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April 16, 2010

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Paul Krugman: The Fire Next Time

Posted: 16 Apr 2010 12:42 AM PDT

Why are Republicans opposed to resolution authority for large banks? Do they want to force another uncontrolled bailout the next time a crisis hits?:
The Fire Next Time, by Paul Krugman, Commentary, NY Times: On Tuesday, Mitch McConnell, the Senate minority leader, called for the abolition of municipal fire departments.
Firefighters, he declared, "won't solve the problems that led to recent fires. They will make them worse." The existence of fire departments, he went on, "not only allows for taxpayer-funded bailouts of burning buildings; it institutionalizes them." He concluded, "The way to solve this problem is to let the people who make the mistakes that lead to fires pay for them. We won't solve this problem until the biggest buildings are allowed to burn."
O.K., I fibbed a bit. Mr. McConnell said almost everything I attributed to him, but he was talking about financial reform, not fire reform. ... But it amounts to the same thing.
Now, Mr. McConnell surely isn't sincere; while pretending to oppose bank bailouts, he's actually doing the bankers' bidding. But before I get to that, let's talk about why he's wrong on substance.
In his speech, Mr. McConnell seemed to be saying that in the future, the U.S. government should just let banks fail. We "must put an end to taxpayer funded bailouts for Wall Street banks." What's wrong with that?
The answer is that letting banks fail ... is a bad idea for the same reason that it's a bad idea to stand aside while an urban office building burns..., the damage has a tendency to spread. In 1930, U.S. officials stood aside as banks failed; the result was the Great Depression. In 2008, they stood aside as Lehman Brothers imploded; within days, credit markets had frozen and we were staring into the economic abyss. ...
Since the 1930s, we've had a standard procedure for dealing with failing banks: the Federal Deposit Insurance Corporation has the right to seize a bank that's on the brink, protecting its depositors while cleaning out the stockholders. In the crisis of 2008, however, it became clear that this procedure wasn't up to dealing with complex ... institutions like Lehman or Citigroup.
So proposed reform legislation gives regulators "resolution authority,"... the ability to deal with the likes of Lehman in much the same way that the F.D.I.C. deals with conventional banks. Who could object to that?
Well, Mr. McConnell is trying. ... It's a truly shameless performance: Mr. McConnell is pretending to stand up for taxpayers against Wall Street while in fact doing just the opposite. In recent weeks, he and other Republican leaders have held meetings with Wall Street executives and lobbyists ... to coordinate their political strategy.
And let me assure you, Wall Street isn't lobbying to prevent future bank bailouts. .... By depriving regulators of the tools they need to seize failing financial firms, financial lobbyists increase the chances that when the next crisis strikes, taxpayers will end up paying a ransom to stockholders and executives as the price of avoiding collapse.
Even more important, however, the financial industry wants to avoid serious regulation... It's worth remembering that between the 1930s and the 1980s, there weren't any really big financial bailouts because strong regulation kept most banks out of trouble. It was only with Reagan-era deregulation that big bank disasters re-emerged. ...
To understand what's really at stake right now, watch the looming fight over derivatives, the complex financial instruments Warren Buffett famously described as "financial weapons of mass destruction." The Obama administration wants tighter regulation of derivatives, while Republicans are opposed. And that tells you everything you need to know.
So don't be fooled. When Mitch McConnell denounces big bank bailouts, what he's really trying to do is give the bankers everything they want.

links for 2010-04-15

Posted: 15 Apr 2010 11:02 PM PDT

Where Do Your Federal and State Tax Dollars Go?

Posted: 15 Apr 2010 03:12 PM PDT

Where

Wheres
[More here and here.]

Krugman versus Sorkin

Posted: 15 Apr 2010 03:06 PM PDT

Score it for Krugman:

Dueling Columnists, by Clark Hoyt: A surprising disagreement has broken out between two Times columnists, with Paul Krugman demanding an apology from Andrew Ross Sorkin and Sorkin so far refusing to back down.
The argument is over what approach Krugman ... favored at the low point of the financial crisis. Sorkin, the DealBook columnist in the Business section, wrote Tuesday that Krugman supported "nationalizing the entire banking system." Under the headline, "Andrew Ross Sorkin Owes Several People an Apology," Krugman fired back on his Times blog the same morning: "I certainly never said anything like that." ...
Sorkin came right back Wednesday on his blog with a salutation that some took as sarcastic. ... I sent Sorkin a message telling him that I did not think his citations supported his argument that Krugman had called for nationalizing the entire banking system. ...
I think the right thing to do is to simply acknowledge that, in trying to quickly summarize Krugman's nuanced position, Sorkin over-simplified and got it wrong. Krugman did not call for the nationalization of the entire banking system... Sorkin said he is going back to his editors to discuss whether some sort of clarification is needed.

