Before reading this NYT article on Freeman Dyson, I had never really thought much about how close physicists and the government became during World War II. But it seems the physicists learned the subtleties of procurement quickly:

Dyson has been hostile to the Star Wars missile-defense system, the Space Station, the Hubble telescope and the superconducting super collider, which he says he opposed because “it’s just out of proportion.” Steven Weinberg, the Nobel physics laureate who often disagrees with Dyson on these matters, says: “Some things simply have to be done in a large way. They’re very expensive. That’s big science. Get over it.”

Every time I read the above sentences, the funnier they get. By the end of it, make sure you realize how hilarious it is that the scientists demand their billions (?) for, ahem, "the superconducting super collider."

Oh, you know what the physicists say they are searching for? The "Theory of Everything"; they even write it TOE. These people are really really smart, no doubt about it. But then it's not surprising if they overrate their importance, since no outsider would really be qualified to point this out to them.

Another thing I just noticed: Isn't it a funny coincidence that the shill for Big Science got a Nobel Prize, but Dyson hasn't (and I think some guy in the article claimed Dyson was robbed by the committee)?

A few people sent this NYT article on physicist and jack-of-all-trades Freeman Dyson, but it was the enigmatic von Pepe's email that pushed me over the top.

It is really amazing. This is one interesting guy.

The article focuses on the climate change stuff, but I find it more interesting that the government (?) would fund the Institute for Advanced Study so well. I mean check out the big guns that hung out there. So isn't it amazing that the government got this one thing right? Isn't it odd that you and the government agree on talent, in this one area but in no others?

A clue might come from the role of "Jason":

In the 1970s, Dyson participated in other climate studies conducted by Jason, a small government-financed group of the country’s finest scientists, whose members gather each summer near San Diego to work on (often) classified (usually) scientific dilemmas of (frequently) military interest to the government. Dyson has, as he admits, a restless nature, and by the time many scientists were thinking about climate, Dyson was on to other problems. Often on his mind were proposals submitted by the government to Jason. “Mainly we kill stupid projects,” he says.

But now the followup: What kind of a guy says with a straight face, "My important job is to make sure government projects aren't stupid"?!?! That's like saying, "Mainly we kill low-brow beer commercials."

I didn't catch this when it ran, but it is now in my archives at Townhall and there are a dozen comments, so it must have... Anyway here is my take on the AIG bonus stuff. An excerpt:

The public was right to be outraged. But the real problem was the bailout in the first place. No matter what AIG does, it will now be with taxpayer money. Obviously, even a company that the government seizes is still going to pay its employees, pay its heating and electric bills, and buy raw materials. If citizens don’t object when their government starts nationalizing companies like they do in South America, then the citizens shouldn’t be shocked when their tax dollars get spent by the government’s handpicked CEO.

Robert Wenzel linked to this; it is really sweet. What diction!

Yesterday I got a box of 10 copies of my new book. Longtime readers know that I am nothing if not modest, but I have to say that this book is sweet. In all seriousness, it used to terrify me when people suggested I give a talk at a bookstore for my first PIG book, since I couldn't imagine passersby getting drawn in by my discussion of cartels.



However, when it comes to cartels created by the New Deal, now you're talking. I can truthfully say that there is some powerful stuff in this new book that is sadly lacking from the current political buzz.

Here's the deal: In order to maximize the chance of getting onto bestseller lists, the publisher wants to hold fire until launch day (April 20). But, it also helps if--when people hear me on the radio and check out Amazon--they see a bunch of favorable reviews from people who have clearly read the book.

So, for any of you who were planning on buying it from Amazon, it's probably most strategic if you pre-order the book and get it as soon as possible, and then write a favorable review on Amazon. (If you hate the book, just remember what your mom said about not having anything nice to say.)

But to be clear, don't buy 15 copies for your liberal relatives just yet. The mass buying should be postponed until the week of April 20.

Good luck, comrades. May the force be with us.

Since I'm speculating on motives, let's turn to the Fed chairman. Let's drop the super conspiracy theory and assume for the sake of argument that Bernanke really does call the shots. (In reality, I think it is entirely possible that Bernanke knows he can't do such-and-such or else he might accidentally take too many sleeping pills.)

Now we know that presidents have always tried to expand the power of the Executive Branch. It's no "conspiracy theory" to say that, it is simple Public Choice economic analysis.

OK so you run the Federal Reserve, and here you have this prime opportunity to write checks for trillions of dollars while the CPI actually falls. (!!!) You've got a pretty good gig going, because no political leader can really challenge you, since a vote of no confidence in the Fed chairman would literally ruin the world economy.

So your one worry is that you won't be reappointed when your present term expires (in 2010). What do you do? Why, I think getting the biggest corporations in the world--not to mention other central banks--utterly dependent on your handouts is a pretty shrewd move. If Obama starts floating trial balloons about canning you, you can float trial balloons about "preventing inflation expectations from becoming unmoored" which would require you to raise interest rates to 30%. I think the president might back off after Goldman Sachs or the British government called him up and had a little chat.

Kids kids kids. Many of you doubt my conviction that Barack Obama will be re-elected. But don't you realize that that is what preoccupies him and all his advisors every day?

All of these moves are not out of some devotion to Karl Marx, they are instead expertly calculated to deliver the Democrats campaign contributions and votes in upcoming elections. Do you think major corporations are going to donate vigorously to only Republicans when the Obama Administration can declare them a "systemic risk" and nationalize them?

What about the labor unions in Detroit? You think a bunch of their members are going to rally for Newt Gingrich to make another go of it?

The elusive von Pepe emails me with his theory that the ultimate reason was to keep GM out of Chapter 11, where a court might overturn union contracts.

Take a guess before looking. Thanks to Tim Swanson who is smarter than most of us because he moved to China.

For those atheist readers on the verge of abandoning this blog, I humbly offer this response to Krugman's critique of the "hangover theory" of recessions. An excerpt:

In the present article, I will set the record straight. Krugman's theoretical criticism of (what he dismissively calls) the "hangover theory" of recessions is silly, and his empirical test is also a poor one. Once we set up a more appropriate test, the "hangover" theory — i.e., the Mises-Hayek explanation — passes with flying colors.

This is a standard arrow in the atheist's quiver. I'm not saying it is the only or the preferred arrow, but nonetheless I think many, possibly most, atheists think it is a perfectly valid illustration of just how preposterous the very concept of God is, at least the "God" that Western people know.

First, it's odd that we have such a flippant wisecrack as one of the standard arguments lodged against God's existence. It's a fairly weighty issue, so it's odd that people are eager to settle it with one-liners.

Second, it doesn't even work. The question is, "Can God make a rock so heavy He can't lift it?" My answer: Yes He can--He's God and can do anything--but He chooses not to.

People think this leads to paradox, but no it doesn't. If I had answered "No God can't make that rock" then I would be contradicting myself. Phew, I'm glad that wasn't my answer! I just dodged a landmine! *wipes brow*

OK but now back to Door #1. I said that God can in fact make a rock that He Himself can't lift. But does that pose a threat to my worldview?

No, not really. It's no more threatening than if I "concede" that God has the power to end His existence. If God chose to create that special rock, at the moment of its creation he would cease to be God. But He chooses instead to retain his omnipotence, and avoids the mistake of Clark in Superman II.

So in conclusion, I don't see why the question, "Can God make a rock so heavy He himself can't lift it?" is so popular. It is no more profound than asking, "Well could your God kill Himself?"

One of the trickiest issues for a Christian is the Mosaic Law. Jesus claimed that He was the fulfillment of the Law, and yet in many respects He clearly overturned it.

One of the most fascinating passages in all of Scripture occurs in Mt 19: 3-9:

3 The Pharisees also came to Him, testing Him, and saying to Him, “Is it lawful for a man to divorce his wife for just any reason?”
4 And He answered and said to them, “Have you not read that He who made them at the beginning ‘made them male and female,’ 5 and said, ‘For this reason a man shall leave his father and mother and be joined to his wife, and the two shall become one flesh’? 6 So then, they are no longer two but one flesh. Therefore what God has joined together, let not man separate.”
7 They said to Him, “Why then did Moses command to give a certificate of divorce, and to put her away?”
8 He said to them, “Moses, because of the hardness of your hearts, permitted you to divorce your wives, but from the beginning it was not so. 9 And I say to you, whoever divorces his wife, except for sexual immorality, and marries another, commits adultery; and whoever marries her who is divorced commits adultery.”

More generally, we have to deal with one of the biggest problems, namely the fact that God ordered the Israelites to kill babies. That's...kind of a big deal.

