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April 28, 2009

Economist's View - 6 new articles

"A Discussion With Nobel Laureates in Economics"

Here is the Nobel lunch panel video I said I'd post. Topics include the value of economics, macroeconomics in particular, regulation, inequality, rationality, and efficient markets. Among other things, I was surprised to hear Becker support regulation, so long as it is automatic rather than discretionary (though Scholes disagrees):

Lunch Panel: A Discussion With Nobel Laureates in Economics: Whither Capitalism?:


  • Gary Becker, Nobel Laureate, 1992; University Professor of Economics and Sociology, University of Chicago
  • Roger Myerson, Nobel Laureate, 2007; Glen A. Lloyd Distinguished Service Professor in Economics, University of Chicago
  • Myron Scholes, Nobel Laureate, 1997; Chairman, Platinum Grove Asset Management


  • Michael Milken, Chairman, Milken Institute

It's become a Global Conference tradition for Michael Milken to moderate a discussion with Nobel laureates in economics, and this year is no exception. Topic A will be "whither capitalism" — that is, how the wrenching events of the last year will affect the long-term prospects of the global economy. Expect provocative commentary on subjects ranging from the logic of bank bailouts to the relevance of Japan's lost decade to President Obama's determination to tackle health-care reform. But if past performance is any indicator, don't be surprised if the conversation veers into terra incognito — great economists have a way of claiming the whole world of ideas as their own.

Update: Paul Kedrosky: "Did you enjoy the 'up with economists session?" That's a good summary of the session...

The Business Card Index?

I'm hoping to post a video to the Lunch Panel: A Discussion With Nobel Laureates in Economics: Whither Capitalism? soon. But for the moment, an observation. One thing I was interested in is the change in the attitudes of participants between last year's meeting and this year's. It's hard to find such a difference in the panelists, though I would say they are more defensive and ready to deflect blame for what has happened for what happened (to government for the most part, you can judge one instance of this for yourself when the video is posted). But a big difference is that last year I was given more business cards than I knew what to do with, it was a huge stack. You could hardly turn around without someone introducing themselves, and offering their card. It probably made a big impression on me because, as an academic, I have never bothered to get nor had much use for a business card, and I found myself apologizing for that every time somebody else would hawk their card.

So I made up my mind I'd have cards this year, but one day turned into another, and on the way down I realized I'd never bothered to actually do that. I figured I'd just apologize again for not having a card to exchange, just like last year, but amazingly so far it hasn't been necessary. I haven't been given a single card. Not one. Then I wondered, is it just me? So I've been paying attention to what goes on at the tables as people sit down, and it's just not like last year as far as I can observe.

Not sure what that means, exactly, and it's certainly not statistically validated other than through my own limited observations and a few questions of others about whether they've noticed the same thing, but it does seem like people - as you would expect - have pulled back considerably in the search for ways to expand their businesses, make new connections, etc. But it's not clear tome why the value of netwrking would have fallen so much due to the recession.

"Palliative Measures ... Have to be Attached to Curative Measures"

Steve Waldman says "we need a root-and-branch reorganization of the financial system":

Value for value, Steve Waldman: Would it have been better if Timothy Geithner had had the power to guarantee all bank debt early on? As James Surowiecki reminds us, that was part of the Swedish solution. Justin Fox plausibly suggests that we might have avoided a lot of pain with a fast, full guarantee.

But that's not the point. The question isn't whether we could have avoided this crisis, if only we had cut a big check. We could have, and that was not lost to any of us debating these issues more than a year ago. (See e.g. me or Mark Thoma.) Had we done so, the near-to-medium term fiscal costs might have been less than they probably will be now. So, with 20/20 hindsight, would it have been a good idea?

How you answer that question depends upon how you view the crisis. Is it an aberration, a shock to a basically sound financial system, or is it a painful symptom of an even more dangerous condition? ...

If you think that our financial system just needs some tweaks, some consolidation of regulators' organizational charts and sterner supervision, then you should prefer that we had just cut a check, passed Sarbanes/Oxley Book II, and moved on. But that is not what I, or most proponents of nationalization temporary receivership for insolvent banks, believe.

If you believe, as I do, that we need a root-and-branch reorganization of the financial system, which must necessarily involve the dismemberment and intrusive restraint of deeply entrenched institutions, does that mean pain is the only way forward, "the worse the better" in the old revolutionary cliché? It need not mean that. But it does mean that palliative measures, like giving the banks money, would have to be attached to curative measures, like enacting capital requirements and imposing regulatory burdens that would force financial behemoths to break themselves up or become boring narrow banks. For almost two years, policymakers at the Fed and the Treasury, including Secretary Geithner, have offered bail-out after bail-out and asked for nothing serious in return.

