AND CONDITIONS- The terms and conditions of any warrant or senior debt instrument required under paragraph (1) shall meet the following requirements:



(A) PURPOSES- Such terms and conditions shall, at a minimum, be designed--



(i) to provide for reasonable participation by the Secretary, for the benefit of taxpayers, in equity appreciation in the case of a warrant or other equity security, or a reasonable interest rate premium, in the case of a debt instrument; and



(ii) to provide additional protection for the taxpayer against losses from sale of assets by the Secretary under this Act and the administrative expenses of the TARP.



(B) AUTHORITY TO SELL, EXERCISE, OR SURRENDER- The Secretary may sell, exercise, or surrender a warrant or any senior debt instrument received under this subsection, based on the conditions established under subparagraph (A).



(C) CONVERSION- The warrant shall provide that if, after the warrant is received by the Secretary under this subsection, the financial institution that issued the warrant is no longer listed or traded on a national securities exchange or securities association, as described in paragraph (1)(A), such warrants shall convert to senior debt, or contain appropriate protections for the Secretary to ensure that the Treasury is appropriately compensated for the value of the warrant, in an amount determined by the Secretary.



(D) PROTECTIONS- Any warrant representing securities to be received by the Secretary under this subsection shall contain anti-dilution provisions of the type employed in capital market transactions, as determined by the Secretary. Such provisions shall protect the value of the securities from market transactions such as stock splits, stock distributions, dividends, and other distributions, mergers, and other forms of reorganization or recapitalization.



(E) EXERCISE PRICE- The exercise price for any warrant issued pursuant to this subsection shall be set by the Secretary, in the interest of the taxpayers.



(F) SUFFICIENCY- The financial institution shall guarantee to the Secretary that it has authorized shares of nonvoting stock available to fulfill its obligations under this subsection. Should the financial institution not have sufficient authorized shares, including preferred shares that may carry dividend rights equal to a multiple number of common shares, the Secretary may, to the extent necessary, accept a senior debt note in an amount, and on such terms as will compensate the Secretary with equivalent value, in the event that a sufficient shareholder vote to authorize the necessary additional shares cannot be obtained.

The law actually requires a contingent equity grant to accompany any TARP asset purchase; it just leaves every salient detail up to the Secretary of the Treasury. So to the question of whether the Secretary can structure TARP purchases as preferred equity injections, the reasonably plain answer from the text of the law is, sure. (See also Krugman, who links Roubini with some backstory.)



This brings us back to a point I made in passing about the blank-check version of the plan: the discretion can be used for good or for ill, and the outcome depends in part on whether Henry Paulson can escape the Davies Conjecture and thus doesn't end up figuring prominently in Lessons From the Great Depression 2 (by Peter Temin's great-grandchild). A la Dodd, the contingent equity arrangements were left much less to the Secretary's discretion. Interestingly, if you want to recapitalize the banks via TARP, it looks like the current form of the law offers somewhat more options for doing so. Along those lines, if the House Republicans really wanted to forestall nationalization of the banking system, they failed miserably as giving the Secretary discretion not to take a meaningful equity stake is not the same as preventing the Secretary from doing so.



Added: With a h/t to DOLB in the comments, here's the definition of 'troubled assets':

(9) TROUBLED ASSETS- The term `troubled assets' means--

(A) residential or commercial mortgages and any securities, obligations, or other instruments that are based on or related to such mortgages, that in each case was originated or issued on or before March 14, 2008, the purchase of which the Secretary determines promotes financial market stability; and

(B) any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve System, determines the purchase of which is necessary to promote financial market stability, but only upon transmittal of such determination, in writing, to the appropriate committees of Congress.

See especially part (B). Dday has some legislative history at Hullabaloo.

by Tom Bozzo (noreply@blogger.com) on October 09, 2008 04:32 PM

by Tom Bozzo



Brad DeLong blogs the train wreck at a clown show that is the McCain campaign so I don't have to (big report due in a week, sorry ). He has a twofer.