As a former college professor, I grapple with these things with an analogy to testing students at different levels. With the freshman Business majors who are taking Intro to Micro, sometimes the multiple choice questions or even the short essays were a little off. That is, I had to dumb the issues down in order to test the students, and thus what they were forced to parrot back on the test (if they wanted a good grade) wasn't quite right.

But if a student majored in economics and took my seminar as a senior, or even better did an independent study and wrote a paper with me as the guide, then obviously we got a lot more nuanced and could see why the kiddie stuff they learned in Intro wasn't actually correct.

(Note that this isn't just about Economics. I've even had math professors tell me the same thing, that they literally teach "bad math" to freshmen in Calc I or whatever because it's not worth going into the real subtleties of certain things.)

It's just an analogy, of course, but I think it serves a purpose in illustrating why God may have ordered the Israelites to do things that modern Christians would consider immoral. In a nutshell, look at what He had to work with!

And just as with my freshmen students, it's still true that an incomplete instruction is better than none at all. In other words, even though I knew that some of the concepts and techniques were a little off, it was still better to show the students that than to show them nothing, and it was also better than trying to dive into Eugen von Bohm-Bawerk on Day One.

So by the same token, even though Jesus seems to be conceding that the Mosaic Law was flawed, He presumably also knew that God was right to promulgate it.

========

And while we're here, a Big Picture thought: In the very beginning, Adam and Eve had total freedom. They abused it.

Then God allowed the humans to run rampant with no intervention on His part. They messed things up so bad, that He destroyed the world and started over with Noah's family.

Then things got bad again and God intervened and guided the Israelites by the hand, like the little children they were.

Now the atheist says, "Ha ha, if God is so smart why did He have to reboot?! What a dumb story."

But I think part of the Christian answer may be, "God wanted it to be perfectly clear that we needed Divine Intervention. So He let things run their natural course right off the bat, before finally He had to stop it. We can't even imagine how awful people must have been back then. In fact, there were probably many non-believers the week before it started raining who said, 'If there were a God, He would surely destroy the earth because there is so much wickedness.' Yup."

To love is to see the world as God sees it.

If the following describes the actual sequence, then it would be understandable why God lets really awful things happen occasionally.

* The first decision God made was that His creatures would have free will. Only then could He shower them with love, and hence only then would God be complete. (It's hard to imagine a God who had no one to love.)

* From that point on, the struggle of the universe was necessary. In a sense, God decided He would allow Lucifer to rebel and become Satan. Further, God would allow Satan a large degree of privileges, to make the choice real. (In other words, if God had stacked the deck so that crime literally didn't pay, or that no one was ever biologically tempted by adultery, etc., then it wouldn't mean much when people obeyed Him.)

* Even so, God really did design this world such that even on earth, the long-run benefits of acting morally outweigh the (earthly) costs.

* Now if Satan had had his way, he would have subjected every person to the maximum amount of suffering imaginable. First, that would drive them more easily to him, because he offers the promise of immediate relief. Second, he just enjoys watching people suffer.

* But God of course doesn't let anything remotely like that happen. However, in order to make sure people appreciate how much "aggregate suffering" is being avoided, He occasionally permits something really awful to happen, even to a totally "innocent" person. That way the other 99.9999% of the world's population can keep a better perspective in their own lives, which in turn will help them fend off Satan's lies.

===> So, if the above sketch is basically correct, then it makes a lot more sense why an omnipotent Being would allow awful things to happen once in a while.

I had heard lots of people praising her, but until Robert Wenzel posted the below video on his site, I hadn't actually watched Michele Bachmann asking Treasury Secretary Geithner and then Fed Chair Ben Bernanke a simple question: "Can you point to me where in the Constitution it gives you the authority to do these things?" (Perhaps not exact quote.)

What's really hilarious is that I'm open to the possibility that Geithner truly didn't understand her question. He tells her, "Congress gave us that authority." She repeats, "But where in the Constitution?" and check out his furrowed brow. It is a riot.

Bernanke, in contrast, was a cool cat as usual and I think he fully understood the question. Now here's something that's very interesting: I didn't watch the whole thing, but in the few minutes I did watch, Bernanke did NOT say, "Well I'm just an economist, and I don't presume as you do that I know more about the Constitution than the Supreme Court." In other words, that would have been a perfectly smooth handling of the issue as far as the general viewing public, and it's also what the "right" answer is.

Yet the closest thing I heard to that defense was Bernanke talking about the "laws of the land." I think it's indicative of how little the people in DC think about abstract limits on their power. Everything is pure political expediency. If something gives you more power and makes it more likely you will be reappointed or re-elected, then it's "good." If it gets the citizens mad at you, then it is "bad." Period.

I tease him a lot, but Robert Wenzel is right when he gloats that he has been blogging about the real reason the Fed wants to issue debt. (I recall much more pedigreed economists being baffled by the Fed's request.)

So anyway, SF Fed Bank President Janet Yellen confirms Wenzel's theory: The Fed wants to issue debt in order to suck reserves out of the system without having to wreck the mortgage-backed securities or Treasury markets. I didn't see the connection with the Fed issuing debt, but--if you'll permit some horn-tooting--I have been saying for quite some time that Bernanke has painted himself into a corner. Once price inflation really kicks in, he will have to suck reserves out of the system. But if the CPI starts blowing through the roof while the banks are still crippled and unemployment is still high, Bernanke will be reluctant to unwind all the life-support propping up MBS and keeping Treasury yields low.

So the "solution"? The Fed can sell its own IOUs to the public. So if you buy a note from the Fed promising you $10,000 in 2015, you write them a check today for it (for less than that, of course, to give you interest) and when the Fed processes the check it drains reserves from your bank.

I hope no one thinks this is a solution to the problem. Almost literally, what it does is shift (say) 10% inflation this year to (say) 15% inflation in two years. Unless of course the Fed just allows its debt to grow exponentially, which it probably will do.

The only way this can even work in theory, is if it buys the Fed enough time for the markets to recover so that selling off the MBS and Treasury bonds when the Fed notes come due, is more feasible. But if things continue to deteriorate--and if you don't believe they will, I would like you to tell me what else the government would need to do and promise to do, in order to make you pessimistic--then we will be in the same spot in two years, except the Fed will now have an additional trillion dollars in new reserves it is supposed to pay out to its noteholders. Oops.

I have another cute and cuddly piece at the Daily Reckoning today. Some excerpts:

[T]he country is currently headed straight into a period of very rapid price hikes and a very bad recession. It would not surprise me at all if the national unemployment rate and the annualized rate of consumer price inflation both broke through into double digits by the end of 2009. Moreover, regardless of when it actually starts, I predict that things will get much worse before they get better, and that the United States will be mired in a malfunctioning economy for at least a decade, with price inflation in the double-digits (possibly higher) the entire time. We can call this condition “hyper-depression.”

All of the financial analysts are aware of this threat, but they foolishly reassure us, “Bernanke will unwind the Fed’s holdings once the economy improves.” But this commits the same mistake as the Keynesians during the 1970s: What happens when the CPI begins rising several percentage points per month, and unemployment is still in the double digits? What would Bernanke do at that point? Expecting the Fed chief to relinquish his new role of buying hundreds of billions in assets at whim, in the midst of a severe recession, would be akin to hoping that a dictator would end his declaration of “emergency” martial law in the middle of a civil war.

I don't think the U.S. government is actually going to significantly cut greenhouse gas emissions. Rather, I think it is going to raise trillions of dollars that it then doles back out to industry. So the identities of carbon emitters will certainly shift from the political out groups to the connected people, but I don't think we will return to the Stone Age. Of course, that's almost worse than if we really did wreck the economy on the off-chance that it would avert global catastrophe. But nope, instead we will make the economy a lot less efficient, and if James Hansen is right then we will still be screwed.

Here's Donald Hertzmark in a comment at MasterResource:

With regard to trade agreements and carbon restrictions, we are on thin ice in WTO terms if we slap countervailing duties on countries without carbon restrictions. Just such a tariff was promised by the Secretary of Energy last week, but I suspect it was not thought through, since the primary target would be the country that holds the biggest share of US treasuries, China.

In addition, the initial allocations would hit many industries that are already ailing, including autos. The temptation to tinker with the carbon allocation, perhaps even giving, say, GM, assistance in the purchase of its carbon permits, would likely prove irresistible to and earmark-addicted Congress.

In Europe they solved the allocation problem by handing out excess permits, so that the trades took place with non-existent carbon reduction. That is a neat solution, but it does nothing to change carbon consumption and sooner or later, like any market in non-existent commodities, it crashes, as indeed occurred.

