Tag Archives: economics

Fiscal crisis 101

The following is from the TwShiloh economic correspondent who was nice enough to answer some questions I had about the origins of our current financial…challenges.  I include it here because I found it not only incredibly interesting but also accessible.  So, assuming that some of you might be just as interested I include it here.

So, my question was:

Granted ‘to big to fail’ is a terrible system but isn’t that where we found ourselves in 2008?

I keep hearing economists say what we need now is more stimulus and not belt tightening (but, of course, that’s off the table).  But there are some that are arguing that not only should we be belt tighten but that had we not done anything in 2008 the economy would be in great shape now.

Even more basic than that, though…doesn’t it depend on if you buy into Keynesianism or some other school of economic thought?  I mean, in 2008 when it got real bad real fast, it seemed the question was ‘How do we stop this from getting worse’ with the assumptions:

  1. the credit market is freezing up
  2. everyone is so freaked out they’re hording whatever money they have
  3. we’re on a precipice of a total global financial shutdown.

If I understand the current conservative line of thought it basically says ‘Let it go and it’ll all work out.’

The ‘conventional’ (?) wisdom was:  we need to pump a lot of money into the economy and keep key businesses afloat to restore confidence and allow existing financial systems chugging along.  Reform can come after the crisis.

So, I guess I’m not sure a) if those assumptions were reasonable, b) what a ‘global financial meltdown’ would mean practically, c) if the ‘do nothing’ approach was a reasonable response and d) were there other alternatives?

And here is his response:

First things first. The bailouts started under the Bush administration as encouraged by all of the ex-Goldman execs within and near the govt. Chief among them is former Goldman exec Henry Paulson, who pursued the ‘declare Apocalypse and throw money at Wall Street’ strategy. He appointed former Goldman VP Neel Kashkhari to oversee the $700 billion TARP fund. Anyway, see below for that laundry list of close ties and infiltrators.* The only reason I bring that up, is the ‘conservative’ approach (the Republican approach), was to pass the bill from Wall Street to the citizens. Ok, let’s look at the great points you raised and examine them.

Premises:

  1. the credit market is freezing up
  2. everyone is so freaked out they’re hording whatever money they have
  3. we’re on a precipice of a total global financial shutdown.

Questions:

a) if those assumptions were reasonable

b) what a ‘global financial meltdown’ would mean practically,

c) if the ‘do nothing’ approach was a reasonable response and

d) were there other alternatives?

Credit Markets Freezing Up

This was not only reasonable, it was a fact. When banks fear the creditworthiness of each other, they are unwilling to trade very short term instruments called swaps. These are the tools used to generate interest on large sums of money held by very large corporations. Example – Coca Cola doesn’t keep its payroll funds sitting in a bank account. It holds paper – very short term commercial paper. It is effectively loaning it’s money to other institutions via the banks to generate some yield. The maturities might be weeks or days. If the banks lose faith, they won’t lend their assets to other banks with customers who want to borrow the funds. The result is a little like musical chairs. When the big banks stop playing, there’s no one left to generate the notes to trade. So large corporations were caught without true cash reserves. This was (and IS) compounded by the fact that some of what little ‘cash’ these companies held was in overseas investments (again to get better yield). That restricted liquidity. So companies had to raise cash – fast – to simply pay bills. Example: Warren Buffett bought $3B worth of GE preferred shares that paid 10% interest – because GE was desperate. There is no doubt that everyone was freaking out. And we were indeed on the verge of a global financial crisis. I think we still teeter there to one degree or another.

