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May 17, 2010

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Latest Posts from Economist's View


Paul Krugman: Going to Extreme

Posted: 17 May 2010 01:08 PM PDT

Why is right-wing extremism suddenly in the news?:

http://www.nytimes.com/2010/05/17/opinion/17krugman.html: Utah Republicans have denied Robert Bennett, a very conservative three-term senator, a place on the ballot, because he's not conservative enough. In Maine, party activists have pushed through a platform calling for, among other things, abolishing both the Federal Reserve and the Department of Education. And it's becoming ever more apparent that real power within the G.O.P. rests with the ranting talk-show hosts.

News organizations have taken notice: suddenly, the takeover of the Republican Party by right-wing extremists has become a story...

But why is this happening?... The right's answer, of course, is that it's about outrage over President Obama's "socialist" policies... Many on the left argue, instead, that it's about race... — and there's surely something to that.

But I'd like to offer two alternative hypotheses: First, Republican extremism was there all along — what's changed is the willingness of the news media to acknowledge it. Second, to the extent that the power of the party's extremists really is on the rise, it's the economy, stupid.

On the first point: when I read ... journalists who are shocked, shocked at the craziness of Maine's Republicans, I wonder where they've been... Indeed, the new Maine platform is if anything a bit milder than the Texas Republican platform of 2000, which called not just for eliminating the Federal Reserve but also for returning to the gold standard, for killing not just the Department of Education but also the Environmental Protection Agency, and more.
Somehow..., the radicalism of Texas Republicans wasn't a story in 2000, an election year in which George W. Bush of Texas, soon to become president, was widely portrayed as a moderate.
Or consider those talk-show hosts. Rush Limbaugh hasn't changed... What's changed is his respectability: news organizations are no longer as eager to downplay Mr. Limbaugh's extremism...
So why has the reporting shifted? Maybe it was just deference to power: as long as America was widely perceived as being on the way to a permanent Republican majority, few were willing to call right-wing extremism by its proper name. Maybe it took a Democrat in the White House to give some observers the courage to say the obvious.
To be fair, however, it's not all ... perception. Right-wing extremism ... clearly has more adherents now than ... a couple of years ago. Why? It may have a lot to do with a troubled economy. ...
When the economy plunged into crisis, many observers — myself included — expected a political shift to the left. After all, the crisis made nonsense of the right's markets-know-best, regulation-is-always-bad dogma. In retrospect,... this was naïve:... in bad times, the gut reaction of many voters is to move right.
That's the message of a recent paper by ... Markus Brückner and Hans Peter Grüner, who find ... periods of low economic growth tend to be associated with a rising vote for right-wing and nationalist political parties. The rise of the Tea Party, in other words, was exactly what we should have expected in the wake of the economic crisis.
So where does our political system go from here? Over the near term, a lot will depend on economic recovery. If the economy continues to add jobs, we can expect some of the air to go out of the Tea Party movement.

But don't expect extremists to lose their grip on the G.O.P. anytime soon. What we're seeing in places like Utah and Maine isn't really a change in the party's character: it has been dominated by extremists for a long time. The only thing that's different now is that the rest of the country has finally noticed. 

"German Households Owe More Than Greece’s"

Posted: 17 May 2010 12:33 AM PDT

Since you had so much fun with the last comparison, here's another one from Yves Smith:

German Households Owe More Than Greece's Do, by Yves Smith: Be careful about your cultural stereotypes! From Bloomberg, via Marshall and Andrew:

Greek-gerrman-debt

"Return to the Abyss"

Posted: 17 May 2010 12:24 AM PDT

Nouriel Roubini is becoming increasingly hawkish about public debt:

Return to the Abyss, by Nouriel Roubini, Commentary, Project Syndicate: ...History ... suggests that financial crises tend to morph over time. Crises like those we have recently endured were initially driven by excessive debt and leverage among private-sector agents... This eventually led to a re-leveraging of the public sector as fiscal stimulus and socialization of private losses – bail-out programs – caused a dangerous rise in budget deficits and the stock of public debt.
While such fiscal stimulus and bailouts may have been necessary to prevent the Great Recession from turning into Great Depression II, piling public debt on top of private debt carries a high cost. Eventually those large deficits and debts need to be reduced through higher taxes and lower spending, and such austerity – necessary to avoid a fiscal crisis – tends to slow economic recovery in the short run. If fiscal imbalances are not addressed through spending cuts and revenue increases, only two options remain: inflation for countries that borrow in their own currency and can monetize their deficits; or default for countries that borrow in a foreign currency or can't print their own.
Thus, the recent ... global financial crisis is not over; it has, instead, reached a new and more dangerous stage. ... The progression is clear: first came rescue of private firms, and now comes the rescue of the rescuers – i.e., governments.
The scale of these bailouts is mushrooming. During the Asian financial crisis of 1997-1998, South Korea ... received ... $10 billion. But, after the rescues of Bear Sterns ($40 billion), Fannie Mae and Freddie Mac ($200 billion), AIG (up to $250 billion), the Troubled Asset Relief Program for banks ($700 billion), we now have the mother of all bailouts: the $1 trillion European Union-International Monetary Fund rescue of troubled eurozone members. A billion dollars used to be a lot of money...
Governments that bailed out private firms now are in need of bailouts themselves. But what happens when the political willingness of Germany and other disciplined creditors – many now in emerging markets – to fund such bailouts fizzles? Who will then bail out governments that bailed out private banks...? Our global debt mechanics are looking increasingly like a Ponzi scheme.
While the right medicine needed to avoid fiscal train wrecks is well known, the main constraint ... is that weak governments ... lack the political power and willingness to implement austerity. Political gridlock in Washington ... demonstrates the absence of the bipartisanship needed to address America's fiscal issues. In the United Kingdom, a "hung" parliament has resulted in a coalition government that will have a hard time implementing fiscal discipline.
In Germany, Chancellor Angela Merkel lost a key state election after the rescue of Greece, and Japan has a weak and ineffectual government that seems in denial of the scale of the problem that it faces. In Greece itself, there are riots in the streets and strikes in the factories; in the rest of the PIIGS (Portugal, Ireland, Italy, and Spain),... political constraints may prevent fiscal austerity and structural reforms from being implemented.
As a result, "crisis economics" is likely to be with us for a long time. Indeed, the recent financial crisis is not over, and, worse, the medicine used to treat may have been partly toxic. It seems to have made the patient weaker and more addicted to dangerous drugs, as well as more susceptible to new strains of the virus that may, in some cases, eventually prove fatal.

When we are around six months until the economy returns full employment, it will be time to begin tightening both monetary and fiscal policy, but anything before that risks unduly slowing the recovery or even sending the economy back into recession. It's fine to plan what to do when the time comes, and we should begin doing that, but we need to avoid being overly anxious to begin reversing stimulative policy. The other thing is, since the main problem is rising health care costs -- the rest of the budget can be managed without much trouble -- it's not clear how we solve that problem right away in any case. There are certainly things we can do on the revenue side, and measures on the spending side such as ending wars would help as well. But the biggest part of the problem by far it the growth in health care costs, and that will take time -- and considerable political battling -- to resolve.

I'm not saying there's nothing to worry about, though things have been a bit better lately the political environment is generally fairly toxic, and it's not clear politicians are up to addressing the long-run health care challenge. But that doesn't mean we should begin pulling back on stimulus programs before the economy is ready. It wouldn't help much at all with the long-run problem, but it could cause considerable trouble in the short-run.

links for 2010-05-16

Posted: 16 May 2010 11:03 PM PDT

MoneyWatch Posts

Posted: 16 May 2010 07:20 PM PDT

This is a list of my posts at CBS MoneyWatch:

[This is just so I have them all in one place (though it won't hurt my feelings if you decide to read one of them). I started a MoneyWatch category for posts not too long ago to make the posts easier to find later, and this is faster than going back and trying to add the tag to all the references to MoneyWatch posts that appeared here.]

Is Merkley-Levin "A Joke"?

Posted: 16 May 2010 06:57 PM PDT

Economics of Contempt argues that statutes that ban on proprietary trading at banks and bank holding companies must leave considerable discretionary power to regulators, attempts to be more specific end up creating more loopholes than they close:

Merkley-Levin Is a Joke, by Economics of Contempt: The Merkley-Levin Amendment (SA 3931) is a version of the Volcker Rule. The Volcker Rule, if you'll recall, is a ban on proprietary trading at banks and bank holding companies (BHCs). If you ask Merkley and Levin's offices, they'd no doubt tell you that their amendment significantly strengthens the existing Volcker Rule language in the Dodd bill (Section 619 of S.3712). Don't be fooled — it does nothing of the sort. I spent the majority of my career as a lawyer for a big investment bank, and my first thought after reading Merkley-Levin was: "Wow, this would be cake to get around." Wall Street is scared of the Volcker Rule, but believe me, they're not scared of Merkley-Levin.

This requires a bit of explanation. To ban prop trading at BHCs, the law must distinguish between market-making trades and propietary trades. Market-makers stand ready and willing to buy or sell securities for their own account, at firm bid and offer prices. If an investor is looking to sell a security, the market-maker will buy the security using its own capital, and hold it in inventory until an investor who's looking to buy the security surfaces. Holding many inventories of securities (i.e., bonds, stocks, derivatives) exposes market-makers to all manner of short-term market risk, interest rate risk, foreign exchange risk, etc. This requires market-makers to do quite a bit of hedging in order to safely carry these inventories. We don't want to prevent banks from hedging the inventories they hold as market-makers, but we do want to prevent banks from entering into trades that aren't intended to hedge a risk associated with its market-making activities — that is, purely speculative prop trades. This is a difficult and complicated task, but it can be done (I've seen it done from the inside).