Do I regret that Henry Paulson was not empowered to issue a blanket guarantee of bank assets early on, as the Swedes did? No, I don't regret that at all. Why not? Because I think that "Hank the Tank" was a crappy negotiator... He would have offered the financial system sugar without requiring it to make the medicine go down. He may believe, quite sincerely, that a cure would be worse than the disease. He may believe that, but he is wrong. ...

You may believe that we have learned our lesson, that if we can just get some stability and comfort for a while we are prepared to do what must be done. That's a respectable position. But I don't share it, and neither do the majority of Americans who are unwilling to allow their representatives to sign off on any more expensive aspirin. We want value for value, an ironclad commitment of root and branch reform in exchange for the unimaginable sums of money we are being asked to hand over. ... Congress would, because the public would, support large, explicit transfers, if they were attached to reforms sufficiently radical to prevent a recurrence, and suitably punitive towards the people who managed the system that brought us here. Value for value. ...

I ... would be willing to hold my nose and tolerate a Swedish-style guarantee of bank creditors. I'd acquiesce to that even without formal nationalization. Nationalization is ... a means to an end, and the desired end is a world in which too big to fail is too big to exist for any financial institution that originates or holds credit risk in any form. Secretary Geithner could send a bill to Congress today that would put all banks with a balance sheet of over $50B into run-off mode... I'd fax my Congressman and support a $2T on-budget buyout of bank creditors as part of that bill, as long as it had teeth. ("Teeth" would imply making sure that off-balance-sheet and derivative exposures were included in the size cap, etc.)

It's not that us pitchfork-totin' populists are unwilling to pay the bill. It's that we want to know that in exchange for writing a very, very large check, the people that we are paying will actually deliver the goods. Given the behavior of bankers before the crisis and of shifty policymakers during, we have every reason to watch warily and to insist upon every precaution while we hand over suitcase after suitcase of freshly printed Federal Reserve notes.

"Libertarian Dogma and the Fed"

Henry Kaufman:

How libertarian dogma led the Fed astray, by Henry Kaufman, Commentary, Financial Times: The Federal Reserve has been hobbled by ... major shortcomings that were primarily responsible for the current and several previous credit crises.

...My second major concern ... is the Fed's prevailing economic libertarianism. At the heart of this economic dogma is the belief that markets know best and that those who compete well will prosper, while those who do not will fail.

How did this affect the Fed's actions and behaviour? First, it explains to a large extent why the Fed did not strongly oppose the removal of Glass-Steagall restrictions. Second, it also helps explain why the Fed failed to recognise that abandoning Glass-Steagall created more institutions that were "too big to fail".

Third, it diminished the supervisory role of the Fed... [The] Fed's ... tilt toward an economic libertarian approach pushed supervision a notch down just at a time when financial market complexity was on the rise.

Fourth, as hands-on supervision slackened, quantitative risk modelling became increasingly acceptable. This approach ... was far from adequate. But it worked hand in glove with a philosophy that markets knew best.

Fifth, adherence to economic libertarianism inhibited the Fed from using the bully pulpit or moral suasion to constrain market excesses. It is difficult to believe that recourse to moral suasion by a Fed chairman would be ineffective. ...

Sixth, the Fed's increasingly libertarian philosophy underpinned its view that it could not know how to recognise a credit bubble but knew what to do once a bubble burst. This is a philosophy plagued with fallacies. ...

By guiding monetary policy in a libertarian direction, the Fed played a central role in creating a financial environment defined by excessive credit growth and unrestrained profit seeking. ... At a minimum, the Fed's sensitivity to financial excesses must be improved.

links for 2009-04-28

David Davis, the 42 Day Terror Detention Plan, and the US Bullying the UK over Torture

At the Global Conference dinner tonight, part of which was a panel discussion on sports philanthropy by Andre Agassi, Mia Hamm, Tony Hawk, and Annika Sorenstam, I sat next to a conservative member of Parliament, David Davis. He told me this story:

Tories in turmoil as David Davis resigns over 42-day vote, UK Guardian, June 12, 2008: The shadow home secretary, David Davis, threw the Conservative leadership into turmoil today by unexpectedly announcing his resignation as an MP, forcing a byelection in his constituency over the government's 42-day terror detention plan.

