Sunday, January 31, 2010


Do You Love Big Ben (Bernanke)?

In one of His most famous and controversial teachings, Jesus instructs His followers to love their enemies:
27"But I tell you who hear me: Love your enemies, do good to those who hate you, 28bless those who curse you, pray for those who mistreat you. 29If someone strikes you on one cheek, turn to him the other also. If someone takes your cloak, do not stop him from taking your tunic. 30Give to everyone who asks you, and if anyone takes what belongs to you, do not demand it back. 31Do to others as you would have them do to you.

32"If you love those who love you, what credit is that to you? Even 'sinners' love those who love them. 33And if you do good to those who are good to you, what credit is that to you? Even 'sinners' do that. 34And if you lend to those from whom you expect repayment, what credit is that to you? Even 'sinners' lend to 'sinners,' expecting to be repaid in full. 35But love your enemies, do good to them, and lend to them without expecting to get anything back. Then your reward will be great, and you will be sons of the Most High, because he is kind to the ungrateful and wicked. 36Be merciful, just as your Father is merciful. (Luke 6: 27-36)
So for me, I don't really have any "enemies" in my personal life. It's probably partly because I'm a consultant and so I don't have any corporate rivals or a jerk boss I can't stand.

But there still is a temptation for me to hate the official power brokers in DC and other heads of state and militaries around the world, for all the carnage that they unleash on innocent people. If my worldview is correct, then the world could be incredibly better on so many levels, if these guys (and a few gals) would abandon their lust for power.

So in that context, it's a useful exercise as a Christian to work yourself up into at least trying to love someone like Ben Bernanke. (Or if you don't really have a strong feeling for him one way or the other, try Barack Obama or George Bush or Dick Cheney or Kim Jong Il.)

So for Bernanke, even though I am positive he is wrecking the US financial system and I am 90% confident that he is at least vaguely aware of what he is doing, I occasionally will try to recalibrate my indignation by stepping back and trying to understand "how could this have happened?" And in the process of doing so, I end up being a lot less angry. So I think (as usual) Jesus' command wasn't some pointless task of obedience that He threw out there for us; if you actually try to love your enemies, you gain a much greater understanding of how the world works. (And note I use that common phrase quite deliberately--in an important sense the ruler of the world is Satan, and it's important to analyze how he manipulates things without focusing your judgment on the weak people who facilitate his plans.)

OK then, if you're starting out in a fury and you think there's no way in the world you could ever sincerely have feelings of sympathy and compassion for someone like Ben Bernanke--and yet you are a Christian and intellectually know that you should--here are some methods that I use.

First, notwithstanding John Steinbeck's theory in East of Eden, I don't think we should assume that a particular adult who is doing really evil things, came out of the womb with no conscience. Steinbeck may be right that some people just never really had a conscience, but I think that's too easy and incorrect when trying to understand the development of adults who do astonishingly wicked things. So even though I haven't researched it, I'm willing to say that Benny Bernanke was a cute little kid who played with kittens and read Moby Dick to shut-ins every other Saturday at the nursing home.

Second, realize that Bernanke probably faces far more constraints on his actions than you realize. C'mon, do you really think the most powerful bankers and other men in the world, would sit back with bated breath to see what a former Princeton econ chair decides with regard to the fate of the world economy? So when you are trying to interpret some of his actions--such as bailing out foreign banks--keep in mind that part of that might be Bernanke trying to buy himself some friends to give himself more options. It doesn't make those actions right, but my point is simply that we don't really know what's motivating him. I don't for one second believe we're seeing the maximization of Bernanke's utility function, where the two inputs are his paramaters for distaste of inflation and the "output gap," but on the other hand it's probably also not correct to view Bernanke as sitting in his quarters twirling a mustache and saying moo-hoo-ha-HA!

Third, realize that whatever awful decisions Bernanke is "forced" to make right now--and which he himself probably recognizes as placing his own career / family's survival above the interests of average people--he probably didn't realize that, going into things. He must have been an incredibly ambitious and very talented guy, to even be a candidate for Fed chief. He probably was very familiar with previous Fed actions and thought he could do a better job, or at least thought he would do at least a good a job as any of the other people in the running.

For the above point, consider your own job experiences. Haven't you ever been disillusioned once you got into a job, and actually became somewhat disappointed (or even disgusted) with how it "made" you act? For example, I used to have this hallowed conception of the mighty Peer Review Process for journal articles. I was picturing scientific economists sending journal articles into an editor, who would then distribute them to the world's experts on the subject. The experts would spend days carefully vetting the submission, reproducing its claims and subjecting it to all sorts of stress tests to judge the robustness of its results. After such a grueling process, only the most airtight articles would see the light of day. And if any economics professors are reading this right now, I hope I gave you a good belly laugh. (I'm not even talking about the CRU email scandal; I'm talking about regular academic discourse here. In practice referees don't have nearly enough time to provide more than a cursory line of defense against erroneous journal submissions.)