Ideally, what the financial reform bill would do is just say, "Proprietary trades are banned; market-making trades are allowed," and then let the regulators work out how to define "market-making trades" and "proprietary trades." This is something that simply can't be done at the statutory level; it has to be done at the regulatory level. Unfortunately, these days it's fashionable for people to bash any sort of regulatory discretion as tantamount to letting Wall Street win. This is where Merkley-Levin comes in, because it's clearly a response to this "anti-regulatory discretion" meme. ...

Merkley-Levin prohibits "proprietary trading," which it defines very broadly, and then creates 9 categories of "permitted activities" (listed in section (d)(1) of the amendment). The categories of "permitted activities," which function like exceptions to the definition of "proprietary trading," are so ridiculously broad that they completely swallow the amendment's prop trading ban. ...[goes on to lists several exceptions and then explains why they are problematic, for example]...

...So essentially, section (G) allows BHCs to continue their prop trading through their London offices, provided they find non-US counterparties (shouldn't be too difficult), and the trading isn't being controlled by someone in New York (fine, just send all your prop traders to London). And this is in addition to all the prop trading the banks could do out of their New York offices under the ridiculously broad "permitted activities" in sections (d)(1)(B) and (C). Seriously, this would be like taking candy from a baby for the dealer banks. ...

People often ask why I say that complicated financial regulations can't be written at the statutory level. The reason, sorry to say — which Merkley-Levin demonstrates quite well — is that Congress sucks at writing complicated financial regulations.

I think specific rules are best, where they can be applied, but strict dividing lines aren't always possible and regulators will generally have at least some discretionary power in enforcing the rules. In addition, even with very specific rules, it still comes down to the will of regulators to enforce the statutes on the books. Strict rules don't do much good if the people enforcing them simply look the other way when they are violated. But I don't know enough about this particular issue to say whether strict rules on proprietary trading are as difficult to write as described above. The argument sounds convincing, but an experienced lawyer ought to be able to make a convincing case. Anyone want to argue the other side?

One other note. If discretionary authority for regulators cannot be avoided, and it can't, and if it sometimes involves very important, but complicated issues, as it does, then we need qualified, dedicated regulators. We are seeing the consequences of poor regulation in the gulf right now, and those problems, together with the problems that poor regulation caused related to the financial crisis, show that the consequences of lax regulation, regulatory error, or poorly structured rules and regulations can be very, very large.

We have been through a period where the people in charge of regulation were not chosen with much care. The attitude toward government in the previous administration led to these positions being used as rewards for political support or to further the administration's ideological agenda much more so than before, and this administration has not moved as fast as it should have to clean up the mess. I hope that recent events lead people to better understand the importance of filling the agencies in charge of regulation with dedicated, capable people, and that politicians and administrations that do not take this mission seriously will be held accountable. But I hope for lots of things, it certainly doesn't mean they'll happen. However, I am encouraged by recent indications concerning financial reform regulation. It's not as strong as I'd like, but it's looking to be much stronger than I thought it would be, so perhaps there's hope that we are beginning to take these issues more seriously than we have for some time now.

"The OECD’s Growth Prospects and Political Extremism"

Posted: 16 May 2010 11:34 AM PDT

Right-wing extremism is more common when economic growth is lower. That doesn't surprise me, but the effect isn't all that large. A one percent change in growth only translates into a one percent change in vote share. But why does this result get stronger when income is more equal, i.e. why does the vote share for extremists double when societies are more equal? Is this a proxy for highly interventionist policies that produce a backlash when growth falls? Or is something else behind this result?:

The OECD's growth prospects and political extremism, by Markus Brückner and Hans Peter Grüner, Vox EU: Will the global crisis lead to a rise in political extremism just as during the Great Depression? ... Is political extremism always likely to be marginal in rich economies? Will changes in growth promote support for right-wing or left-wing parties, or both?

Benjamin Friedman has argued that GDP per capita growth is a key factor for the development of a political system (Friedman 2005). His analysis ... points out that only a continuous improvement of individual living standards provides the ground for the development of what he calls a more "open" society. Accordingly, it is not so much the level of GDP that determines the way in which a democracy develops but the growth rate. ...

In our recent CEPR Discussion Paper (Brückner and Grüner 2010), we examine the question of how GDP per capita growth is linked to the support for extreme policy platforms for a panel of 16 OECD countries. ...

Our main finding is that higher per capita GDP growth is significantly negatively linked to the support for extreme political positions. While estimates vary between specifications, we find that roughly a one percentage point decline in growth translates into a one percentage point higher vote share of right-wing or nationalist parties. Moreover, we find that the amount of income inequality in a country affects the role that growth plays. Highly unequal countries display a lower growth effect than more equal countries. For countries with a more equal distribution of income, a one percentage point drop in the growth rate may increase the vote share of far right parties by up to two percentage points. ...

Our results lend support to Benjamin Friedman's view that economic growth determines the direction in which a democracy develops. ...

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