So my challenge to the Obama Administration is: Man up, make your case for a carbon tax and accept the up or down decision.

Tyler Cowen tips us off to this:

Mr. Yamaguchi was in Hiroshima on a business trip on Aug. 6, 1945, when an American B-29 dropped an atomic bomb on the city. He returned to Nagasaki, his hometown, before the second attack, officials said.

I can't decide how I want to crack a joke about this. I'm thinking I could say something like, "Whoa, I bet he doesn't love America," or maybe, "Huh, looks like the government can't even make a lethal A-bomb," or perhaps some sort of Watchmen reference, like calling this guy Dr. Nagasaki.

That's the actual headline of this CNBC story. I think if European leaders* are telling your government it's spending too much, people should sit up and take notice.


* And I realize Czechoslovakia has an interesting political landscape...

This is a tough one. On the one hand, I don't want my son (our only child) thinking he has to lead a libertarian revolution, but on the other hand, I expect him to do great things with his life. But I think I would be just as pleased to see him become a (great) poet as a (great) mathematician or even a (great) restaurant owner.

I have high hopes for my son, but not big plans.

Because I have a new book coming that (I hope) will appeal to conservative fans of Rush Limbaugh and Glenn Beck, I reviewed my LvMI talk about my first book. I was worried that the speech--entitled (not by me) "How I Bamboozled Thousands of Conservatives Into Thinking Like Anarchists"--would turn these people off once I was "outed."

Now it's true, I am very radical in this talk. (Another hidden gem: My discussion of Jonah Goldberg's infamous mugging of Gene Callahan. This was back when Gene wanted to be associated with the Institute of Ludwig von Mises.*) Even so, I must plead to being Ralphie when he reads his essay on what he wants for Christmas: "Wow that's great."

Go ahead and listen, conservatives. Prove me wrong, kids, prove me wrong.


* This is where I stir up controversy in order to increase Google ad revenues. I may discuss the libertarian approach to abortion in a future post.

The number one thing I think people need to do to prepare for a possible hyper-depression (=stagflation squared) is to move out of variable-rate, dollar-denominated debt as quickly as possible. You don't want an ARM or a rolling credit card balance when the prime rate jumps to 45%. Strictly speaking, it's fine to let the balances roll over right now, but make sure you can pay them off within a month if you had to. And of course the issue isn't, "Could I pay them off next month if I had to?" Rather, the issue is, "If the 'unthinkable' happens such that one of the offshoots is a 45% prime rate, in that environment would I be able to pay off all my variable rate credit card debt?"

The number two thing I think you should do is get your hands on (ideally) a few months' worth of income (at today's prices) for an austerity budget, in physical gold and silver. So for example, if your drop-dead monthly expenses right now are $5000, then ideally you would want $15,000 in actual gold and silver--and if we're really going to be specific, I think you want them embedded in old US coins, so that they will be very identifiable to many Americans.

The number three thing is to get the wheels in motion on income streams that will at least rise with general prices. For me, that vehicle is a book contract. The way my royalty contracts are structured, I get a percentage of the retail price. So if CPI goes up by 50% over the next two years--something I consider entirely possible, though I wouldn't yet commit to "likely"--at least my stream of royalties will rise too. It won't keep me whole, of course, since only the lucky recipients at the foot of Bernanke's printing press will be the real winners. But it's a lot better than having a salaried job where, at best, I can ask for a cost-of-living raise every 12 months.

If you have a bunch of spare cash, a possibility is buying low-frills housing or office space to rent out. Now maybe real estate per se is risky for obvious reasons right now, but you get the point: If at all possible, you want streams of income that will automatically rise with the fall of the dollar's purchasing power.

I don't know what other options exist, but there have to be tons of them. One of my former students used to make a decent amount of money cruising around looking at garage sales for stuff to sell on e-Bay. Now there, it's not as obvious, since presumably the person running the garage sale would increase the price of the stuff too. But even so, the point is that as an entrepreneur, you can increase your "markup" very flexibly. So whatever margin worked under the old price relations, could also be inflated in the new regime.

Ultimately, you do not want to be relying on a corporate salary--let alone bond payments and Social Security checks--if and when large price inflation hits.

I had never thought about it much until someone else brought it up (I think when I was down in Auburn for ASC 2009). Have you ever wasted your time checking the Yahoo! Answers when you google something? Seriously, I think I perused those things maybe 8 times, before realizing that they were worse than useless. Worse, because if they were demonstrably idiotic the first 8 times, then why would I trust the mechanism on the 9th time when it appeared plausible?

I happened to be in the car for a long stretch this evening and caught most of President Obama's press conference. As Beavis would tell him, "Heh heh damn you're smooth."

I think he will easily be re-elected. Yes, the economy will be in the tank, but if he can casually and persuasively explain his programs are the way to counteract leveraged debt financing, speculation, inflated house prices, and out of control government deficits, then he will be able to convince voters he is part of the solution in 2012.

Remember kids, FDR won four elections. And things weren't exactly rosy on his watch.

In the comments of my post about Anthony Gregory's songwriting fan, Douglas pointed us to the Paul Krugman song:


The AG song was much cooler because the writer showed that he really had read Anthony's stuff. In contrast, although the song above sounds more like a "real" pop song, all the writer really proves he knows is that Krugman (a) writes for the NYT, (b) maintains a blog, (c) thinks a lot (sic),* and (d) won the Nobel. I give the writer a tiny bit of credit for ripping Geithner, but everybody's doing it.


* This is where I actually go overboard and make unfair criticisms of my intellectual opponents. Everybody's doing it these days on the intertubes.

* This post shows that the Obama budget's estimate of $646 billion from cap and trade revenues was way below the real belief. According to the deputy director of the National Economic Council, the White House is expecting more like $1.3 to $1.9 trillion. I'm sure it was just an oversight that those numbers didn't make it into the original release.

* In this post the writers (mostly me) explain Smoot-Hawley and the return to protectionism today under the guise of stopping carbon "leakage." So on top of all the other garbage going on, we will probably have a trade war too.

Hey kids, is it really so farfetched to think the dollar (and US Treasurys) will crash this year? As this article reports:

China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

My colleague (who emailed me the story) said, "Bob, isn't this traditionally referred to as gold?"

I get a few emails from fans, but nobody has written a song about me. Anthony played it for us at the Austrian Scholars Conference. Yuks all around.

So what's new? I know I know, but every once in a while these things just hit me, and so I pass them along.

Today's case in point, the White House's own estimate of federal debt held by the public. As you can see in Table S-1 here [pdf], the Obama Team in its own rosy forecasts says that the federal debt as a % of GDP will rise from 41% in 2008 to 67% by 2019.

Folks, this isn't, "Oh, George Bush screwed things up and so now we have to spend money to save money." You don't raise the national debt as a share of the economy by 63% over the course of ten years, if you're really concerned about fiscal responsibility. To say that you are doing everything possible to restore sanity to the nation's finances would be, well, a lie.

* Tyler Cowen links to a piece that explains a strategy to game the Geithner plan.

* Oh man, more talk about the Fed's "weapons" at Mankiw's blog...Check it out:

Some people are concerned that in the the fight against recession, the weapons of monetary policy are nearly out of ammunition. That is certainly the case for the standard monetary weapon--cuts in short-term interest rates. After all, short-term interest rates are already about zero, and the Fed cannot cut interest rates below zero.

Or can it? In a discussion at a Harvard seminar recently, a clever grad student proposed a solution to the zero-lower-bound problem.

...I can now state the proposed solution: Reduce the return to holding money below zero. Imagine that the Fed were to announce that, one year from today, it would pick a digit from 0 to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 2 percent. Losing 2 percent is better than losing 10.

Folks, at this point can we admit that the mainstream models are BAD? If you're trying to figure out how to help the economy, and you end up concluding, "We might try randomly turning off 10% of the dollar bills," then I think you need to check your assumptions.

To repeat a point I've been making lately: Does it make any sense that after everyone realizes we were all consuming way too much, and we all need to buckle down and save like crazy, that the solution involves...negative interest rates?!

* Here [mp3] is my hour interview with David Hanson (who sounds like Ronald Reagan when you first hear him). I followed Tom Woods, so you know I blew the audience away.

* Here is the itinerary for my May 16th talk at the North Dakota Policy Council. What the heck, I have to follow Tom Woods at this thing too?! I guess that's going to be my career now, cleaning up after Tom.

The people touting the market can plausibly say, "We never gave it a shot." But those blaming the housing bubble on deregulation don't really have a strong position. There really wasn't deregulation, but instead changed regulation (or reregulation) after the changes in financial regulation that allegedly spawned the boom.

