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August 7, 2012

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Latest Posts from Economist's View


Posted: 11 Jun 2012 12:24 AM PDT
Why won't central banks do more to help the unemployed?:
Another Bank Bailout, by Paul Krugman, Commentary, NY Times: Oh, wow — another bank bailout, this time in Spain. Who could have predicted that?
The answer, of course, is everybody. In fact, the whole story is starting to feel like a comedy routine: yet again the economy slides, unemployment soars, banks get into trouble, governments rush to the rescue — but somehow it's only the banks that get rescued, not the unemployed.
Just to be clear, Spanish banks did indeed need a bailout. ... What's striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain's workers — and more than half its young people — jobless.
Most notably, last week the European Central Bank declined to cut interest rates. This decision was widely expected, but that shouldn't blind us to the fact that it was deeply bizarre. Unemployment in the euro area has soared, and all indications are that the Continent is entering a new recession. Meanwhile, inflation is slowing, and market expectations of future inflation have plunged. By any of the usual rules of monetary policy, the situation calls for aggressive rate cuts. But the central bank won't move.
And that doesn't even take into account the growing risk of a euro crackup. ...
Put all of this together and you get a picture of a European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve.
Still, are we much better? America's near-term outlook isn't quite as dire as Europe's, but the Federal Reserve's own forecasts predict low inflation and very high unemployment for years to come — precisely the conditions under which the Fed should be leaping into action to boost the economy. But the Fed won't move.
What explains this trans-Atlantic paralysis in the face of an ongoing human and economic disaster? Politics is surely part of it — whatever they may say, Fed officials are clearly intimidated by warnings that any expansionary policy will be seen as coming to the rescue of President Obama. So, too, is a mentality that sees economic pain as somehow redeeming, a mentality that a British journalist once dubbed "sado-monetarism."
Whatever the deep roots of this paralysis, it's becoming increasingly clear that it will take utter catastrophe to get any real policy action that goes beyond bank bailouts. But don't despair: at the rate things are going, especially in Europe, utter catastrophe may be just around the corner.
Posted: 11 Jun 2012 12:06 AM PDT
Posted: 10 Jun 2012 01:52 PM PDT
Luigi Zingales has changed his mind about Glass-Steagall:
Why I was won over by Glass-Steagall, by Luigi Zingales, Commentary, FT: I have to admit that I was not a big fan of the forced separation between investment banking and commercial banking along the lines of the Glass-Steagall Act in the US. I do not like restrictions to contractual freedom, unless I see a compelling argument that the free market gets it wrong. Nor did I buy the argument that the removal of Glass-Steagall contributed to the 2008 financial crisis. The banks that were at the forefront of the crisis – Bear Stearns, Lehman Brothers, Washington Mutual, Countrywide – were either pure investment banks or pure commercial banks. The ability to merge the two types was crucial in mounting swift rescues to stabilize the system – such as the acquisition of Bear Stearns by JP Morgan and of Merrill Lynch by Bank of America.
Over the last couple of years, however, I have revised my views and I have become convinced of the case for a mandatory separation.
There are certainly better ways to deal with excessive risk-taking behavior by banks, but we must not allow the perfect to become the enemy of the good. In the absence of these better mechanisms, it makes perfect economic sense to restrict commercial banks' investments in very risky activities, because their deposits are insured. Short of removing that insurance – and I doubt commercial banks are ready for that – restricting the set of activities they undertake is the simplest way to cope with the burden that banks can impose on taxpayers. ...
I was initially swayed by Dean Baker's argument that the banks that caused the most trouble were "either pure investment banks or pure commercial banks" as noted above, and thus that reestablishing a forced separation between the two types of institutions would not do much to insulate us from crises in the future. By my view on this has also evolved along the same lines, e.g. that "With the repeal of Glass-Steagall, investment banks exploded in size and so did their market power" leading to "an opaque over-the-counter market populated by a few powerful dealers," that "The separation between investment and commercial banking also helps make the financial system more resilient," and that, importantly, "Glass-Steagall helped restrain the political power of banks." This should not be the only thing we do to try to make the financial system more stable, there is much,much more that needs to be done. But it is an important part of the effort. (One more note on this -- I also think that there were additional vulnerabilities created by the removal of Glass Steagall. Even if those additional vulnerabilities didn't cause trouble this time around, that doesn't mean they never can. Re-imposing the separation between investment banking and commercial banking eliminates some of these potential problems.)