First, there's the the McCain health plan. Or, rather, the evolution from



We're phoning it in, to



OMG, people are looking at it and figuring out ways it might suck, so



Sweeten it, but...



That's too expensive for our small-government-conservative narrative, and voila,



Let's commit political suicide!!

You know, we have llike seen this before. On health care:

• McCain started with a tax credit that was equal in aggregate to the additional tax he levied on employer-sponsored health benefits in the first year--in later years the credit became much smaller than the tax.
• Then it was like ooops, that's not popular. We know--we never intended to subject employer-sponsored benefits to the FICA tax, only to the income tax.
• Then it was like ooops, now we're scared that the plan is fiscally irresponsible and will raise the deficit. We know--we will cut Medicare!
• Then it was like ooops, we have to carry Floria. We know--have Sarah Palin say that McCain will not cut but will protect your entitlements.

Can't anybody play this game? If we lose the election to these clowns, I am going to be really embarrassed. It seems as though nothing is competently staffed out--as if nobody in the McCain campaign cares about actually having policy proposals, but only about having something incoherent that an ignorant and lazy reporter can be deceived into thinking is a policy proposal.

Second, on the housing crisis, McCain pulls his new bailout plan out of his behind at the "debate." However:

But it soon develops that much of Senator McCain's proposal is not his but Barney Frank's, and that the differences make it not a homeowner relief bill but an imprudent banker profit and rescue bill.

And so our so-called conservatives want to nationalize negative home equity (that's some concern for the taxpayer, there):

[DeLong quoting the Politco] “Clearly we face the trade off that we would in fact be taking the negative equity position and putting it on the taxpayers books instead of putting it on the private lenders books or the homeowners books,” Holtz-Eakin told Politico. “We think the balance of risk has shifted to the point where this is the way to go.”

Does the McCain website say that? No.

But by the time I got to the website, it read differently:

JohnMcCain.com - McCain-Palin 2008: For those that cannot make payments, mortgages must be re-structured to put losses on the books and put homeowners in manageable mortgages. Lenders in these cases must recognize the loss that they’ve already suffered. [Apparently that last sentence was struck by a panicked editor -- ATB.]

Apparently the schmuck who was assigned the job of writing up the web description did not believe the plan could possibly be what he was told it was.

Most deliciously, someone couldn't stop from thinking out loud in naming the "program," such as it is: it's the "American Homeownership Resurgence Plan (McCain Resurgence Plan)." Apparently it's change someone can believe in.



(Cross-posted at Marginal Utility.)

by Tom Bozzo (noreply@blogger.com) on October 09, 2008 12:30 PM

by cactus



The Flat Tax Revolution - A Brief Second Visit



It wasn't that long ago that folks on the right were crowing about how flat tax fever was sweeping much of Europe and producing monster economic growth. (Examples abound - enter the words "flat tax revolution Europe" and you find about 200,000 hits, most of them from about 2005 to 2007.) These were the same folks who had told us in 2001 about the rapid growth that cutting taxes was going to produce in the US.



So whatever happened?

by rdan (noreply@blogger.com) on October 09, 2008 10:29 AM

It appears that the word of the month is Melamine, and that a lot of those large bags of semibiodegradeable candy may have been imported from China.

by Ken Houghton (noreply@blogger.com) on October 09, 2008 06:17 AM

Via Mankiw, who notes that "among economists listed" at PinnacleSports, Martin Feldstein is the favorite.



I was going to snark that that must be because they have a lousy field for bettors, but Mankiw links to Ladbrokes, too, where people rationally expect that declaring Economics once and for all irrelevant (i.e., giving the award to Fama and/or French [UPDATE: Tyler Cowen disagrees.) is The Way to Bet.



Comparing the two lists, there is only one possible conclusion: PinnacleSports has a lousy field for bettors.