The mysterious von Pepe and I were emailing about credit default swaps, and how a bank could meet its capital reserve requirements by buying a CDS and (for purposes of regulation) effectively take the volatile asset off its books. The bank would still hold the volatile asset, but it supposedly now had taken care of the downside because of the CDS which acted as an insurance policy against default.

So as I said to von Pepe, "People keep saying that the CDS market allowed firms to evade regulation. No, the regulation allowed firms to use CDSs to evade capital requirements."

This CNBC article explains:

The Fed's bid to lower long-term interest rates on home mortgages and corporate debt is already running into trouble.

In the aftermath of last Wednesday's announcement that it would buy back $300 billion of 2-10 year Treasury securities, yields on benchmark 10-year notes were cut 51 basis points, from 3.02 percent to 2.51 percent in a matter of minutes.

But rates have since crawled up on Thursday and Friday, and show no sign of falling today, leaving the market just 36 basis points lower than before.

And I liked this part:

The Fed is trapped. The current buy back program is too small to have more than a symbolic effect. Expanding it, though, would trigger fears about inflationary financing and risks bringing on the rise in bond yields and collapse in confidence and the currency the Fed is desperate to avoid.

I have been saying this more and more in the last couple of weeks: Everyone says, "Bernanke will have to suck those reserves out of the system once the recovery begins." But what happens when unemployment is in double digits and CPI is rising at more than one point per month? People are acting as if that's impossible. We're back at the pre-1970s Phillips Curve consensus.

This CBS review of Tom's new book Meltdown is really good. I don't just mean, that I agree with guy, but I'm also saying objectively, he is very well-read for someone who gets a CBS spot. I think the Internet is really opening up the floodgates in terms of nuanced analysis.

In this post, I merely want to note the point that the existence of an omnipotent being who created the structure of reality--and who moreover is reputed to have an actual personality and enjoys interacting with humans--well that's by far the most important aspect of your belief system. How you answer that question fundamentally influences what kind of life you will lead.

So I fully grant that I may be making a horrendous mistake by saying I "believe in Jesus." Fair enough.

However, I think that I think about this issue more than most atheists. That doesn't make me right, obviously. But it does mean that those (atheists and believers alike) who spend all their "philosophical" time tracing out the implications of their answer to that big question, are putting the cart before the horse. For example, if it turns out that there was a God, then the implications of evolutionary biology wouldn't be so awesome. The strictly positive statements would still be true, of course, but they could no longer really say, "There is no 'purpose' or 'goal' behind evolution." That would be easily seen as a bold conjecture on their part, because it would mean they were sure the (known) God was not acting slyly through some undetected mechanism to influence evolution, if only from establishing the initial state of the universe juuuuuust right.

And as I say, the danger holds for the evangelicals, too. It would be disastrous to structure your life around this one guy, if it turned out he was a fraud (or insane). So I encourage Christians reading this to think more deeply about why they believe. A true believer should relish this task, not shrink from it for fear of what he might realize. (Because of this, I don't worry that my son might become an atheist--maybe just to spite me. That's fine, I was an atheist too for a few years. The LORD can deal with that sort of thing. He's fairly clever, and that whole omnipotence thing doesn't trip Him up either.)

Last point: If you do want to ponder the implications of the possible existence of (the Christian) God, then you're in luck: He allegedly wrote a book, all about Himself. They call it the Holy Bible (a fairly presumptuous title, eh? Who is this guy, some kind of guru?) They market it as a history book, but it just as well could have been sold as an autobiography: God: My Years With the Talking Monkeys.

In the previous post, I said it would not be hard to imagine the government taxing the heck out of hedge funds that hadn't taken a dime of bailout money. Well, von Pepe just sent me this NYT article that contains the following ominous paragraphs:

WASHINGTON — The Obama administration will call for increased oversight of executive pay at all banks, Wall Street firms and possibly other companies as part of a sweeping plan to overhaul financial regulation, government officials said.

The outlines of the plan are expected to be unveiled this week in preparation for President Obama’s first foreign summit meeting in early April.

Officials said the proposal would seek a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire financial system.

Von Pepe's only comment: "It's over."

So I said in this unusually pessimistic appearance on Scott Horton's radio show.

This AIG bonus bill has really sealed the deal for me. Suppose you were put in charge of AIG. How would you structure compensation packages to attract the right people who would actually turn the company around? Why, I think you would want low base salaries and bonuses tied to objective measures of performance, which could be quite lucrative depending on what happened with corporate profits.

Well shucks, the government just took that option away from you. Try again.

Now look, I am NOT defending the $165 million as "efficient." Obviously the people running AIG (and who offered those contracts) didn't know what they were doing; that's why they have asked the government for $170 billion so far.

But what I am saying, is that now it will be much harder for not only AIG, but also all other financial institutions, to turnover their employees and retain/attract the right people needed to fix this mess.

As a matter of fact, I imagine the most competent people are jumping ship for other industries en masse now. Now they realize, that even if they succeeded in their difficult task, the government would swoop in and take their earnings.

Seriously, just think about that: Suppose you run a completely private hedge fund, which had no ties to government bailout money. Is it inconceivable that if you made $20 billion shorting U.S. Treasurys, that Uncle Sam would design some special new tax that basically gave them the right to take $19 billion of it from you? And make it realistic: You made $20 billion from "shorting America" while unemployment is 10.4%. You think the public is going to cry foul when the feds take your money?

I am pretty pessimistic now about the next 8 years. (Yes I think Obama will be re-elected. FDR had no problem with re-election, and the economy was awful. But he was an amazing orator and could blame it on the previous Republican buffoon. Same today.)

However, I do want to point to two positive trends, amidst the general march toward central planning. First, like FDR with alcohol, I think it is very possible that there will be a serious rollback of the Drug War as the Great Depression II intensifies. The government will be able to save money (from cutting the DEA and releasing all of the nonviolent drug offenders) and even raise new revenues from taxing marijuana and possibly harder drugs if they go that far.

A relaxation of the Drug War is really critical now, because there is going to be so much unrest in big cities during the next few years. If it's ever a good time to stop the flow of billions of dollars into the pockets of violent drug gangs, it's right before the Great Depression II hits, I think.

Second positive trend: Sure it's just talk, but I have to say I'm impressed with how "weak" Obama allowed himself to be in this message to the Iranians. Yeah yeah, of course it was mostly done to impress American voters, but Obama looks like he's the kind of guy who isn't afraid to walk away from a fight. To repeat: I am NOT saying he is fundamentally changing foreign policy. I'm saying that it's big of him to give this message, knowing what the talk radio hosts etc. will do with it, in the same way that I was impressed by Sarah Palin's Saturday Night Live performance.

...is of the ratings agencies. Seriously, if you had to pick a single group who were most directly responsible not in terms of moral culpability, but in terms of their huge intellectual mistakes being directly tied to the housing bubble...well it's gotta be the ratings agencies. I couldn't find how many total employees Moody's, Fitch, and S&P have, but I bet it's a fairly small group of people, given how much influence they had. Don't get me wrong, Greenspan had more per capita influence on the housing bubble, but you can't tell the story of what happened without invoking the absolutely horrendous job the ratings agencies did.

So what I was originally going to post is that these firms have largely emerged unscathed. After all, AIG shareholders have gotten trounced, as well as the shareholders of other firms that got in over their heads and benefited the most during the boom years. But I don't see S&P posting billion dollar losses. It's true, the agencies' profits are down, but that's because of the general downturn in the credit markets; it's not that their former customers are taking their business elsewhere.

But there's a new twist: Dan Simmons sent me this WSJ article that explains that the ratings agencies might see up to a billion-dollar windfall from the Fed's recent announcement of further experiments in hyperinflation. In any deal spurred by the Fed's program, the ratings agencies need to come in and provide the requisite labeling--for a fee. This part's great:

Now the government is in the uncomfortable position of rewarding these same firms through a new program that will result in numerous companies issuing securities. If the ratings companies are wrong this time around, the Federal Reserve and the Treasury -- and therefore taxpayers -- will be on the hook for some losses.

A Federal Reserve spokesman declined to comment. At a Senate hearing in Washington earlier this month, Fed Chairman Ben Bernanke said the central bank has looked at the models of the major rating companies and is "comfortable" they can rate securities eligible for the new program "in an appropriate way."

The reason that Moody's et al. are invulnerable to competition is--you guessed it!--government regulation. When banks, life insurance companies, and other heavily regulated financial institutions buy financial assets, they typically need a minimum rating (e.g. AA or better). (This regulation is intended to ensure that your life insurance company can pay your wife when you die.)