The system seized up, not because all banks were uncreditworthy. But because no one knew which banks were unworthy. The answer was NOT to throw money into the system, but to guarantee certain transactions and liquidity while the banks unwound their bad investments. Guarantee counterparty risk for the swaps, or better yet, become the temporary bank of last resort as the government itself. Open a window and provide LOANS (not gifts) with real interest rates and top priority in the capital structure – ahead of every other stock or bondholder. Example: GE needs $$, but banks won’t lend. So GE goes to the govt. and borrows $3B at a reasonable rate and that loan is the FIRST in line to recover assets should the company default. Subordinate all the other stakeholders immediately. Then, as GE recovers, it can pay off the debt as it wishes. If the company’s balance sheet is SO bad, because it holds too much junk listed as assets (the mortgage backed securities and straight up bad loans made by GE Capital), then the company must trim other obligations to stabilize the balance sheet. Instead of adding public dollars to the asset side, the company should default on its bond payment obligations. If those bonds were wiped out – either through a traditional corporate bankruptcy or lesser restructuring, the balance sheets might balance. In many cases they would have. I’ve heard that would have been the case if GM restructured its bond debt.

In this scenario, we’d have a LOT of upside.

1)      The fixes would all be based on existing laws – bankruptcy laws, etc. This provides precedence, consistency, justice and predictability. Also, accountability.

2)      There would be VERY little public risk. There WOULD be a lot of investor losses. But isn’t that part of the deal as investors?

3)      The culpable institutions as well as the victims would be dismantled and replaced with new firms under new management. And there might actually be a lesson learned that taking these ridiculous risks is NOT worth it. Boards of directors might wake up. Executives might be more attentive.

4)      The recovery would be genuine. It would take a little time (maybe less than the current plan will take), but the strength of our system would regrow more like a healed broken limb and less like a boxer jacked up on speed to finish the fight (and then collapse).

I don’t think ‘do nothing’ was ever an option. It got too bad to ignore. In fact, it only got so bad BECAUSE it was ignored so long. But I think a rational, legal unwinding of the institutions that placed themselves in such direct jeopardy would have been much better for us as a country. It would NOT have been better for the elite few who actually profited from the inflation and subsequent bursting of the bubble. Nor would it have been better for the profiteers who made out like bandits in the midst of the panic and chaos. But their interests have been prioritized not only above the other 90% of Americans, their interests were placed above our national security, our reputation and indeed, our very sense of justice and fairness.

Side note: I’ve read that despite the ridiculous profits the banks have made over the past year (borrowing money from the fed for free and then using hat same money to buy treasuries which pay interest risk free), most of the large banks in this country would be completely insolvent if they had to mark their assets to market. Right now, they are allowed to value their assets based on their own estimates – which are most likely MUCH higher than the real value. So, while the balance sheets are skewed by fake numbers of the asset column, and the banks are making massive profits at the direct expense of the public (who pay the interest on the treasuries), they’re setting records for executive bonuses.

By the way, not dive too deeply into the grit, here’s an article on the way these investment banks played their hands with the shady mortgage backed bonds. They were eyes-open and playing full-contact rape. They should have gone out of business and their collective demise might serve as a lesson to future management teams. Instead the only lesson is that crime pays VERY well.

http://www.propublica.org/article/banks-self-dealing-super-charged-financial-crisis

Kvick Tänkare

Even though it was a long, long time ago, I still remember the day I was sworn into the Army and shipped out to my basic training.  Lots of trepidation and anxiety that I can only imagine is only a fraction of what Russian conscripts go through when they’re called up.  With rampant hazing of new soldiers I’m pretty sure I’d do whatever I could do get out of military duty there.

Still…at least they get jugglers.

Have you seen this ad by the Citizens Against Government Waste (uh, apparently except when the government wastes on them)?  It takes us into a dystopian future of the Chinese dominated world.  We peer into a Chinese university campus where the professor explains how great powers fall.  And there, surrounded by pictures of Mao (indicating the Communist Party is still doing pretty good in 2030) we hear what caused the mighty U.S.A. to fall:

  1. government stimulus spending
  2. big changes in its health care systems
  3. public intervention in major industries

The message is clear.  We need to be more like those danged Chinese who are cleaning our clock by being so darned economically adaptive (and let’s face it, their willingness to imprison and execute those who question if their country isn’t the bestest, greatest country every bestowed upon mankind is pretty great too).  We could continue to be masters of the world if only we followed their lead and, for example, embraced their free market principles of:

  1. government stimulus spending
  2. big changes in its health care systems
  3. public intervention in major industries

While the commercial is slick and well done it’s misunderstanding of history is staggering.  Rome fell because it turned its back on its principles?  It lasted (depending on how you count it) for about 800 years and probably ‘abandoned its principles’ 500 years before it fell.

