http://www.realclearmarkets.com/unconventional-wisdom/ en-us Copyright 2008 Mon, 23 Jun 2008 12:54:29 -0600 http://www.sixapart.com/movabletype/ http://blogs.law.harvard.edu/tech/rss I Don't Buy Calvo's Argument, Paul Krugman Guillermo Calvo is one of my favorite economists. But — you know there had to be a but — I just don’t buy his latest missive. Still, it’s important that we have this debate: something awesome is happening to oil and other commodities, and figuring out what it means is crucial. So, a couple of points. First, Calvo dismisses the argument that the absence of physical hoarding is evidence against a speculation/liquidity source of high commodity prices. “Suppose, for the sake of the argument, that the demand for commodities for current consumption or production is completely inelastic …” Well, that’s assuming your conclusion. When I think about speculation, I always start from Paul Samuelson’s classic analysis in terms of intertemporal price equilibrium (a 1957 paper — and not available, as far as I can tell, online. Why isn’t Weltwirtschaftliches Archiv on JSTOR?). Speculation can affect spot prices because it takes physical stuff off the market. Argue, if you like, that the inventory data are unreliable, or that stuff is being held in the ground; but don’t tell me that physical quantities are irrelevant. More More from Paul Krugman and Mark Thoma]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/06/more_on_the_commodities_specul.html http://www.realclearmarkets.com/unconventional-wisdom/2008/06/more_on_the_commodities_specul.html Oil Mon, 23 Jun 2008 12:54:29 -0600 NY Times Story Is Inaccurate and Misleading, MBIA Armonk, NY – A story in the New York Times on June 18, entitled “MBIA Debt is Setting Up a Quandary.” contains inaccuracies and is misleading. Following are the specifics: #1: The story leads with the speculative question of “whether regulators will let MBIA…renege on a promise to shore up a crucial unit with $900 million in capital.” That phrasing is erroneous, primarily because no such “promise” has ever been made. The $900 million referenced is part of the net proceeds from the Company's $1.1 billion equity offering that closed in February, which was issued as part of MBIA’s overall capital strengthening plan. The prospectus for the offering stated in the Use of Proceeds section: “We estimate that the net proceeds from this offering and the backstop commitment will be approximately $959 million, after deducting estimated expenses relating to this offering and the backstop commitment. The net proceeds of this offering and the backstop commitment shall be used to support our business plan and operations.” No promise was made to put the capital in MBIA Insurance Corporation. In a January 9 press release, MBIA said “Upon successful completion of its capital management plan, the Company expects to meet or exceed the rating agencies' current capital requirements for MBIA to retain its Triple-A ratings. Based on discussions with the rating agencies and the commentary they have released to the market, the Company believes that the successful implementation of this capital plan will result in a robust capital position that will lead to stable ratings.” More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/06/new_york_timesfair_and_balance.html http://www.realclearmarkets.com/unconventional-wisdom/2008/06/new_york_timesfair_and_balance.html Markets Wed, 18 Jun 2008 13:19:54 -0600 In Praise of the Wealth Effect, Jubin Zelveh
Mark Thoma pointed last week to a typically catchy headline from Slate: "Debunking the 'Wealth Effect'" For the uninitiated, the wealth effect refers to an increase in spending as a result of a rise in wealth (in this case through things like stock or home price appreciation). In his story, writer Christopher Flavelle says: ... (Flavelle lets Backus do the talking here, and Backus is an excellent economist, but not the best verbal communicator. The other time I heard him speak was at a debate in which he, along with a couple of others, were tasked with defending the position that Markets Are Moral. Unfortunately, Backus took a couple of moments at the beginning of his alloted time to talk about how economists like to get together, drink beer, and talk shop. This left him with much less time to actually argue his case for the morality of markets. It wasn't all his fault, but before the debate, 68 percent of the people in the audience favored the competing view that markets are not moral. After the debate, that contingency grew to 76 percent. This should serve as a note to economists: no more cute anecdotes about how much your profession likes beer, we get it.) But back to Slate. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/06/in_praise_of_the_wealth.html http://www.realclearmarkets.com/unconventional-wisdom/2008/06/in_praise_of_the_wealth.html Wealth Gap Tue, 17 Jun 2008 07:35:14 -0600 Is That A Small Violin I Hear Playing?, Tom Bozzo In BusinessWeek, Jane Sasseen's "Taxing the 'Not-So-Rich' Rich" tries to make me feel, uh, well, here's the lede: ... Granted, income is a flow and wealth is a stock. There's nothing much beyond self-control that would prevent a family with a 97th-percentile income a la the Hammers from spending drunken sailors under the table (if perhaps in ways the drunken sailors would find dull), seeing as the modern economy's undeniable talent is providing an array of goods and services capable of relieving anyone of their money for arbitrary values of "their money." Still, a regularity of the income-and-wealth data is that households with $300,000/year incomes also tend to be in high percentiles of the wealth distribution. In the Fed's 2004 Survey of Consumer Finances, for example, households in the 75th-90th percentile range for the wealth distribution had a median income of $77,000 (in 2004 dollars) and a mean income of $87,800. So there's some skew to the income distribution for people in that wealth fractile, but you can conclude that there aren't too many people making $300,000/year who aren't also in the top 10% of the wealth distribution. At least, they're for the most part rapidly on the way there. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/06/to_tax_more_or_not_to_tax_uppe.html http://www.realclearmarkets.com/unconventional-wisdom/2008/06/to_tax_more_or_not_to_tax_uppe.html Taxes Tue, 10 Jun 2008 12:00:12 -0600 The Economy Is Better Than You Think, James Pethokoukis The media love bad news. Bad news sells. A story with the headline "America's Best Airports" probably won't be as popular as a story called "America's Worst Airports." For another example, here's a story about the U.S. economy from the latest issue of Newsweek, "Why It's Worse Than You Think." Not a surprising piece, given that the magazine made its recession call back in February, though the economy has stubbornly refused to roll over. A few choice bits of negativity from writer Daniel Gross: ... In other words, the declinist 1970s are back, and they're not going away. But is the U.S. economy really replaying that horrific 1970s show, plagued by out-of-control oil prices, out-of-control inflation, and an out-of-control economy that produces wild swings from growth to deep recession and back? Again, I am reminded of something one of my history professors at Northwestern University once told me, "History rarely repeats itself but historians often do." I don't think this a rerun for the following reasons: 1) Fewer than 8 percent of private-sector workers are covered by unions. That's way down from the 1970s and means that the transfer mechanism of higher food and energy inflation into cost-of-living wage adjustments—collective bargaining—has been severed. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/06/is_the_economy_better_or_worse.html http://www.realclearmarkets.com/unconventional-wisdom/2008/06/is_the_economy_better_or_worse.html Recession Mon, 09 Jun 2008 12:00:30 -0600 Should Citi Cut its Dividend?, Felix Salmon Holman Jenkins has a most peculiar column today which seemingly tries to defend Citigroup's decision to continue paying dividends, even as it's raising billions of dollars of capital elsewhere. Except he never quite comes out and says that Citi is doing the right thing: the best that he can come up with is that it's possible that Citi is doing the right thing. And even getting there is something of a stretch. Holman has two main premises. Both are true, as far as they go, but neither does a particularly good job of getting him to where he wants to go. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/should_citigroup_cut_its_divid.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/should_citigroup_cut_its_divid.html Dividends Wed, 28 May 2008 12:20:39 -0600 Weird WSJ Story on Bear's Demise, Yves Smith, Naked Capitalism It doesn't take long to pick up on a news outlet's quirks. For instance, Bloomberg tries to be out first with stories, yet also provide relevant market details for busy investors. They often compensate for their artlessness via juicy quotes. The New York Times, lacking the staff to report on business comprehensively, looks to leverage its high caliber of writing and sniff out trends or under-reported aspects of other stories. One of my frustrations with the Wall Street Journal is that it ought to do a better job of storytelling. It often has a flashy introductory paragraph or two, and too often its stories drift into the journalistic never-never land of reciting the views of dueling sources. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/lost_opportunity_for_a_good_ar.