But then that begs the question: Who is an acceptable rater of the bonds a bank buys? The bank president can't simply call up his brother-in-law and have him send over a notarized letter declaring everything on the books is a AAA.

Although I think the rules for being an acceptable rating agency are in theory open to a wide field of competition,* in practice the regulations ensure that Moody's et al. have a cartel.

If any companies should be liquidated because of their executives' mistakes during the housing boom, it is the ratings agencies. But instead of heads rolling, they get a nice cut of every injection of new Fed money into the credit markets.


*von Pepe chides me in email and says that the government really is picking the cartel. The SEC requires the ratings for the regulated buyers to be performed by "Nationally Recognized Statistical Rating Organizations," and if you check out the definition of this phrase, it turns out that only the Big Three of Moody's, Fitch, and S&P qualified up to a few years ago, and now only 7 or so qualify. But that was my point, that if you read the actual regulation, it doesn't say, "You need to get your rating from Moody's," but in practice to comply with the regulation you have to go to the big boys.

Wow I stumbled across these (1, 2, 3) on YouTube. It was from an interview I gave a while ago, sometime in early 2008 I believe. Note that I follow Ilana Mercer on Part 1 about 10:20 into it. We talk about the financial crisis, mortgage market, etc.

I'm sorry kids, but I have to call it like I see it. And in this blog post Brad DeLong blows up Chicago's John Cochrane. If you're a guest on a talk radio show, I think it's fine to say (as Cochrane does) that the government can't create jobs because every dollar it spends ultimately comes from the private sector.

However, if you are writing actual economics, you have to be much more nuanced. It is possible for the government to "create jobs," but so what? The way to answer DeLong and Krugman is to say that periods of unemployment are necessary as the market redirects misallocated workers. You can't just point to accounting, as Cochrane and some others do. For one thing, it's not really correct, and for another, DeLong and his smug fans will tear you apart.

In that light, let me take two pot shots at Cochrane myself. (And incidentally, I'm not saying Cochrane is dumb, or that his general views of macroeconomics are wrong. I'm just saying, he was sloppy at times on the crucial points.)

* When pointing out how much modern economists know more than Keynes, Cochrane says:

We all now understand the inescapable need for markets and price signals, and the sclerosis induced by high marginal tax rates, especially on investment. Keynes recommended that Britain pay for the second world war with taxes. We now understand that it is best to finance wars by borrowing, so as to spread the disincentive effects of taxes more broadly over time.

But wait a second. A little while later Cochrane also writes:

Robert Barro's Ricardian equivalence theorem was one nail in the coffin. This theorem says that [fiscal] stimulus cannot work because people know their taxes must rise in the future. Now, one can argue with that result. Perhaps more people ignore the fact that taxes will go up than overestimate those tax increases. But once enlightened, we cannot ignore this central question. We cannot return to mechanically adding up today's consumption, investment and export demands, and prescribe the government demand necessary to attain some desired level of output. Every economist now knows that to get stimulus to work, at a minimum, government must fool people into forgetting about future taxes, an issue Keynes and Keynesians never thought of.

Hmmmm. Let's say Britain is fighting World War II and has raised taxes enough to cover the spending. But with those crippling tax rates, the most productive people don't work as much, and a bunch of low-skilled people get laid off.

So the British government uses a time machine to call an important economist from the future. They get lucky and get Cochrane on the horn. They ask him if they should borrow the money to pay for the war, so that they can cut taxes and try to stimulate the economy. I believe Cochrane's answer would be, "Yes we now know you should do that, but we also know it won't work."

* In his effort to rip the Keynesians, Cochrane says:

Our situation is remarkable. Imagine that an august group of Nobel-prize-winning scientists and government advisers on climate change were to say: "Yes, global warming has been all the rage for 30 years, but all these whippersnappers with their fancy computer models, satellite measurements and stacks of publications in unintelligible academic journals have lost touch with the real world. We still believe the world is headed for an ice age, just as we were taught as undergraduates back in the 1960s." Who would seem out of touch in that debate? Yet this is exactly where we stand with fiscal stimulus.

Holy cow John, you keep talking like that, and I'm going to buy The Return of Depression Economics. Why don't you compare them to evangelicals next? Then you'd really raise my sympathy and make me doubt your confident assurances that you've got it all figured out.

This is one of the few times on this blog where I'm not being sarcastic. Krugman actually makes some really good points in this blog post (HT2 Brad DeLong).

Anyway, Krugman's post is worth reading if for nothing else than this: "I think quantitative easing (it’s really qualitative easing, but I give up on trying to fix the terminology) is the right way to go." Thank you Dr. Krugman! I have been wondering what in the heck quantitative easing could even mean. (It's not like the Fed used to cut interest rates from funny to amusing, but now they are cutting them from 2% to 1%.)

But Krugman also makes the important observation that the Fed will lose money if there is indeed a Treasury bubble. And that means that even if he wanted to, Bernanke couldn't merely "unwind" his terrifying pumping up of the Fed's balance sheet in order to withdraw all of the new reserves from the system. As Krugman says:

But here’s the rub: if and when the economy recovers, it’s likely that long-term interest rates will rise, especially if the Fed’s current policy is successful in bringing them down. Suppose that the Fed has bought a bunch of 10-year bonds at 2.5% interest, and that by the time the Fed wants to shrink the money supply again the interest rate has risen to 5 or 6 percent, where it was before the crisis. Then the price of those bonds will have dropped significantly.

And this also means that selling the bonds at market prices won’t be enough to withdraw all the money now being created. So the Fed will have to sell additional assets; if the rise in interest rates is at all significant, it will have to get those assets from the Treasury. So the Fed is, implicitly, engaged in a deficit spending policy right now.

My back of the envelope calculation looks like this: if the Fed buys $1 trillion of 10-year bonds at 2.5%, and has to sell those bonds in an environment where the market demands a yield to maturity of more than 5%, it will take around a $200 billion loss.

Good times at the Austrian Scholar's Conference. Tom Woods sent me this. He loves it, but I suspect it's due to his narcissism. I love his talks too, because he usually has an anecdote involving my naughtiness.


True story: After this talk, a guy came up to me and was waving his arms around saying, "Whoa Dr. Murphy you must be part Italian!"

So I said, "Oh, was I moving my hands a lot?"

Then he goes, "No, I just thought you gave a lively talk."

If you think about it, you will realize just how awkward a situation I had created.

Ladies and gentlemen, start your engines! I don't trust the BLS's "seasonal adjustments," but at face value they say CPI rose 0.3% in January and then 0.4% in February, for an annualized rate of almost 4.3% for the new year. I think next year we will laugh that people were still worried about deflation at this late a stage.

* I defend the gold standard.

* Rose and White warn the Fed that it is committing the opposite mistake that (according to Friedman) the Fed committed during the 1930s.

* Arnold Kling has a great post about financial regulation.

* Not sure what I'm saying here.

* James Fogal sends the YouTube below. I got this guy.

Before I was caught doing Billy Joel's "Scenes From An Italian Restaurant," and it wasn't pretty. In fact, I am not even going to link to it.

But in the below it sounds much better. Even here, though, I swear the iPhone (or whatever) is not doing it justice. I had people who weren't even in our group coming up and saying I did a good job. Now (a) maybe everyone in the bar had beer headphones on, and (b) maybe I did sound really good, but only because it was relative to the standard karaoke person. But now in the calm of my office, maybe I can hear myself with fresh ears and so I'm comparing myself to Jimmy Buffet.

Anyway, here ya go. It's a shame that Jason Osborne, fellow Hillsdale grad and no fan of Big Government, didn't get into this clip. He did the best "Sweet Caroline" I have ever heard at a karaoke bar.

Gold jumped up about $50/oz. because of the Fed's announcement to buy $300 billion in long-term U.S. government debt.


I'm glad to see the gold traders get it. We are dangerously close to the situation where the Fed creates money out of thin air and then "loans" it directly to the Treasury to finance the $2 trillion deficit. But don't worry, kids, Bernanke's on the job.

OK I am comfortable now predicting that this will be the Great Depression II. I am not claiming that the standard stats will rival those of the 1930s. But folks, this is insane. This is not, "Oh we gotta just wait for the market to find its bottom. And yeah, there might be a few years of high inflation while we slog through this."

Tom Pyle, president of IER (and note: my boss there), has a good op ed on NRO today. I liked it because he acknowledged the pros of a carbon tax (versus cap-and-trade), but still says:

Economists rarely agree on the past, and never on the future. But in the present debate over carbon taxes, a strange consensus is starting to form around the idea that a national tax on carbon is better than installing an economy-wide cap on it.