Sadly, neither has EconoSpeak favorite William Easterlin on the list, while my pick*—William Baumol—rates as ones of the longest betting shots at Ladbrokes.



*I've been wrong every year, so selling Baumol at 40:1 is probably a better bet than Phillies over Dodgers or Red Sox over Tampa Bay.

by Ken Houghton (noreply@blogger.com) on October 09, 2008 05:24 AM

Josh Marshall connects the dots:

Seems like almost every day now there’s a McCain-Palin rally where the campaign has the candidates introduced by someone who hits on “Barack Hussein Obama”. . . . After the fifth or sixth time you pretty much know [it’s] on the orders of the campaign. It is obviously with tacit approval (to believe anything else is to be a dupe at this point); and quite probably on the campaign’s specific instructions.

Given the regularity of the cries of “treason” and “terrorist” and the like, and the frequency with which the screamers seem in oddly convenient proximity to the mics, we should probably be considering the possibly that these folks are campaign plants. It happens all the time. It’s just that usually they don’t scream out accusations of capital crimes.

(Or incitement to capital crimes. One of the recent shouters was quoted screaming “Kill him!”]

by KTK on October 09, 2008 02:16 AM

In this case, it was probably because—unlike the Vice Presidential candidate whose account he allegedly accessed—David Kernell tries to figure out how the world works.

by Ken Houghton (noreply@blogger.com) on October 08, 2008 08:07 PM

This didn’t take long, now, did it?

UPDATE: As quickly as it went up, it came back down. Image is still visible here, and I’ll also post below:

by tgirsch on October 08, 2008 07:03 PM

Nothing new here, really, but worth checking out anyway.

by tgirsch on October 08, 2008 06:00 PM

Holy crap! Who’s been putting what in Tom Friedman’s Wheaties?

After years of self-congratulatory “big idea” drivel and smug sooth-saying, I’ve noticed that Friedman seems to have been returning to real, thought-out, argumentative analysis lately. And today he apparently woke up with whatever strange, crippling monkey he’s been carrying around all this time finally off his back and decided to take a full cut at the ol’ pill, one time. He starts by treating Sarah Palin like a big fat teeball, but that’s just a warm-up swing. By the time he gets around to how taxes “buy civilization”, and whose interests, exactly, are served by the GOP continually stoking our oil addiction, he’s fucking Babe Ruth.

Criticizing Sarah Palin is truly shooting fish in a barrel. But . . . there was one thing she said in the debate with Joe Biden that really sticks in my craw. It was when she turned to Biden and declared: “You said recently that higher taxes or asking for higher taxes or paying higher taxes is patriotic. In the middle class of America, which is where Todd and I have been all of our lives, that’s not patriotic.”

I only wish she had been asked: “Governor Palin, if paying taxes is not considered patriotic in your neighborhood, who is going to pay for the body armor that will protect your son in Iraq? Who is going to pay for the bailout you endorsed? If it isn’t from tax revenues, there are only two ways to pay for those big projects — printing more money or borrowing more money. Do you think borrowing money from China is more patriotic than raising it in taxes from Americans?” That is not putting America first. That is selling America first.

Sorry, I grew up in a very middle-class family in a very middle-class suburb of Minneapolis, and my parents taught me that paying taxes, while certainly no fun, was how we paid for the police and the Army, our public universities and local schools, scientific research and Medicare for the elderly. No one said it better than Justice Oliver Wendell Holmes: “I like paying taxes. With them I buy civilization.” . . .

[P]utting the country in the position where a total novice like Sarah Palin could be asked to steer us through possibly the most serious economic crisis of our lives is flat out reckless. It is the opposite of conservative.

And please don’t tell me she will hire smart advisers. What happens when her two smartest advisers disagree?

And please also don’t tell me she is an “energy expert.” She is an energy expert exactly the same way the king of Saudi Arabia is an energy expert — by accident of residence. . . .