The Swedish city of Malmö has a sniper who’s been targeting immigrants lately.  The Swedish press is referencing an earlier shooter from the 1990s known as the ‘Laser Man‘.  It also appears that even though they haven’t identified any suspects authorities are assuming this is a lone gunman.

Perhaps they should review the Beltway Sniper case to see how relying too much on unexamined assumptions can hinder investigations.

 

‘There are opportunities…it just depends on if you can grab them.’

If you’re concerned about a growing Chinese military threat you’re wasting your time.  Rather, if you see China as a threat to American hegemony you should be looking at places like Senegal.  Al Jazeera has a special about Chinese immigration to Africa.  How many Americans (even in this time of economic hardship) are willing to pack up and move to a new economic frontier?  Meanwhile, who do you think is going to have more influence throughout the continent in the next 10 or 20 years?

Best line:  ‘Chinese people like to do things quickly and things move slower in Africa.’

One doesn’t usually hear of Chinese being the impatient ones.  After all, aren’t they still waiting to see how the French revolution worked out?

Kvick Tänkare

This article (I can’t remember where from now..mea culpa!) discusses some interesting and disturbing research if you’re looking for underlying causes why some countries ‘made it’ and others have struggled.  Don’t think colonialism or slavery…you have to go much further back.

1500 AD technology is a particularly powerful predictor of per capita income today. 78 percent of the difference in income today between sub-Saharan Africa and Western Europe is explained by technology differences that already existed in 1500 AD – even BEFORE the slave trade and colonialism.

The state of technology in 1000 BC has a strong correlation with technology 2500 years later, in 1500 AD.

This dude has had his house hit by meteors six times!  Now, he might be the only guy in the world who can say this and not be dismissed as a kook out of hand:

“I am obviously being targeted by extraterrestrials,” he said.

Snapshot of economic attitudes in America: Mrs. TwShiloh was shopping and a man was behind her in line with one or two items.  Mrs. TwShiloh, having a fairly full cart and, more important, handfuls of coupons said:

“If you’d like you can go ahead of me.  I’ll probably take a while with all these coupons.”

To which he replied:  ‘No problem…I like to see capitalism get ripped off.’  I think it’s reasonable to assume that guy didn’t purchase a copy of ‘Going Rouge’.

H/T Balko for a link to this story about a mashup between NGOs and an Abbott and Costello routine:

The World Health Organization found itself Friday in the strange position of defending North Korea’s health care system from an Amnesty International report, three months after WHO’s director described medicine in the totalitarian state as the envy of the developing world.

Cynic is guest posting for TNC and he raises some interesting questions about the intersection of COIN and law enforcement.

Last year, our forces shot and killed 36 Afghan civilians, and wounded more than twice that number, as their vehicles approach convoys and checkpoints. And not once since McChrystal’s arrival have any of those we’ve shot proved to be a genuine threat. Imagine, if you will, that the NYPD had a record like that.

Look out Stephen Colbert.  Bears may be a big threat now but global warming may put giant marmots at the top of the threatdown.

Neo-Nazi clothing maker throws a hissy fit when some people decide to market their own line of clothing mocking them.  If you’re going to be a nazi, you probably shouldn’t be a whiner as well.

The fall of Rome with spoiled brats

I’m finally getting around to reading this months Atlantic monthly (you’d think for the amount of time I shill for them they’d throw me some swag or something) and hit upon ‘How a New Jobless Era will Transform America‘ by Don Peck.  It’s grim.  Basically, unemployment (and underemployment) is over 17% and we’re going to need amazing levels of growth over an extended period of time if we want to get at the ‘benchmark’ rate of around 5%.  But that’s not what caused me to write about the article.