Maybe so. But being "better" than cap-and-trade doesn't make a carbon tax a worthwhile public investment. Black bears are less dangerous than grizzly bears; neither should be let loose in the subway. Just as we shouldn't let the perfect be the enemy of the good, we shouldn't let the horrendous serve as a justification for the horrible.

Well not really, but it sounds the same (HT2LRC). What's funny is that if this had come out during the primaries, I think a lot more Republicans would've voted for Paul. I'm not saying that with pride, but I think a lot of older Republicans would say, "Heh this guy is old school" to hear Paul's judgmental but yet quaint use of "queer" instead of a much harsher term that a younger person would have used if searching for a pejorative statement.*

* And yes it occurs to me that I sound just like the people defending Bill Clinton for not using the n-word when he thought his mic was off and he ripped into Jesse Jackson. I am aware of my weakness for Ron Paul.

I don't know all that much about him, so maybe usually he's a really cool guy. But I find it very disturbing that Senator Chuck Grassley would hop on the anti-Wall Street bandwagon by recommending that AIG execs either resign or commit suicide. Yeah yeah, I know, he's "just kidding." But he doesn't say he's kidding, at least not in the CNBC story.

Incidentally, the grunting is mostly for show. My manager told me I would get more sponsors that way.

I think I've hit another aspect of it. (Note that I'm not sure if any of the mysteries of God can ever be fully explained while you still have a human body. Rather, I think what happens is that they gradually make more and more sense to you if you continue meditating on them. But you very rarely can say, "Aha! I figured it out guys!")

Part of why God is so funny/bold/shocking is that He is omnipotent and yet chose to entrust the propagation of His will to a bunch of humans, and in particular humans who overwhelmingly were poor, uneducated, and social rejects. Moreover, rather than arming His servants with a supergun or magical shielding, instead He gives them a bunch of ideas written down into a book that tells stories.

Just think about that. Let it sink in. God is not refraining from intervention out of stupidity or malice or indifference, He's doing it out of braggadocio. We tremble and say, "But Satan isn't afraid to lie and hurt little babies!!! Do something!!"

And the LORD says,

I AM doing something. I exist, and that is enough. But I also directly told some of you the Truth. Trust me, I designed the world--the 'real world' as you like to call it in your cute and redundant way--so that Truth and Love are stronger than lies and hate. Just watch. And in the meantime, since you have no idea what is going on, do what I tell you, OK? I love you.
---Daddy

* Here (mp3) is my 14-minute commercial for the Human Action study guide at the 2009 Austrian Scholars Conference (pdf). For what it's worth, I had several people tell me this was the best presentation I have ever given. (Note that that is not necessarily a compliment.) What happpens so often (at least in my life) is that I wasn't prepared to give such a long talk. I thought all of us authors would be sitting at a long table and would give a few remarks about our books and then throw it open for Q&A. It was only when I got in there and saw the podium on the stage with the video camera set up, and Mark Thornton told me, "You've got 15 minutes, I'll signal you when your time is running out," that I realized, "Whoa! I've got a half hour to come up with some jokes!" Fortunately Tom Woods (mp3) made a fool of himself in the opening talk, and thus provided me with a few easy opening lines. (Note this would probably translate better if you could see the video rather than listen to the audio; I don't know if they will ultimately put that up on the website as well.)

* Here (mp3) are two phone interviews I did with Scott Horton on the economic crisis.

In the previous post I was rendered without speech by Krugman's analysis. However, I tried to deal with several problems that I perceived, and thus may have given readers the wrong impression. His last confusion of the post had nothing to do with politics. In this post, I want to isolate that particular absurdity to make sure everyone here sees just how bad it was.

Recall that Krugman said:

Plus, who is “the government”? It’s basically us, you know — the government spends money providing services to the public. Demanding that the government tighten its belt means demanding that we, the taxpayers, get less of those services. Why is this a good thing, even aside from the state of the economy?

His mistake here is so bad and so basic that we shouldn't even worry about the political naivete. Suppose someone had said that there were too many houses built during the boom years, and so that sector needs to shrink. Now Krugman might say, "I disagree with that analysis"--and in fact he has. But suppose the way he disagreed was to write:

[Satirical Krugman quote:] Plus, who are these "homebuilders”? It’s basically us, you know — the homebuilders spend money on lumber, nails, and workers providing houses to the public. Demanding that the homebuilders scale back their operations means demanding that we, the consumers, get fewer houses. Why is this a good thing, even aside from the state of the economy?

Do you folks see it now? Back when I was teaching, if a business major had put this down on a short-answer for an Intro to Macro exam I would have read it to my wife so she could chuckle. ("Laugh" is a strong word; my wife is not the geek I am.)

And this guy won the Nobel (Memorial) Prize in economics. Oh my gosh.

I am a walking violation of rational expectations theory, because I do not learn. I continue to be shocked by Krugman's blog. Check out this one:

So I read this:

Boehner said Americans want government to practice the same financial restraint they have been forced to exercise: “It’s time for government to tighten their belts and show the American people that we ‘get’ it.”

and I wonder if this country can handle the crisis we’re in. Remember, John Boehner is, in effect, the second-most influential member of the GOP (after Rush Limbaugh)....

So the fact that Boehner’s idea of economics is completely insane matters.

What’s insane about Boehner’s remark? He’s talking about the current economic crisis as if it were a harvest failure — as if we faced a shortage of goods, so that the more you consume the less is left for me. In reality...we’re in a world desperately short of demand. If you consume more, that’s GOOD for me, because it helps create jobs and raise incomes. It’s in my personal disinterest to have you tighten your belt — and that’s just as true if you’re “the government” as if you’re my neighbor.

OK up till now it's just standard "scarcity doesn't apply when unemployment is above 6 percent" nonsense. The first time I read it stated so nakedly (months ago), I was stunned, but I've gotten over it. Yet Krugman continues, and makes a qualitatively worse mistake, that has all the political sophistication of a 7th grader:

Plus, who is “the government”? It’s basically us, you know — the government spends money providing services to the public. Demanding that the government tighten its belt means demanding that we, the taxpayers, get less of those services. Why is this a good thing, even aside from the state of the economy?

Again, this is what the leaders of a powerful, if minority, party think. Can this country be saved?

OK first of all, if the government is "basically us," then Krugman's blog post just proved that Krugman doesn't understand Keynesian economics. After all, Boehner is part of the government, Boehner doesn't understand Keynesian economics, the government is us, Krugman is part of us...you get the idea.

But second of all, notice that Krugman says "even aside from the state of the economy." Let that sink in for a second. Krugman is actually saying that it is NONSENSE for anyone to suggest that there exists even a THEORETICAL DRAWBACK to more government spending, EVER.

Seriously, am I misreading him here? Isn't that what he's saying?

How in the world did we get to a point where a Nobel economist can say that even in normal times, government spending is costless? Can I* be saved?

* You see what I did there?

I think the lesson here is, if Jon Stewart rips you on his show, just enjoy the attention and let it go. Hey, do any of you parents out there watch Dora the Explorer? Is that really the voices at the end of this clip?

The Daily Show With Jon StewartM - Th 11p / 10c

Basic Cable Personality Clash Skirmish '09

Daily Show Full Episodes
Important Things With Demetri Martin

Political Humor
Economic Crisis

Ludwig von Mises' magnum opus is Human Action. One of the hardest/easiest things to get across to newcomers is Mises' notion of "action," which is simply purposeful behavior. One of the questions we get a lot in Mises University is, "Can animals act?"

From now on I'm using the chimp Santino as an illustration that some of them clearly do. (HT2 Aristos)

What is it about these Keynesians? Why can't they just admit that Herbert Hoover ran unprecedented (peacetime) deficits, and then claim they didn't work because they were too little? That would be a decent argument.

Instead, they keep repeating the myth ("lie" is a strong word, since it implies that the people realize the facts) that Hoover ran balanced budgets. Here is Obama's head of the Council of Economic Advisers Christina Romer (pdf) in her just-released paper, "Lessons from the Great Depression for Economic Recovery in 2009" (HT2 Greg Mankiw):

One crucial lesson from the 1930s is that a small fiscal expansion has only small effects....The key fact is that while Roosevelt's fiscal actions were a bold break from the past, they were nevertheless small relative to the size of the problem. When Roosevelt took office in 1933, real GDP was more than 30% below its normal trend level....The emergency spending that Roosevelt did was precedent-breaking--balanced budgets had certainly been the norm up to that point. But, it was quite small. The deficit rose by about one and a half percent of GDP in 1934. One reason the rise wasn't larger was that a large tax increase had been passed at the end of the Hoover administration. Another key fact is that fiscal expansion was not sustained.