At least the king of Saudi Arabia, in advocating “drill baby drill,” is serving his country’s interests — by prolonging America’s dependence on oil. My problem with Palin is that she is also serving his country’s interests — by prolonging America’s dependence on oil.

Damn. I haven’t heard such a clear or uncompromising statement about what taxes are for since I can remember. And selling America to China and Saudi Arabia? About time someone said it.

He hit that one out of the park. Hope somebody notices.

by KTK on October 08, 2008 05:17 PM

rdan

Home mortgages and foreclosures make headlines; someone who has missed a car payment or two isn't a "hot" enough story for the evening newscast. "No visuals!" a TV producer will say. Nobody puts a sign saying "We Repo'd Here!" at the end of a driveway when some poor person loses their car or truck, which is often their only source of transportation for work, school, doctor visits, shopping, etc.



Automotive retailing accounts for 20 percent of all retail sales nationwide - 20 percent of all retail sales in this country - and they've already dropped precipitously. Auto sales were down 26.6 percent in September compared to a year before. There were 965,160 vehicles sold in September in the US, and the last time fewer than one million cars and trucks were sold in a single month was February, 1993.

2008-10-08-yokohamaassemblylinegtr.jpg



Markets as diverse as Great Britain, Germany, Vietnam, India, South Korea and Italy all suffered dramatic car sales losses that month, as did China. In Japan, September sales dropped to their lowest levels in 34 years.



And while October isn't even ½ over, it's almost a sure bet that these kinds of serious losses will continue and creep into even more countries.





The number of people late on their monthly car and truck payments is also huge, represented by nearly $25 billion worth of consumer auto loans that are delinquent, a new study reports, according to industry journal Automotive News.



In the second quarter of 2008, Experian Automotive says, 2.48 percent of all auto loans were 30 days past due, compared with 2.28 percent in the year-ago quarter. Auto loans that were 60 days past due in the second quarter rose to 0.75 percent from 0.67 percent in the second quarter of 2007, Experian says.



Don't let those seemingly-small numbers throw you; they add up to $25 billion in missed or late payments.



The machinery for the Detroit bailout was in a bill passed last December; the $25 billion amount of the bailout has now been worked-out and approved by lawmakers. GM, Ford and Chrysler should start seeing about $7 billion of the total this week.

2008-10-08-tochigiassemblygtr4.jpg

Chrysler is an especially interesting case. They're an independent, privately-held company with no stockholders, and their stock is no longer traded on any of the world's exchanges. It occurs to us, and maybe you, too - Should Chrysler even be eligible for a bailout using taxpayer's money? Sure, plenty of companies benefiting from the big bailout are privately-held, too. Think of all those investment house, bank and brokerage firm executives who are whooping it up this week thanks to our money.



But if Chrysler were to go out of business, it wouldn't mean the end of the world, wouldn't mean the destruction of some sort of iconic corporation whose loss would irreparably harm the nation. These were among the reasons put in front of us when the public was clamoring (and still is, rightfully) for government to justify the $700 billion bailout.



It's still not entirely clear whether some newly-formed government entity will be able to buy bundled car loans and leases and hold them until the market considers them viable and profitable again, as is happening with home mortgages.

by rdan (noreply@blogger.com) on October 08, 2008 12:11 PM

1. Nothing earth shattering came out of this. Obama probably had a small win, but McCain certainly did nothing to help himself.
2. “That one”? McCain really, really holds Obama in contempt.
3. McCain’s plan to buy mortgages was an interesting moments in that 1)it is already in the bailout package and 2) it is a pretty clear signal that the Reagan Revolution/Washington Consensus model of economics is dead.
4. Obama and McCain both had effective closings, but aside from that Obama was clearly the better person on stage. He answered more of the questions and was better at tying his answers into the larget theme of what his presidency would be like.
5. McCain is not funny and he should no try to be — it really comes off false.
6. Brokaw mostly sucked. He tried too much to keep them on schedule instead of using their obvious willingness to ctualy debate each other to try and lead the debate inot interesting territory. The questions he chose were re-hashes of the ones at the last debate and he too often used right wing frames in his questioning and follow ups. He did almost nothing to drag the candidates back ont the questions asked, either. At east he didn;t sneak in any McCain Ayrs talking points in the form of questions.
7. Obama stating that health care was a right warmed this liberal heat. It is reassuring in the face of his cautious approach to heath care reform.
8. The format was terrible. Can we please, please, please have a real debate sometime before the Cubs win a World Series?