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/lost_opportunity_for_a_good_ar.html Bear Stearns Tue, 27 May 2008 15:10:38 -0600 You Can't Soak the Rich, David Ranson Kurt Hauser is a San Francisco investment economist who, 15 years ago, published fresh and eye-opening data about the federal tax system. His findings imply that there are draconian constraints on the ability of tax-rate increases to generate fresh revenues. I think his discovery deserves to be called Hauser's Law, because it is as central to the economics of taxation as Boyle's Law is to the physics of gases. Yet economists and policy makers are barely aware of it. Like science, economics advances as verifiable patterns are recognized and codified. But economics is in a far earlier stage of evolution than physics. Unfortunately, it is often poisoned by political wishful thinking, just as medieval science was poisoned by religious doctrine. Taxation is an important example. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/hausers_law_aka_laffer_curve.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/hausers_law_aka_laffer_curve.html Income Inequality income_inequality Wed, 21 May 2008 09:00:27 -0600 I Beg To Differ, Larry Summers I am sorry but not terribly surprised to have provoked Devesh Kapur, Pradap Mehta and Arvind Subramanian (henceforth KMS) with my recent columns on globalization and appropriate American policy responses. Their recent response distorts what I wrote in important respects and much more importantly adopts a posture towards globalization that is analytically dubious and politically untenable. My columns included the assertions that “the policy of withdrawing from the global economy or reducing pace of integration is untenable” and that after stating a number of standard economic arguments for free trade “all of these arguments have the very considerable virtue of being correct arguments…the United States will be better off with than without trade agreements and the world will be a richer and safer place with increasing economic integration”. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/is_larry_summers_the_canary_in.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/is_larry_summers_the_canary_in.html Globalization globalization larry_summers protectionism Tue, 20 May 2008 09:00:22 -0600 Bail Out Housing To Salve Damaged Psyches, Yves Smith I kid you not, the headline above is a faithful representation of the thrust of an article today in the New York Times, "The Scars of Losing a Home," by Yale economist Robert Shiller. With friends like this, liberals have no need of enemies. Shiller's argument is ludicrous: implement the legislation before Congress, which guarantes up to $300 billion in mortgages for stressed borrowers, to prevent psychological damage to them. Wouldn't it be cheaper just to hand out Prozac? Or copy New York's Red Cross 9/11 mental health program? This piece illustrates much of what is wrong-headed about the "rescue the homeowner" concept. First, attempting to prop up assets at levels not supported by the underlying economics (in this case, incomes) does not work (see here for an illustration). The prices will in the end revert to a sustainable level, if not trade below them for a while in some (perhaps even many) markets. Japan is an extreme example of the consequences: low growth due to good capital being thrown after bad and delays in clearing out bad loans and recapitalizing the financial system so it could get back to its job of funding productive enterprise. More Calcuated Risk Is Similarly Befuddled]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/is_robert_shiller_now_a_psycho.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/is_robert_shiller_now_a_psycho.html Housing calculated_risk housing naked_capitalism robert_shiller subprime_mortgages Mon, 19 May 2008 08:15:36 -0600 Reaganomics in Retreat, Donald Luskin IT SEEMS THAT the world is beginning to come around to my point of view, that the credit crisis has been averted and the economy is not going to weaken enough to deserve to be called a "recession." Several speeches this week by Federal Reserve officials have talked about the credit crisis very much in the past tense. The Fed finally came up with new liquidity facilities that were effective at easing the crisis — after nine months of flailing, doing everything wrong and nothing right. This after years of keeping interest rates too low, and triggering the cycle of speculation that led to the credit crisis in the first place. So now the Fed speechifiers can pontificate about the mistakes that bank lending officers and brokerage firm risk control experts made. Even my longtime ideological nemesis Paul Krugman, the economist who writes a column for the New York Times in which, for years, he has forecasted every possible horrific outcome for the economy, admitted last week that "the worst of the financial crisis is over." More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/reaganomics_in_retreat_donald.