Davis's move - to "take a stand" on what he said was the "relentless erosion" of freedoms by the government - was taken against the wishes of David Cameron, who beat him in a Tory leadership election in 2005.

Cameron made his disappointment clear by replacing Davis as shadow home secretary with the shadow attorney general, Dominic Grieve, and saying Davis had no guarantee of returning to the front bench if - as all parties expect - he wins the byelection. ...

Davis seemed unaware he had consigned himself to the backbenches, telling the BBC: "I may or may not be on the backbenches … This issue matters more to me than my job."

Labour attempted to undercut Davis by announcing that they, like the Liberal Democrats, would not contest the byelection... But Davis's decision to resign and stand again - a move last seen on the British mainland in 1982, and not since 1973 on a single issue of principle - injects new unpredictability into British politics. ...

A Conservative source said Davis had had only three hours' sleep on Tuesday night and was going through some kind of personal crisis. Davis brushed the suggestion aside, saying: "Pop psychology in politics is very amusing but rarely right."

In his resignation statement, delivered outside the Commons at 1pm, Davis said: "I will argue in this byelection against the slow strangulation of fundamental British freedoms by this government." He said the undermining of civil liberties through moves such as detention and the introduction of ID cards "cannot go on".

"It must be stopped, and for that reason today I feel it is incumbent on me to take a stand," he told reporters...

He said his current issue is torture:

Ministers face torture pressure, BBC: UK ministers must answer allegations that Britain was complicit in torture, a senior Conservative MP has said. David Davis said a High Court ruling on Wednesday alleged that Binyam Mohamed, a UK resident held in the Guantanamo Bay camp in Cuba, had been tortured. ...

The judges said the UK's attorney general has begun a criminal investigation into possible torture against Mr Mohamed. Lord Justice Thomas and Mr Justice Lloyd Jones said the attorney general would be investigating the issues of "torture and cruel, inhuman or degrading treatment".

The judges said they wanted the full details of the alleged torture to be published in the interests of safeguarding the rule of law, free speech and democratic accountability.

But they had been persuaded that it was not in the public interest to publish those details as the US government could then "inflict on the citizens of the United Kingdom a very considerable increase in the dangers they face at a time when a serious terrorist threat still pertains". ...

No 10 said it was not aware of any threat from the US government to withdraw intelligence co-operation with Britain if details of the case were revealed. ...

Mr Davis said a High Court ruling, which pointed to complicity by the UK and US authorities in his torture, was prevented from being published after the US put pressure on the UK. ...

He said Mr Miliband should make a statement to MPs about the issue as soon as possible to "explain what the devil is going on". He said the UK government should make it "plain" that it did not support torture in any circumstances.

Mr Mohamed, 30, has been held in Guantanamo for four years... But war crimes charges against him were dropped in October. ...

Last August, Lord Justice Thomas said evidence relating to the case should be disclosed, saying it was "essential". However, the British government argued the disclosure of certain material would cause "significant damage to national security".

Mr Davis said it appeared the Bush administration had "threatened" the UK government about the repercussions should details of the case be made public.

"Frankly it is none of their business what our courts do," he said, adding this was "plain fact" not merely an allegation.

"They should not seek in any circumstances to put pressure on British courts. That's completely beyond the rule of law."

He said Mr Miliband must explain why this had happened and whether the new Obama administration supported its predecessor's stance on the issue.

"While he is at it, he [the foreign secretary] should explain what degree of complicity we have in this," he told the BBC.

Mr Davis said the government had taken a "highly principled public stand" against torture but must "come clean" about whether there were cases where British agencies ever knew about instances of torture by others. ...

Civil liberties campaigners described the judges' remarks on the case as "astounding". Shami Chakrabarti, director of Liberty, said the Bush administration had tried "to bully" the British courts and President Obama must make it clear he would not do the same.

And Lib Dem leader Nick Clegg said all the documents in the case must be published immediately. "There is no other terms for what the US intelligence services are doing than blackmail," he said. "It is simply incredible that the US government would have halted intelligence co-operation with the UK if this information had been made public."

I encouraged him to pursue this, and the torture issue more generally, relentlessly.

Where are the US conservatives with this kind of courage? He said that when he first came out against the 42-day detention plan, the reaction on conservative blogs was very negative. However, the comments on those blogs disagreed overwhelmingly, and in no uncertain terms, and that grassroots support as he called it along with the support of a paper (the Daily something? - sorry - I don't recall) he compared to getting the support of Fox news caused the conservative blogs (and others in the media) to change their position. And once that happened, it was "checkmate" for those within the government who opposed him.

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