by Kevin on October 08, 2008 12:03 PM

rdan



Dean Baker at Beat the Press notes Brokaw's definitive pronouncement about Social Security:

If Social Security Was a Private Corporation Then it Would Sue Tom Brokaw for Every Penny He Has



If a news reporter deliberately makes a false statement claiming that a private company like Boeing or Microsoft is going broke, the company has the right to sue the reporter and the news agency. That is why reporters rarely make statements like Microsoft or Boeing (or Lehman Brothers, AIG, or Goldman Sachs) are going broke.



However, reporters can freely impugn the financial health of a government program like Social Security because a government program cannot sue for libel. That is why Brokaw knew that he could imply that Social Security is going broke, even though it is not true. Social Security cannot sue Brokaw even if he deliberately tells explicit lies about its financial health.



Those who are interesting in learning about the true state of Social Security's financial health can find out by looking at the non-partisan Congressional Budget Office's website.

Angry Bear Bruce Webb and reader coberly have a lot to say on the matter, from whom we will likely hear.

by rdan (noreply@blogger.com) on October 08, 2008 10:45 AM

rdan



William Polley has a note on paying interest with links to Altig, DeLong, and others:

David Altig takes up the question with links back to Marginal Revolution, DeLong, as well as my post from yesterday. (Thanks, David!)



Rather than looking at it as what DeLong calls "Operation Twist", Altig opts for the simpler explanation that it will put a lower bound on the effective fed funds rate. That is, of course, the fundamental effect that this would have in any circumstance--crisis or not. It puts the Fed in as the residual buyer of the funds and thus establishes the floor.



The apparent lack of a (non-zero) lower bound on the funds rate was first noticed over a year ago when there were trades happening at zero percent. Here's what I said in August 2007:



So while I don't have a full and definitive explanation [for the zero percent transactions], it would seem that borrower risk is a factor, and the fact that these are excess reserves (which earn no interest) is also a factor. In that case, the low end of the range could stay low until the reserve picture gets back to normal.



When the Fed began discussing it more seriously in May 2008, I said:



I'll go on the record that this is a good idea. It will help to smooth out the recent fluctuations in the funds rate that garnered so much consternation at this blog among other places. It would prevent interest rate policy from getting in the way of policies for directly injecting liquidity into the financial markets by effectively keeping a floor on the funds rate even during a big injection of liquidity.



So I am clearly on board with the stated reasoning behind the move. Plus, I think it's just a good policy to eliminate what is effectively a tax on reserves.



But I was struck by DeLong's comment about open market operations on the risk premium rather than on the liquidity premium. The more this drags on and the more we learn, the more I am coming to the conclusion (see here, for example) that this is a problem with the risk premium. Why else would the CP market freeze up despite the massive injections of liquidity, not to mention the CDS market? There seems to be a lot of liquidity out there, but it's not necessarily getting to where it needs to go.





And that got me wondering if paying interest on reserves might, as Tabarrok suggested, accomplish the goal of getting that liquidity where it needs to go in an Operation Twist sort of way. While the Fed is not yet targeting particular assets, we're treading very close to the kind of environment where that might be necessary. (Have you seen a T-bill rate lately?) Having the ability to pay interest on reserves would not be counter to that purpose, even if it wasn't the primary reason. Of course, it should also be noted that the paying of interest on reserves is a permanent change rather than a temporary one meant only for the crisis.