How Mathematics Might Have Caused the Financial Crisis

Posted: 15 Apr 2010 02:07 PM PDT

"Public Education Worth More than Social Security and Medicare"

Posted: 15 Apr 2010 11:43 AM PDT

Is the older generation exploiting the younger generation when it comes to intergenerational entitlement programs such as Social Security and Medicare?:

For post-boomers, public education worth more than Social Security and Medicare, EurekAlert: It's popular to assume retiring baby boomers will benefit from Social Security and Medicare at the expense of younger generations, as analysts estimate that these government-run programs will pay out more than they collect in payroll taxes by 2017.
But a far-reaching new study from the University of California, Berkeley, concludes that younger Americans – specifically those born between 1972 and 2060 – are actually getting the better deal when the value of public education is factored in as an intergenerational entitlement program on a par with Social Security and Medicare.
"Receiving public education is a really big benefit, and the fact that kids get it at the start of their lives rather than at the end makes it even more valuable," said Ronald Lee, a UC Berkeley demographer and economist who coauthored the study, "Who wins and who loses? Public transfer accounts for U.S. generations born 1850-2090."
On average, Americans pay the taxes that subsidize education 30 years after receiving the benefits, the study noted. By contrast, people start drawing their Social Security and Medicare benefits 30 years or so after paying taxes into these government funds. Thus, each education dollar is worth $10 in retirement benefits, according to the study, which is published in the March issue of the journal Population and Development Review.
The study marks the first time that analysts have treated public education from kindergarten through college as an intergenerational entitlement benefit, which refers to programs funded by taxes paid by generations other than the recipients. The analysts calculated the value of public education relative to the recipients' lifetime earnings.
Contrary to conventional wisdom, "older Americans are not making out like bandits when you factor in the value of public education," Lee said. ...
Using historical data and future projections, Lee and his research team calculated the net value of Social Security, Medicare and public education at all levels – minus taxes – for Americans born from 1850 through 2090. They found that people ages 38 and younger – including those born 20 years from now – will make net gains in earnings of 4 to 6 percent over their lifetimes. By contrast, those now aged 63 to 80 will have paid out more in taxes than they will have received in Social Security, Medicare and public education benefits, losing 1 to 2 percent in net earnings over their lifetimes. ...
While the study found greater benefits for those born after 1972, it projects that tougher times are ahead for generations born 50 years from now. Unless significant changes are made to the Social Security and Medicare programs, those later generations would have to be heavily taxed – 44 percent of their lifetime earnings – and their benefits reduced, to make up for severe shortfalls due to population aging and escalating health care costs...
"The current young and future generations are sometimes viewed as victims of profligate public policy in the United States, whereby the current elderly cohorts live comfortably at their expense," the UC Berkeley study said.
"In fact, however, an elderly person born in 1936 experienced a net loss of about 2 percent of lifetime earnings, while a baby born today is projected to realize a net gain of 5 percent … Evidently, adding education to the mix dramatically changes the generational equity picture," the study concluded.

Weekly Initial Unemployment Claims Increase to 484,000

Posted: 15 Apr 2010 09:45 AM PDT

I've been keeping my eye on initial unemployment claims as I've been worried they are moving sideways rather than downward. Unfortunately, last week we didn't even get sideways movement -- claims went up:

Weekly Initial Unemployment Claims Increase to 484,000, by Calculated Risk: The DOL reports on weekly unemployment insurance claims:

In the week ending April 10, the advance figure for seasonally adjusted initial claims was 484,000, an increase of 24,000 from the previous week's unrevised figure of 460,000. The 4-week moving average was 457,750, an increase of 7,500 from the previous week's unrevised average of 450,250. ...
Weekly Unemployment Claims
Click on graph for larger image in new window.
This graph shows the 4-week moving average of weekly claims since 1971. The four-week average of weekly unemployment claims increased this week by 7,500 to 457,750.

The dashed line on the graph is the current 4-week average. The current level of 484,000 (and 4-week average of 457,750) is still high, and suggests continuing weakness in the jobs market. This is much worse than expected.

I know everyone has declared that a robust recovery is about to commence and that happy days are here again, but I'd like to see employment markets turn around before declaring victory. (Better news, at least with respect to output, is that both industrial production and capacity utilization increased.)

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