Posted: 10 Jun 2012 11:56 AM PDT
This is a relatively long extract from a much longer transcript of a worthwhile Berkeley initiative:
U.S. Republican Party: "It's Even Worse than It Looks": Tom Mann and Norm Ornstein at U.C. Berkeley on May 18, 2012, by Brad DeLong: Eric Schickler: Welcome everybody to the Institute of Governmental Studies. ... I want to note it's a really special pleasure to have these two individuals here... Tom Mann and Norman Ornstein play a special role in Washington. They provide the kind of systematic careful analysis that political science prides itself on providing... They are here today to talk about their most recent book,... "It's Even Worse than It Looks; How the American Constitutional System Collided with the Politics of Extremism."
I am now going to turn it over to Tom and Norman.
Tom Mann: ...We have a severe mismatch. On the one hand we have the political parties of today, which political scientists have studied and characterized as intensely polarized, vehemently oppositional, and—given their strategic focus—inclined to act like they would if in a parliamentary system. But alas, they are working under a separation of power system which over time has evolved in a way that has increased the number of veto points—in particular the routinization of the filibuster... It has changed its character, and made it especially difficult to govern. Our recent experience after the 2008 election shows what happens when you have a parliamentary-like minority, convinced that their only hope is to ensure that the president of the other party is unsuccessful, that he fails, occurring in a time of extraordinary economic crisis.
They planned it, they talked about it, they executed it.
It involves, obviously, opposition, delay, defeat if possible, discrediting if it manages to get through, and something we call a new nullification,: that even if the piece of legislation passes, you can deny its implementation not through legitimate means if you have the power to block appropriations, but to deny the conformation of executives to run the agency even if those nominees are fully qualified. It is as if we are in the pre-Civil War south, where they can choose which laws not to acknowledge as legitimate. ...
Now the GOP is distinctive. We have this mismatch in general, but the asymmetry between the two parties is what contributes overwhelmingly to our dysfunctional politics today.
Over to Norman.
Norman Ornstein: ...as you know, we have devoted a lot of our lives to both trying to explain to a larger public how the governing process is supposed to work, and how it does work. We try to say how to improve the machinery and the institutions so that they work relatively well, or at least better than they have been working. And we have written a lot about these different institutions, and been engaged very much in reform efforts.
This now is different for us. It is different because in those 22 1/2 years we simply haven't seen it this dysfunctional. We have seen plenty of dysfunction. When you go through two impeachments, the trauma over the Vietnam War, a lot of other difficulties. ... But this is different. We are alarmed by it. We are alarmed by it in addition because the kinds of problems that we face now, both short and long term are extraordinarily challenging. ... You have a political party that has basically decided: "if you want to implement real revolution, you've got to spill a lot of blood along the way". It's troubling...
I think a good part of the problem is that one side is really trying to encourage that tribalism and make it and us versus them and make it an existential fight. ...
The system doesn't operate if it doesn't have vibrant parties that can compete with different world views and butting heads. But it cannot operate if you don't have something the way the framers designed it, where you can deliberate and reach conclusions to make social change that almost inevitably means dislocation and change for people that will be accepted as legitimate. And that requires building bridges and finding common ground. And that's not happening now. ...
In the Republican Party,... I do think there is simply a cultural difference. For Republicans, it's almost more of a religion or a tribal identification than it is for Democrats. ... You look at misbehavior on the part of the leaders of that religion, and you are shocked and dismayed, but you are not leaving your religion. And you are still going to go to church: you just can't give up something that you held in a lifelong way.
I think Democrats are just different in that front. They don't have the same discipline. ...
Brad DeLong: But they were not organized enough to pass a carbon tax through reconciliation in February of 2009 and then bargain back in the Senate to cap-and-trade.
Norman Ornstein: Well, you know, let's remember this is the Democratic Party. Will Rogers said: "I am not a member of any organized political party, I'm a Democrat." So that's built into the culture as well. But there is a difference here. I think it's one of the things—part of our frustrations, I could easily pick out 30 Republicans in the House who are problem solvers, and who would love to be out there working with Democrats--and in some cases they do in committee and sub-committee. Then there are bills which they contributed to, and they have been compromised before they even get to the floor, and they all vote against him. And of course the other part of this is there is no Democratic Club for Growth that says: "We are waiting for you, and if you vote in way that we don't like, there will be millions in to knock you off in the primary." It happens to Democrats, but nowhere near as significant and the threat is nowhere near as deep.
Brad DeLong: So is the problem that Daily Kos and Netroots Nation are not strong enough?
Norman Ornstein: No, we are not advocating having both parties have an ideological police. ...
Tom Mann: ...many of the groups that have pledges and keep score cards share a broad social, conservative agenda. They do coordinate. But the most consequential pledge by far is the "no new taxes" pledge. Nothing has done more to prevent collaboration on dealing with economic problems than that pledge. It's not Grover Norquist's fault. He was innovative and creative enough to see an opening after Ronald Reagan and Bush 41 signed those tax increases. He wanted to hold on to the image of the early Reagan, and they worked it very well.