Paying interest on reserves is a good policy for a lot of reasons. The obvious ones and the ones that might still be a stretch--at least for now.

by rdan (noreply@blogger.com) on October 08, 2008 10:45 AM

Because Hilzoy asked, and I agree with Brad DeLong that it's not an unreasonable question.



No guarantee the 11 are on this list, of course. This is a simple cross-reference of "The McCain '100'" and "NBER Family Members." There are 14 Faculty Research Fellows, 13 Research Associates, and 2 OLs on this list.*

*I can't find any indication on the NBER website what an "OL" is; most of the people so desginated have a c.v. that shows them as being or having been a Research Associate only. Also, while some of the Research Associates (RA) were surveyed, no inference that the people listed above are the ones who returned their surveys should necessarily be made.

by Ken Houghton (noreply@blogger.com) on October 08, 2008 06:42 AM

I’m a little behind, but just finished watching tonight’s debate on TiVo. I think you’ve got to score this one as a win for Senator Obama. Not a blowout by any stretch of the imagination, but still a win. His demeanor was calm, and while not particularly charismatic, he didn’t come across as unlikable or too professorial, I don’t think. Senator McCain, on the other hand, seemed antsy, and at times a little crabby. And on TV, he just looked old — that shouldn’t be an issue (at least, it wouldn’t be as big an issue if not for his VP pick), but it is one. Further, I did catch a little of the debate on the radio while I was out running an errand, and McCain managed to come across worse on radio than on TV.

On substance, this is going to sound contradictory, but bear with me. Obama was more substantive, but didn’t always answer the question that was being asked of him. McCain was more likely to answer the question, but he almost always did so in vague terms. (Saying “I know how to do this” may be reassuring to people who already support you, but shoring up your base isn’t going to help you very much at this juncture.) Contrast this against the VP debate, where Biden was generally both substantive and on point, whereas Palin was generally off-topic and vague.

Finally, I think McCain overused the “my friends” bit, and I think it wore a little thin. I wonder if I’m alone in this regard.

McCain needed a game-changer here, and he didn’t get it. Because of that, a tie here equals a win for Obama. But as I said above, I think Obama won outright, even if not overwhelmingly. That can’t be good news for the McCain camp.

But none of that, I think is the big story. The big story is the town hall format. It’s one of those things that looks like a good idea on paper, but never really works. One of the biggest problems was that there simply wasn’t enough time for the candidates to really address the questions in any kind of detail — they had to get in a few talking points, and then they were already over their time and had to move on. (I suspect this is a problem with the format — they went for quantity of questions rather than quality of answers.) But I think the biggest problem here was Brokaw. As a moderator, he was terrible. He seemed hostile to both candidates, and was just too in love with the rules. Here’s a hint, Tom: When both candidates are having a substantive discussion about an important issue, and both of them want to continue, FUCK THE RULES — let them continue to discuss. I don’t care what both campaigns pre-agreed to; both candidates — present there, right in front of you — clearly wanted to keep talking about it, and they hadn’t gotten repetitive or overly personal. Health care and mandates, I think, was a premier example of this. Both candidates had interesting things to say, even if you didn’t agree with them, and the discourse was well above the level of basic mudslinging and repeated talking points — and Brokaw cut them off. That’s inexcusable.

OK, enough of my ranting. Give me your thoughts.

Cross-posted at Tennesseefree

by tgirsch on October 08, 2008 04:35 AM

Here's what Happens When I Click a Link by Accident:

1. Does anyone believe the market rate for taxi drivers in Maryland is $11.41 an hour?
   
   
2. The base salary for an Assistant Professor of Economics is $115-120K for elite schools (well, Harvard and Stanford, but you get the idea).*
   
   
3. Morgan Stanley offered $85,000 for an Analyst in 2006. No indication whether it was a bonus-payingeligible position (though presumably the answer would have been "yes").

Have fun with the database. Sure to stun and amaze.