Again, it would be difficult to be more misleading without actually lying. Her statement sure as HECK makes it sound like Hoover ran a balanced budget (or very close), and that he jacked up taxes to keep it balanced, doesn't it?

Well go again to my new favorite website and check out the Hoover record. Note in particular the column saying Deficit as a % of GDP.

Now here's the really fun part. Look back up there again. Romer pooh poohs Roosevelt's "unprecedented" deficit spending because it only bumped up the deficit as a percentage of GDP from 4.5 to 5.9 from (fiscal) 1933 to 1934.

Hmm. Budget-balancing, arch conservative, liquidationist Herbert Hoover increased the deficit by 3.4 percentage points from 1931 to 1932. So on Romer's own measure of wild-spending Keynesian, Herbert Hoover was twice as bold as FDR.

I'd like to say she stopped looking at the data at 1933, and so didn't know what Hoover had done with the deficit after the stock market crashed... But then how could she responsibly inform us that balanced budgets had been the norm before FDR?

P.S. I stopped reading Romer's paper at this point. If she clarifies later on, someone please let me know and I will apologize for my strong words.

I can't believe this isn't getting more coverage. According to the financial wizards at CNBC:

Roubini, who is also known as "Dr. Doom," told CNBC that the risk of a total meltdown has been reversed for now but that the economy is going through "a death by a thousand cuts." He also said that "most of the U.S. financial institutions are entirely insolvent."
...
Earlier in the day, Roubini spoke to the CBOE Risk Management Conference and said he believes total losses could peak at $3.6 trillion in the financial system, with half of that being borne by banks and bank dealers and the other half borne by hedge funds and pension funds, among others.

He said that while U.S. GDP next year could be zero, global GDP could dip into negative territory.

I haven't seen anyone else claim US output will be zero next year, and I don't even know what it would mean for global GDP to become negative. Would barbers go around chloroforming people and giving them awful haircuts? This recession is serious!

Oh man. While promoting his new book (at least two weeks on NYT bestseller list, btw) on a radio show, Tom Woods fielded a caller who said Smoot-Hawley was in effect only for a year. Tom asked if this were true, I said I had no friggin idea, and I resorted to my trusty source of economic knowledge, Google.

This site says Smoot-Hawley was effectively repealed in 1934, and since the author hates free trade, I have no reason to doubt him. But check this out:

No, there is practically NO evidence that Smoot-Hawley hurt our economy. The US was already in a Depression when Smoot-Hawley was enacted. Prior to Smoot-Hawley, the 1929 Trade Surplus was +0.38% of our GDP. In other words, it contributed less than 1/200th to our economy.

What happens if we focus on exports alone? Exports were $5.9 billion in 1929, and had declined to $2.0 billion in 1933, for a -$3.9 billion decline. This $3.9 billion decline was roughly 3.8% of our 1929 GDP, which had already declined by a whopping 46% over the same period of time. Thus, of the -46% GDP decline, only 3.8% of it was due to a fall in exports.

But the effects on trade must also include the reduction in Imports, which ADDS to GDP. (A decline in imports increases GDP). If the import decline is added back to the GDP total (to measure the net trade balance), the "loss" becomes only -$0.2 billion from our GDP — or less than ½ of 1% of the total GDP decline. In other words, the document-able "loss" from the Smoot-Hawley Tariff — the "net export" loss — contributed less than ½ of 1% of our our -46% GDP decline.

Oh man. This is the problem with the whole mainstream macro approach. People assume that if you tinker with one variable in the Y=C+I+G+(X-M) formula, the other stuff remains the same.

Suppose we have a small island (think of Manhattan or Hong Kong if you want) that has millions of people who are utterly dependent on importing food, gasoline, etc. The island has no natural resources to speak of, and there's not enough room for farming. There are big skycrapers and the people are all software engineers, novelists, musicians, and other things that are exported electronically to the rest of the world.

Suppose further that it just so happens that year after year there is a no balance or deficit in the trade accounts. The islanders import, say, $100 billion a year in food, gasoline, compact cars, etc., and they export $100 billion a year in electronic goods and services.

Now there is a war, and the island gets surrounded by warships that completely seal off incoming cargo ships. Further, the enemy has airplanes flying overhead that scramble communications so they islanders can't send emails abroad.

According to our author, this should have no effect on the island real GDP, since X=$100 billion and M=$100 billion right before the enemy forces reduce both values to $0.

UPDATE: Just to make sure you folks really "see" it, let me elaborate: Before the war, the islanders' real GDP was $100 billion, and the macro guys at Harvard would tell you the following breakdown:

C = $74 billion
I = $10 billion
G = $15 billion
X = $100 billion (exports)
M = $99 billion (imports)

Right so doublecheck: Y = C+I+G+(X-M) = $100 billion. The people spend 74% of their income on private consumption, they invest 10% back into their economy, and the government takes its cut of 15%. International trade "contributes" 1% of GDP.

Now after the blockade is imposed, the Harvard economists come back and report the following:

C = $15 billion
I = $0
G = $5 billion
X = $0
M = $0

A lot of idiot free market economists blame the depression on the blockade, but that's crazy talk. See, GDP dropped 80% in one year, from $100 billion down to $20 billion. But of that drop, only 1/80th of it is attributable to the blockade. The rest is due to the enormous fall in private consumption and investment, as well as the government's stupid decision to slash its own spending. What idiots! These people need to call up Krugman pronto. If the government simply borrowed and spent $80 billion more, it could close the output gap.

* My brother sends me this YouTube of Hitler reacting to the Buffalo Bills' signing of Terrell Owens. (We grew up in Rochester and so are Bills fans--they lost the Superbowl every year I was in high school. I am still bitter.) This is now the 3rd or 4th spoof of this scene; can someone tell me the actual movie?! It looks awesome.

* A reader (sorry I forget which thread this was in so I can't look up who it was!) recommended this rather ominous story about the Bank of England promising to inflate until the economy is fixed. *Gulp*

* LRC hosts this AWESOME Jim Rogers interview. It's 26 minutes, so what I did was start it and then do other stuff. But note how the young interviewer keeps bringing up the same fallacies over and over, and the wisened old Rogers--like Yoda correcting Luke's aggression--keeps bringing him back to reality. It's especially funny around 12:00 when Rogers reminds the guy that the British government couldn't borrow money in the 1970s, and the guy says, "But that can't happen again." Rogers says (paraphrasing), "Well why don't you write that one down and we'll see."

* Tyler Cowen links to a Greg Ransom post. The guy below is Hayek, the animal is named "Inflation," and you'll have to click here to see the full story (including double entendre).

In a recent debate (which I discuss here), Brad DeLong referred to an apparently decisive argument from Paul Krugman regarding the "hangover theory." Here's Krugman:

[T]he hangover theory, which I wrote about a decade ago, is still out there.

The basic idea is that a recession, even a depression, is somehow a necessary thing, part of the process of “adapting the structure of production.” We have to get those people who were pounding nails in Nevada into other places and occupation, which is why unemployment has to be high in the housing bubble states for a while.

The trouble with this theory, as I pointed out way back when, is twofold:

1. It doesn’t explain why there isn’t mass unemployment when bubbles are growing as well as shrinking — why didn’t we need high unemployment elsewhere to get those people into the nail-pounding-in-Nevada business?

2. It doesn’t explain why recessions reduce unemployment across the board, not just in industries that were bloated by a bubble.

One striking fact, which I’ve already written about, is that the current slump is affecting some non-housing-bubble states as or more severely as the epicenters of the bubble. Here’s a convenient table from the BLS, ranking states by the rise in unemployment over the past year. Unemployment is up everywhere. And while the centers of the bubble, Florida and California, are high in the rankings, so are Georgia, Alabama, and the Carolinas.

I'm going to deal with objection (1) in a forthcoming Mises Daily article. But for here, I want to discuss objection (2).

First, note that the BLS table looks at the yr/yr change in unemployment (by state) from Dec 07 to Dec 08. Now is that really a good measure of whether the bursting of the housing bubble has anything to do with the recession? After all, the bubble had well burst by Dec 07. So if the Austrians--or in fact, any economist who thinks the current recession "started" in housing--are right, you would expect the connection between unemployment jumps, and housing price collapses, to be weaker, the farther along you get from the bursting of the bubble.