So for Bernanke (or Obama or Bush) think of how much "on the job" training he must have received. Whatever promises (implicit or explicit) he made in order to get the job, he had no idea what certain powerful people were going to ask of him. It wouldn't surprise me if, in reality, Bernanke's true job is to take his marching orders from other people, and then come up with the way to sell it to the financial markets so it sounds like a coherent plan. Now even if that's true, note that Bernanke isn't a complete puppet. He always has the option of pushing the boundaries of what his handlers want him to say or do, because ultimately it would look really weird if all of a sudden his brakes didn't work next Tuesday. So once he got into power and (let's suppose) realized the people "coaching" him weren't doing their level best to help average Americans, even if he wanted to repent at that point, it would be pretty difficult. It would be very very very easy--and I bet many of us have thought like this in some of our jobs--for him to say, "This whole organization is going down the wrong path, but I'll do what I can to check its worst excesses and avoid disaster. Mr. X and Y and Z are some seriously bad influences, but I can steer things away from what they want." I'm not saying that is what's going on, but it could be.

I'll stop here because I think you get the point. As crazy as it sounds, try to work up some sympathy for the Fed chief. Jesus told us to.

Saturday, January 30, 2010


An Oldie But Goodie: Murphy Contrasts the Classical with Modern Theory of Economic Value

This is for the geeks in the crowd... I came across my critique of Kevin Carson [.pdf] for another project, and--like Ralphie from A Christmas Story--was just really impressed with how good my essay was. So if you want to see a straightforward explanation of how the classical economists explained market prices, and why (in my opinion) the modern approach is superior, check it out. The so-called Marginal or Marginalist Revolution was truly an improvement in theoretical economics, analogous to Einstein's special relativity versus Newton's classical laws. In other words, the modern theory is more general, and can handle the classical theory's meat-and-potatoes as a special case.



* Scott Sumner discusses the Fed's hints that they will drop the "federal funds rate" as their target variable, and instead will use the interest rate on excess reserves. If you can't stomach the wonkish stuff, just scroll down to the end where Sumner explains that beyond the jargon, this transition would transfer power from regional Fed banks to DC. Hmmm. BTW, if you really parse their trial balloon statements, it seems that maybe what the Fed gurus are really saying is that they will still be targeting the fed funds rate, because it will trade at some spread relative to the interest rate on reserves. So having put 5 minutes of thought into this, I have to side with Robert Wenzel who says this is a mere codification of what the Fed has been doing already, rather than a stunning change in policy as Sumner argues.

* I haven't had time to read this carefully, but more on possible government moves to tap into your retirement accounts.

* Chip Knappenberger has an uncharacteristically harsh critique of the IPCC. What I mean is, Chip is usually very moderate in his claims, but he lets loose in this piece describing (apparently) shocking lapses in the IPCC's official procedures to codify the "scientific consensus" on various points. Chip is actually a published climate scientist so he is not a mere right-wing talking head.

* Doug French describes Rothbard in class.

Friday, January 29, 2010


Bloomberg Catching On to the "Secret Banking Cabal"

David Kramer at LRC relays this choice excerpt from a Bloomberg commentary by David Reilly:
Secret Banking Cabal Emerges From AIG Shadows: David Reilly

Commentary by David Reilly

Jan. 29 (Bloomberg) -- The idea of secret banking cabals that control the country and global economy are a given among conspiracy theorists who stockpile ammo, bottled water and peanut butter. After this week’s congressional hearing into the bailout of American International Group Inc., you have to wonder if those folks are crazy after all.

Wednesday’s hearing described a secretive group deploying billions of dollars to favored banks, operating with little oversight by the public or elected officials.

We’re talking about the Federal Reserve Bank of New York,
whose role as the most influential part of the federal-reserve system -- apart from the matter of AIG’s bailout -- deserves further congressional scrutiny.

The New York Fed is in the hot seat for its decision in November 2008 to buy out, for about $30 billion, insurance contracts AIG sold on toxic debt securities to banks, including Goldman Sachs Group Inc., Merrill Lynch & Co., Societe Generale and Deutsche Bank AG, among others. That decision, critics say, amounted to a back-door bailout for the banks, which received 100 cents on the dollar for contracts that would have been worth far less had AIG been allowed to fail.
As thrilling as it is to see this frank discussion in a Bloomberg article, Reilly doesn't go the full distance. If you're stocking up in preparation for Mad Max times, you need jelly to go with your peanut butter.