Check out this quote:

“…the innovative potential of the U.S. economy looks limited today.”

“Dynamism in the U.S. has actually been in decline for a decade; with the housing bubble fueling easy (but unsustainable) growth for much of that time, we just didn’t notice…”

At the risk of appearing melodramatic, for some reason I immediately thought about the late Roman empire.  While I don’t think this the the end (or even the beginning of the end) I began thinking about how aware we might be to historically significant trends and events that might be going on around us.  Did Romans see the spread of the Laitfundium and the tying of people to hereditary occupations would lead to weaken the empire over the long term and eventually give rise to feudalism?  Heck, provided you weren’t in the way of the migratory nations would you even know the empire was ‘falling’ (a long, inevitable decline rather than just a temporary rough spot)?

“We haven’t seen anything like this before:  a really deep recession combined with a really extended period, maybe as much as eight years, all told, of highly elevated unemployment…We’re about to see a big national experiment on stress.”

So how might something like this affect the population and then what would the long term consequences be (if any) on the culture (political/social/economic) and international system?

That leads into my second point which is a bit more whimsical.  Peck makes it quite clear that it’s ‘folly’ to try to characterize entire generations with labels and stereotypes.

But, once that formality is out of the way, he takes a couple pages to generalize and slap around Gen Yers.  Normally, I’d really call him out on that but since I enjoy talking trash about them as well (Us generation  Xers are the only decent generation – everyone else is either too old or too dopey).

Well, all I’ve got to say is we’re in big trouble if Peck is right about these knuckleheads.

“…a combination of entitlement and highly structured childhood has resulted in a lack of independence and entrepreneurialism in many 20-somethings.  They’re used to checklists…and ‘don’t excel at leadership or independent problem solving.”

Peck then goes on to spread the gloom.  These economic conditions could also strike a blow to the institution of marriage as the poor put it off (too expensive and risky) but don’t postpone having children (which are seen as a ‘low cost way to achieve meaning and bolster identity’).  This leads one of Peck’s sources to say:

We could be headed in a direction where, among elites, marriage and family are conventional, but for substantial portions of society, life is more matriarchal.

One of the emerging stories of this recession has been that crime hasn’t risen as many people expected.  Some say this proves that ‘liberal’ theories about why people commit crime is flawed (lack of alternatives, economic shortcomings, etc.).  The argument in the article is that the impact of a distressed economy on the social fabric takes time to manifest (insert your trying to turn a battleship on a dime metaphor here) and will take a long time to recover from as well.

So…predictions of immediate spikes in crime were unfounded and treated society as much more nimble than it is.  For us, the worst may be in the pipeline.

Finally, misery won’t be a positive social bonding experience either:

…both inside and outside the U.S., lengthy periods of economic stagnation or decline have almost always left society more mean-spirited and less inclusive, and have usually stopped or revered the advance of rights and freedoms.

The article does have some problems.  It’s filled with so many ‘could’, ‘might’, ‘may’ phrases that it sounds like a a weather report (‘We can expect either rain or sun today so bring your umbrella and sun screen!’).   The article relies on various experts in the field (although the article doesn’t provide a lot of clues how reliable/credible these people are) and anecdotal evidence so it’s difficult to tell how much of this article is steak and how much is sizzle.

What to cut?

So you may have seen this already but the NY Times has a nice graphic of the 2011 proposed budget.  I get the fiscal conservative thing.  I really do.  But, assuming we don’t voluntarily undertake a serious realignment of what we do and who we are (like fundamentally change our military posture and significantly restructure entitlements) what in the hell can you cut that would make any sort of a dent into our deficit spending?

And please…explain to me how lower taxes are going to make this picture better (and yes, I understand the Laffer curve but I would like some evidence of where we might be on that curve before we automatically start shifting left on it).