Nudged on by an email from the mysterious von Pepe, I decided to check on the relation during a time frame that more tightly captures the bursting of the housing bubble. The OFHEO data is quarterly, and I picked the top of the bubble as 2q 2006. We can quibble with that, but that's what I picked.

Then I picked the other variable to be the change in unemployment (in terms of absolute point changes, not percentages of percentages) from Jun 2006 to Dec 2008.

Then I ranked the states according to these two criteria, and looked at the worst 10 in both rankings. The 7th through 10th slots don't match up, but check out the top/worst 6 slots in both lists:

Ranking of States By Point Increase in Unemployment Rate, Jun 06 - Dec 08
1......Rhode Island (+4.9)
2......Florida (+4.8)
2......Nevada (+4.8)
4......California (+4.4)
5......North Carolina (+3.9)
6......Michigan (+3.8)

Ranking of States By Percentage Drop in OFHEO Housing Price Index, 2q06 - 4q08
1......California, -27%
2......Nevada, -26%
3......Florida, -22%
4......Arizona, -16%
5......Rhode Island, -11%
6......Michigan, -11%

Note that North Carolina and Arizona are the only ones that don't match.

I confess I haven't yet run Monte Carlo simulations to see how likely this result is, out of 50 states, if there were no causal relation. But I'm feeling pretty good about my hangover theory.

Wintery Knight has an interesting post on how to argue with non-believers regarding the resurrection of Jesus. However, more than the post itself, what interested me was the issue he and a commenter touch on underneath it, regarding "front loading":

Actually, in Christianity, there is a faction of scholars who prefer to “front-load” all of the biological design and miracles. I think this is done in order to keep God outside of time, subsequent to the big bang.

I have tons to say on this, but let me right now give a very succinct argument that I find irresistible. Maybe Wintery Knight or someone else can show me it's not so open-and-shut. But here goes:

(1) The "laws of physics" are regularities that humans think they have discovered; they are apparent patterns that exist in the observations of physical phenomena.

(2) If one really understands the character of physical law--as explained by the master, Richard Feynman--then nature can never violate the laws of physics. If scientists repeatedly observe a violation of, say, the conservation of energy, then the "law" wasn't really a law.

(3) Therefore it is impossible for God to "intervene" in nature and "perform a miracle," if "miracle" means "matter behaving not in accordance with the true laws of physics."

Like I said, I have a heck of a lot more to say on this issue. I am not disputing that Jesus did "miraculous" things, like walk on water. But my point is, by definition He did not thereby violate the laws of nature or physics. Such talk is nonsensical.

Three great pieces for ya...

* The definitive free marketeer blog post on how to think about the mark-to-market controversy.

* Bob Higgs rolls up his sleeves and blows up (what he calls) vulgar Keynesianism. I warn you that there are a few equations in here, but this is top-flight stuff. Higgs really nails the conceptual problems in the standard policy prescriptions coming from today's gurus.

* Mario Rizzo adds yet another post on the problems with Keynesian "stimulus." He links to this graph:



Now I'm not 100% sure, but I think what this image shows us is that the job losses during this recession are fairly concentrated in a few specific industries, particularly those in the manufacturing sector. (Note that I think the chart is not saying, "The job losses are mostly concentrated in manufacturing." Rather, I think the chart is saying that within manufacturing, job losses are focused in very specific areas. But I could be wrong about that interpretation.)

UPDATE: Mario Rizzo sent me this clarification from the original site; they are saying the graph above means the opposite of what I claimed. My smart-butt response was, "So they should rename this the anti-diffusion index?" I will have to go the BLS and figure out exactly what this thing measures.

Tokyo Tom passed along this very interesting piece describing the accusations. (EPJ has two follow ups here and here.)

I'll boil down the essentials here:

In a speech...[former Australian PM] Paul Keating gave a starkly different account of Geithner's record in handling the Asian crisis: "Tim Geithner was the Treasury line officer who wrote the IMF [International Monetary Fund] program for Indonesia in 1997-98, which was to apply current account solutions to a capital account crisis."

In other words, Geithner fundamentally misdiagnosed the problem. And his misdiagnosis led to a dreadfully wrong prescription.

Geithner thought Asia's problem was the same as the ones that had shattered Latin America in the 1980s and Mexico in 1994, a classic current account crisis. In this kind of crisis, the central cause is that the government has run impossibly big debts.

The solution? The IMF, the Washington-based emergency lender of last resort, will make loans to keep the country solvent, but on condition the government hacks back its spending. The cure addresses the ailment.

But the Asian crisis was completely different. The Asian governments that went to the IMF for emergency loans - Thailand, South Korea and Indonesia - all had sound public finances.

The problem was not government debt. It was great tsunamis of hot money in the private capital markets. When the wave rushed out, it left a credit drought behind.

But Geithner, through his influence on the IMF, imposed the same cure the IMF had imposed on Latin America and Mexico. It was the wrong cure. Indeed, it only aggravated the problem.

Keating continued: "Soeharto's government delivered 21 years of 7 per cent compound growth. It takes a gigantic fool to mess that up. But the IMF messed it up. The end result was the biggest fall in GDP in the 20th century. That dubious distinction went to Indonesia. And, of course, Soeharto lost power."

Exactly who was the "gigantic fool"? It was, obviously, the man who wrote the program, Geithner, although Keating is prepared to put the then managing director of the IMF, the Frenchman Michel Camdessus, in the same category.

Worse, Keating argued, Geithner's misjudgment had done terminal damage to the credibility of the IMF, with seismic geoeconomic consequences: "The IMF is the gun that can't shoot straight. They've been making a mess of things for the last 20-odd years, and the greatest mess they made was in east Asia in 1997-98, so much so that no east Asian state will put its head in the IMF noose."

China, in particular, drew hard conclusions from the IMF's mishandling of the Asian crisis. It decided that it would never allow itself to be dependent on the IMF, or the US, or the West generally, for its international solvency. Instead, it would build the biggest war chest the world had ever seen.

Keating continued: "This has all been noted inside the State Council of China and by the Politburo. And it's one of the reasons, perhaps the principal reason, why convertibility of the renminbi remains off the agenda for China, and it's why through a series of exchange-rate interventions each day that they've built these massive reserves....

Is this some flight of Keatingesque fancy? The former deputy governor of the Reserve Bank of Australia, Stephen Grenville, doesn't think so: "After the Asian crisis, the countries of east Asia decided that they would never go to the IMF again. The IMF is taboo in east Asia. Look at the evidence. The revealed preference of the region is that no one has gone to the IMF since, even when they needed the money."
...
Keating went on to argue that, by frightening the Chinese into building their vast $US2 trillion foreign reserves, Geithner was responsible for the build-up of tremendous imbalance in the world financial system. This imbalance, in turn, according to Keating, contributed to the global financial crisis which has since devastated the world economy....

"That is the fundamental cause of the problem - the imbalance is the fundamental cause."

Now I'm not necessarily endorsing Keating's analysis. For one thing, it sounds like he's saying that everything was chugging along nicely, until Indonesia cut its government spending. Obviously I don't endorse that.

However, it wouldn't surprise me in the least if the IMF "austerity" measures messed up the region. When compassionate leftists complain that the cold-hearted IMF foists "market reforms" on beleaguered countries, my eyebrow shoots up. For one thing, I went to school with people who were going to work for the IMF, and believe me, they did not have dog-eared copies of Free to Choose lying around.

As I explained in the PIG to Capitalism (link is on the left margin if you're curious), the IMF and World Bank austerity measures would--yes--involve things like lowering tariffs, but that sometimes include tax hikes to close budget deficits. Remember that the financial press described the Bush years as extreme deregulation, the next time you read that the IMF foists capitalism on socialist dictators.

Anyway, even though I came out strongly against the "global savings glut" explanation for the housing boom, in some conversations with Bill Barnett and Tom Woods, I came around to the position that the Bank of China's actions could have exacerbated Greenspan's ridiculous interest rates in the early to mid-2000s.

Think of it like this: Greenspan flooded the market with a bunch of new credit after the dot-com crash and 9/11 attacks. Now if the US were just a regular old country, the result would have been a decline in the foreign exchange value of the dollar, and hence a rise in the price of imports into the US. In other words, Greenspan's money pumping would have led to domestic price inflation, and he would have had to back off.

But because the Chinese central bank had pegged the yuan (or renminbi) to the dollar, this in effect meant the Chinese were committed to sopping up as many US assets (mostly Treasury debt) as they had to, to prevent Greenspan's inflation from causing the dollar to depreciate against the yuan. So I'm not sure if that would be reflected in the figures of "global savings rate," but surely it didn't help things.