*Columbia offered far less for next year: an Assistant Professor at the Medical Center campus for $90,000 in 2006, an Associate Professor at the main campus for $95,000 in 2007. But not certain what the specialties are.

by Ken Houghton (noreply@blogger.com) on October 08, 2008 01:40 AM

sc, commenting at Alea on September 24th, was much better:

How to play this to make money? GLD and SKF (if it starts behaving properly) and OTM [out of the money] puts on C, BAC, WB.

That last is WalkAllOverYa, which is either WFC or Big C bound, depending on time of day, phase of the moon, and how obvious John McCain's Stage IV melanoma and or TIA attacks are. I'm leaving it out of the graphic below because it has dropped too much, even compared to The Big C.



The current results (click to enlarge and see Sep 24 prices):

by Ken Houghton (noreply@blogger.com) on October 07, 2008 11:45 PM

Alea notes TAF results:

Total propositions submitted: $138.092 billion

Total propositions accepted: $138.092 billion

Bid/cover ratio: 0.92



Number of bidders: 71

The auction in question was supposed to be a $150B, 85-day auction to get firms through year-end. (For contrast, the last 84-day [12 week] auction had a bid-to-cover of 1.27.)



Clearly, all the firms that are using the TAF have no capital impediments through the end of the year. The crisis is over!



So why is the government in the Commercial Paper business?

by Ken Houghton (noreply@blogger.com) on October 07, 2008 11:27 PM

In case you missed it:

by tgirsch on October 07, 2008 08:30 PM

I’m late with this, but as you know, my team (the Brewers) and Kevin’s team (the White Sox) have been eliminated.

I’ll let Kevin handle the Sox, but the Brewers’ demise didn’t go down quite how I expected it to. With the exception of a subpar outing by Sabathia (which really amounted to one bad inning) and a terrible outing by Suppan (which Brewers fans have come to expect), the pitching wasn’t the problem. The much-maligned Brewers bullpen only allowed one run in four games. The problem, as it so often was during the regular season, was lack of hitting, especially with runners in scoring position. During the regular season, they were 29th in the league in that category, and this series was no different.

Defensive errors squandered a great outing by Yovani Gallardo (who, in my opinion, should have been the game 4 starter for Milwaukee) — 0 ER in 4 innings of work, with three runs thanks to an error by Rickie Weeks, and another should-have-been-an-error by Mike Cameron. But despite all of this, the Brewers had chances to tie or go ahead late in two of the three games they lost, thanks in large part to the fact that the Phillies also forgot how to hit in that series (excepting game 4).

One more nit: Though it didn’t impact the outcome of the game, and though the umps got the call right according to the current rules, I think the rules should be changed so that “catches” like Corey Hart’s spectacular almost-catch from Game 3 would actually be ruled as a catch, and an out. If you didn’t see it, Hart caught the ball as he crashed full-speed into the outfield wall; he bounced off the wall, landed on his back, and rolled over; the ball popped out of his glove just as he was completing the roll, a good second after he made the catch. (The rules currently stipulate that the catch isn’t legal until you remove the ball from your glove with the other hand, no matter how long you hold on. You could die, with the ball tightly clutched in your glove and rigor mortis setting in, and the catch currently wouldn’t be legal.)

My “A-Rod October Disappearing Act” award goes to Prince Fielder, who was just 1-for-14 with 5 strikeouts, 2 RBI (one on a sac fly), and one homer (after it was two late to matter) in the series. He walked twice, but both of those were intentional. The bright spot for the Brewers offensively was J.J. Hardy: 6-for-14 (.429), 2 RBI, 2 runs, and an OPS of 1.000. (Relief pitcher Carlos Villanueva put up a sick 2.000 OPS, but he singled in his only at-bat, so it’s nowhere near as impressive as it looks on paper.)

At this point, I have to set aside my hatred for all things Philadelphia (except the cheesesteak!) and root for the Phillies to go all