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/reaganomics_in_retreat_donald.html Reaganomics donald_luskin fiscal_policy smart_money us_economy Fri, 16 May 2008 09:09:11 -0600 The Dumbest WSJ Story Ever. Really, James Pethokoukis What the heck is the matter with Thomas Frank? The new columnist at the Wall Street Journal—and author of the book What's the Matter With Kansas?—wrote a commentary earlier this week, "Our Great Economic U-Turn," that basically said the economic boom of the past quarter century was a "man-made catastrophe." (It's an opinion seemingly shared by Barack Obama if you listen to his speeches.) This chunk pretty well sums up Frank's thesis: ... Where, oh where, to begin? OK, a few quick observations: 1) It was the 1970s, a decade Frank praises because of its strong unions and low income inequality, that was the economic disaster. High inflation, high oil prices, high taxes, a terrible stock market and three (!) nasty recessions averaging 11 months apiece. Ugh. The 1973-75 downturn was the worst since the Great Depression. Even most liberal economists would say taxes were probably too high and regulation too heavy. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/the_dumbest_wsj_story_ever.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/the_dumbest_wsj_story_ever.html Globalization Thu, 15 May 2008 09:00:47 -0600 The Fed Already Has a Blank Check!, Economist's View In the interest of continuing the conversation, I want to argue a contrary position and push back a bit on Steve Waldman's post about allowing the Fed to pay interest on reserves, and his worry that this change will allow the Fed to put excessive amounts of public money at risk: ... Some "off the cuff" thoughts: 1. Public money is always at risk when the Fed does open market operations. The amounts may not be as large, but the risk is always there. For example, suppose the Fed prints $100 and purchases a T-Bill for $100, and that while it is holding that T-Bill, the price falls to $75. The Fed has just taken a 25% loss - if it tries to sell the T-Bill back to the public, it will get less for it than it paid originally. The big difference is that with MBS and other risky securities there is default risk - the value could fall to zero - but this is about the magnitude of the loss, not the fact that the Fed is able to put taxpayer money at risk. In addition, every action the Fed takes can affect the public treasury. If monetary policy changes GDP, tax collections change and this affects the deficit. Similarly, when the Fed changes the interest rate, the amount of interest paid on the accumulated federal debt changes - and this can be quite a bit of money... More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/does_the_federal_reserve_have.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/does_the_federal_reserve_have.html Monetary Policy the_fed Tue, 13 May 2008 11:55:14 -0600 Is The Housing Crisis Over?, Calculated Risk From an opinion piece in the WSJ this morning, hedge fund manager Cyril Moulle-Berteaux argues "that the housing crisis is over." ... Mr. Moulle-Berteaux appears to be arguing that new home sales have bottomed, not prices or new home construction. He ignores the existing home market (with the huge overhang of supply, especially distressed supply), and that leads Moulle-Berteaux to an inaccurate conclusion. It is actually possible that new home sales may be nearing the bottom of this cycle, however that doesn't mean the "housing crisis is over" - far from it. I'm not here to correct all the errors in this piece. As an example, Moulle-Berteaux writes "residential construction" when he means "residential investment" (RI) - there is a difference, since RI includes home improvement, broker's commissions and a some other components, while Moulle-Berteaux appears to be focusing on the new home market. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/is_the_housing_crisis_over.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/is_the_housing_crisis_over.html Housing calculated_risk housing wall_street_journal Thu, 08 May 2008 09:00:37 -0600 Are We Running Out of Food?, Kel Kelly Paul Krugman writes in the New York Times, April 7 that there is a world food shortage, accompanied by skyrocketing prices. Because of this, poor people in Africa and other places are starving. He suggests that this has come about mostly for these reasons: ... Krugman's proposed solution to these problems is for us to give more of our money to government, so that it can solve the problem the market is apparently incapable of solving. And now, the real story: Regardless of whether one thinks the above-listed factors play a role in world food shortages, there are in fact two issues of primary importance related to food shortages and food costs that Krugman does not mention and may not know. More ]]> http://www.realclearmarkets.com/unconventional-wisdom/2008/05/are_we_running_out_of.html http://www.realclearmarkets.com/unconventional-wisdom/2008/05/are_we_running_out_of.html Wed, 07 May 2008 15:00:25 -0600