As a tool for conveying information I have to admit I’m a sucker for interactivity like this.  I suspect that’s why I also liked pop-up books and such when I was a kid.  This seems nice, simple to navigate and conveys a nice bit of information even if you don’t get into the weeds (all you people who think we’d be financially secure if we’d just stop sending money overseas, check out that puny box that represents foreign aid).

Strongly held assumptions resist data!

Planet Money yet again provided a great example of how preconceived notions resist contrary information.  First a bit on context, although the details of the episode aren’t totally relevant to the point I’m making here.  The episode focuses on the idea of taxing ‘Cadillac’ health care plans and they get an economist from MIT to argue for the proposition saying that the evidence is that such a plan does not negatively impact upon public health, controls cost and will likely lead in increased wages.

The sound engineer objects strenuously.

Madcap hilarity ensues as both try to convince each other by using criteria the other rejects.

The engineer relies on personal, anecdotal evidence (“I’ve seen this…I know someone that…”) while the economist relies on data (‘We’ve got X number of studies that say Y’).  There’s no convincing going on here and it reminds me (whoa…name dropping alert) of Kierkegaard’s  Either/Or (eh…it’s not that impressive, I only know about it because I heard a summary of the work via the Teaching Company) where he says everyone has to make a decision between the religious and aesthetic life and there’s no criteria upon which to base the decision which doesn’t presuppose the answer.

This is the same situation.  The economist could have cited studies until he was blue in the face and the engineer would still say:  “Yeah, but I don’t know anyone like that.”

I suspect this happens a lot more than we realize, even in the intelligence field and the problem lies in the fact that the protagonists don’t set the ground rules and aren’t clear what they’re talking about.  They both value different aspects of the issue their studying and what metrics to use to define success.  Of course I suspect any attempt to reach an agreement on what to talk about would result in it’s own dispute but at least these guys would know what they were arguing about rather than having to have a proxy fight about something else.

The other interesting point is one that was discussed by Richards Heuer when he says:

  • Mind-sets tend to be quick to form but resistant to change.
  • New information is assimilated to existing images.

Good examples of both of those here.

Economic heresy

Planet Money had a couple of podcasts about the economy of Denmark recently and presented some interesting facts:

Denmark has one of the lowest poverty rates in the world and lowest income disparities. At one point the jobs picture was so good unemployment dropped below 2 percent, something some economists would tell you should be impossible. Despite having the highest taxes in the world, economist Ove Pedersen says Denmark’s economy has grown steadily. Also, Danes are the happiest people in the world, at least according to one analysis.

‘Yeah’ I hear you say, ‘But they’re backs are breaking under the strain of living under this tax crazy, soul-sucking socialist hell.’  Well, what do the young people (the ones expected to pay the most while getting the least out of this system) think about this?  According to one student who was asked about how she felt paying such high taxes:

“I think it is terrific. . . . I get a little bit angry because constantly in Denmark there’s this talk that we have to lower the taxes, lower the taxes, lower the taxes. And I can only say I’m very young, I am only 25 years old, and already the system has provided me with a great education and help whenever I need it. I have been able to go the library whenever I needed it. I have not been to the hospital many times in my life, but when I have been it has not been a problem. I mean, I think we are so privileged that it is so wrong to attack this system.”

These podcasts are the basis of a really interesting post (and the point of this post) on the Baseline Scenario that talks about out (American) assumptions about capitalism and what economic system is the most efficient and productive.  He discusses this and expands upon two arguments:

  1. First, it’s not obviously true that the more free your markets, the faster you grow.
  2. …it stretches plausibility to argue that more free markets and smaller government always lead to more growth…

What I really like about all these posts is how they present a whole different view of reality from what we’re used to AND a demonstration of how we can internalize assumptions without even being aware of it.

From Baseline Scenario again (this time following up from the student’s comment):

Obviously not very many Americans feel this way; since the Reagan Revolution if not the 1970s, there has been an increasingly widespread belief that government spending is wasteful, and therefore people want to hold onto their money. But there’s nothing irrational or bizarre about thinking that high taxes and high benefits are good, and you don’t have to agree with her to see that.