They coordinate very closely with the Club for Growth, and all of the economically-oriented groups on the outside that put enormous pressure on Republicans who are not naturally disposed to sign such a pledge to do so. And it hit a tipping point, where if you are not part of it you are out there alone. And it's dangerous and it is uncomfortable being in the Republican Party. If I were a dictator and could change one thing, I would get rid of the pledge and any memory of it, and so to try to return people to a time when they could argue about taxes but ... it wasn't a religion. ...
Brad DeLong: So why aren't you advocating the rapid destruction of the Republican Party as fast as possible? Why aren't you telling everyone go out and vote Democrat now, for this is your last chance?
Tom Mann: Anyone who reads the book, you know, well, might draw that influence in the short term. We talk about reining in the outlier party, and the only way the Republican Party will change is when they are embattled. When it looks as if what they were doing consigns them to permanent a minority party status...
Norman Ornstein: I am not with that. I mean this-- if we get identified as people whose goal is to elect democrats then this book goes right into the trash. I guess I wasn't sort of clear about—what I am saying is one inference to draw from us in the last chapter is you look through this and look at the different dynamics of what could happen is if you agree with the Republicans sort of running of the tracks, then they are going to have to suffer defeat before they change. That's not the same as going out and saying everyone vote democratic you know....
Tom Mann: ... One thing I want to tell you in response to the article ... is that we have had two very interesting categories of emails that have come in. One is from self-identified Republicans, who were part of the group Norm would like to see more dominant within the party, saying: "Thank God! Someone needs to say it!" But the others are from reporters and major news organizations saying: "You have given us a basis to raise these questions again in our news rooms with editors and producers". The best of them are deeply frustrated by this. The object is to get the story right, to tell the truth. It's not to make sure both sides have their voice, for all you have done then is to blur and dumb down the commentary and demobilize the public, because the pubic then has no basis on which to make an intelligent choice.
Norman Ornstein: ... For the mainstream press there is a particular sensitivity to charges of liberal bias. So they have not done their job. We do what we do just to hold them to account. I think you are absolutely right: electoral defeats may not work here. One of the things to keep in mind is if Mitt Romney loses—and he can go all the way over to the far end of the right end of the spectrum in almost everything that he does—the message and theme that will emerge from the right is: "See, we did it again, we picked another moderate ,and we can't keep making that mistake". So next time it's going to be just off the charts. It's not just need for a defeat. You have to bring back the concept of shame, and really force people into a position where they stop behaving badly. ...
Posted: 10 Jun 2012 10:12 AM PDT
The idea that policy uncertainty is holding back the recovery does not find much support when tested against actual evidence, but facts have never constrained Republicans in the past and they continue to try to make this charge stick with voters. In fact, Republicans are so desperate to make this charge, they are resorting to criticizing Obama for letting too many regulation expire. This is John Taylor:
The ... chart shows the number of provisions in the tax code that are expiring each year. ... It shows a substantial increase in the past few years in policy uncertainty.
Republicans complain about any new regulation (unless it constrains social behavior they disapprove of), and they complain when regulations expire. Does that mean they think we are at the Goldilocks point where regulation is just right?
Posted: 10 Jun 2012 09:42 AM PDT
When people get into financial difficulties and have to decide which loans to pay, mortgage payments used to come first. That is no longer true:
Paying mortgage isn't a top priority in tough times, research shows, by Mary Umberger, LA Times: If we've learned one thing from the housing downturn, it's that making the monthly mortgage payment is no longer a sacred concept in many American households. ... When times are tight, consumers put paying for their cars first. Then the credit cards will be paid. The once-mighty mortgage has slipped to No. 3. ...
Why have cars taken the top priority?
We believe that it's primarily because consumers need their cars to get to work or to seek employment. Being able to seek employment is particularly relevant because of how long people have been out of work.
Another factor is what we call the timing of consequences. If you stop paying on your credit cards, the credit card account gets closed, and you can't use it anymore. When you stop paying your auto loans, at some point fairly soon people are going to come to take that car away from you.
But when you stop paying the mortgage, the average time to foreclosure in so-called nonjudicial states [in which the courts aren't involved in the process] is 300 days. In judicial states, in which the courts rule in foreclosures, now you're looking at 10 to 20 months before you'll be evicted.
And you have to look at the idea of equity. In the "traditional" hierarchy, you'd say that people valued their homes above all else. But this is slightly inaccurate: They valued their equity above all else. When equity evaporates for consumers, the home is not so important.
Is this a permanent change in our attitudes?
We don't think so. We think that when home values become stable, when unemployment returns to healthier levels ... we would expect those traditional forces to return to normal. It's not that consumers have become irrational; they're actually rational. ...
I would also add that the expected consequences of default on a mortgage, e.g. the ability to get credit in the future, aren't as large as they used to be.

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