So I think it’s telling that on an issue as basic as this–is small government necessary for economic growth–they have internalized the economic orthodoxy so completely that Denmark becomes “Bizarroland.”

I like Planet Money but they do clearly have an intellectual framework within which they base their reporting.  When they bring in people with contrary opinions it’s clear that they are introducing ideas that are contrary to (their) conventional wisdom and (at least to me) comes across as therefore less than credible.  (I really could develop this more as I can’t point to specifics here but rather just a feeling I get as I listen to their podcasts.  I haven’t really dug into this question enough to pinpoint what it is about their reporting that gives me that impression.)

Intelligence agencies struggle with the very same issues except they have an added layer of difficulty in that:

  1. fewer people get to see the assumptions which drive the analysis because of security
  2. most of the producers and consumers of intelligence share a worldview, if not an organizational culture, which predisposes them to not just view information through a particular lens but also in terms of what information is deemed worthy of viewing.

So, how to overcome those biases?  Well, there are the usual platitudes of ‘include more people’, ‘search for more sources’, etc. but it’s hard (impossible?) to systematize those things.  Likewise, it’s just not practical to subject every piece of analysis to an academic style peer-review.  I suspect there is no perfect answer but I’d recommend a couple of easy steps

  1. reducing products to the lowest classification possible (nothing new here)
  2. Actively develop ‘push’ and ‘pull’ distribution systems (beyond individual products to the shop/agency level).  This needs to be more than the occasional email or period homepage update.  If you aren’t already the ‘go to’ agency (any regardless of what you think, you probably aren’t) ‘marketing’ of your products needs to be more than an afterthought.  Your brilliant product isn’t worth jack if nobody knows about it.
  3. An open forum for continuing conversations on the product.  Paper/pdf/powerpoint/etc. products need to be heading in the direction of the dinosaur or, at least, should be very rare indeed.  For products to maintain their usefulness, they need to not just have the ability to be continuously updated but debated within the community (and maybe even outside when circumstances allow).

Quick thinking (Kvick Tänkare)

As promised, here is your smorgasbord of things to think about…

Medieval ‘Vampire’ Skull found!   Don’t get excited, it’s not nearly as cool as the headline would lead you to believe but it’s still worth a read.

Monster Mummies of Japan:  This IS as exciting as it sounds.  I’d recommend just looking at the pictures if you don’t want to be disabused of the idea that demons really do roam the land of the rising sun.

Zoo chimp ‘planned’ stone attacks:  In Sweden (of course) a chimp is accused of stockpiling rocks in order to attack the gawking public.  Now, I was planning on writing about how this is an indication of how the notoriously violent Swedish society has even filtered down to the zoo animals or how this must be another fiendish plot by King Gustav but the real story here is that this is evidence that animals have the ability to plan future actions.  It becomes much more morally problamatic to treat animals like Cartesian automatons if we can prove they actually think.

Wall Street on the Tundra:  A little bit of everything, hubris, economics, cod and elves.

Welcome to the New Gold Mines:  Interesting article on gold farming where people pay others (usually in the third world) to do the mundane tasks in their computer games in order to advance and gather wealth.  It seems to me that if you have players who’d prefer to pay people to play for them rather than play themselves it’s probably:

  1. not a very good game,
  2. people don’t understand the concept of ‘play’, and
  3. the end is near

Alternate hypothesis – the case of Rick Santelli

Megan McArdle posted an article that went up (and then quickly came down) from the Playboy website (hey, I guess people really do read the articles! – ok…I know, totally lame and predictable line) about Rick “Are you listening President Obama?!” Santelli.  I don’t mention it here for the subject matter but rather because it’s an interesting example of someone putting forth an alternate hypothesis to a series of events that differs from the conventional wisdom.

McArdle poo-poos the article which may be because it’s full of flaws or that she’s sympathetic to some of the subjects mentioned (at least some of which she discloses) or some combination of the two.  I can’t comment about the validity of the arguments either way but it is an interesting read.