Glenn Greenwald Not a Fan of the Iraq Invasion

I'm not entirely outsourcing Free Advice to Glenn Greenwald--he works for union scale--but this post contrasting the British investigations into the Iraq Invasion with our own (nonexistent) ones contains some remarkable paragraphs. For example:
British political news has been consumed for the last several weeks by a formal inquiry into the illegality and deceit behind Tony Blair's decision to join the U.S. in invading Iraq. Today, Blair himself is publicly testifying before the investigative commission and is being grilled about numerous false claims he made in the run-up to the war, not only about Iraqi weapons programs...and Saddam's ties to Al Qaeda, but also about secret commitments he made to join the U.S. at a time when he and Bush were still pretending that they were undecided and awaiting the outcome of the U.N. negotiations and the inspection process.
[A]ll of this stands in stark and shameful contrast to the U.S., which pointedly refuses to "look back" or concern itself with whether it waged an illegal (and horribly destructive) war....[O]ne can barely even imagine George Bush and Dick Cheney being hauled before an investigative body and forced, under oath, to testify publicly about what they did as a means of determining the legality or illegality of that war. Doing that would fundamentally conflict with two leading principles in American political life: (1) our highest political leaders must never be accountable for actions they take while in power; and (2) whether something they do is "illegal" -- especially the starting of wars -- is utterly irrelevant. Instead of formally investigating whether they broke the law, we treat them like elder statesmen who deserve a life of luxury and media reverence.
And then this:
I'm periodically criticized for an "angry" tone in my writing, which I always find mystifying. I genuinely don't understand why anger should be avoided or even how it could be. What other reaction is possible when one looks around and sees the government leaders who committed these grave crimes completely unburdened by any accountability and treated as respectable dignitaries, or watches the Tom Friedmans, Jeffrey Goldbergs, Fred Hiatts and other unrepentent leading media propagandists who helped enable it still feted as Serious and honest experts, or beholds the current Cabinet and Senate filled with people who supported it, or observes the Michael O'Hanlons and Les Gelbs and other Foreign Policy Community luminaries who lent trans-partisan credence to it all continue to traipse around still pompously advocating for more wars that never touch their lives?


The Unemployment Game Show

Tony G. apparently has nothing better to do than send me funny videos. Maybe he's not in the labor force?


Help Me Out With the "Inventory Bounce" Cynicism

I am as skeptical of GDP numbers as the next guy. But I don't quite get this commentary by Krugman:
As expected, a big GDP number (pdf), signifying nothing much. It’s an inventory blip: topline growth at 5.7 percent, but only 2.2 of that is final demand.
Don't get me wrong, I understand the superficial plausibility of distinguishing between changes in final demand versus "mere" changes in inventory. But when we push the analysis one step deeper, I can't come up with the same conclusion that Krugman reaches. (It's not just him, by the way, lot's of people talk like this.)

If I'm not mistaken, the procedure (roughly speaking) goes like this: The BEA measures how much money people spend on finished goods and services. But that figure isn't necessarily how much businesses produced during the quarter, because some of those sales could have been handled through falling inventories.

So for example, if final sales were $1 trillion, but inventories declined by $100 billion, then they would subtract it and say that GDP was actually only $900 billion. In other words, only $900 billion in stuff was actually produced, since the other $100 billion in sales came from drawing down inventories (which were produced in earlier periods).

OK, so now for today's announcement of the 4th quarter GDP figures, Krugman is saying that the 5.7% official figure is misleading, because if you strip out inventories, then "final demand" only grew 2.2%. This strikes me as backwards.

If you break down the numbers, inventories still fell in the 4th quarter, they just didn't fall as sharply as in the 3rd quarter:
Business inventories fell only $33.5 billion in fourth quarter after dropping $139.2 billion in the July-September period. The change in inventories alone added 3.39 percentage points to GDP in the last quarter. This was the biggest percentage contribution since the fourth quarter of 1987.
Am I making sense here? I can understand if inventories rose by a bunch, and then Krugman wanted to say, "Aww, that's just firms replenishing their depleted inventories--this isn't really a spike in final demand by consumers."

Can anybody clarify this? I am hesitant to say not only Krugman, but many other commentators, on this point are getting things backwards, especially since I'm no expert on GDP accounting. I am thinking I'm doing something wrong, because in my version I don't see where the 2.2% figure is coming from, when you "strip out inventories," if they only fell by $33.5 billion.


The Fate of the Mighty Dollar

Tony G. passes this along. Note there are some naughty words at the end.

Thursday, January 28, 2010


Senate Reconfirms; Bernanke Says, "Come to the Bar, Drinks Are On Dollar-Holders"

CNBC reports:
Federal Reserve Chairman Ben Bernanke won Senate confirmation for a second term, ending a bruising political battle that forced the head the world's most powerful central bank to fight for survival.

Bernanke's nomination was approved 70-30 by the Senate after clearling a procedural roadblock with a 77-23 vote. A simple majority of 51 votes in the 100-person chamber was needed for approval.
Well shucks, besides my disappointment that the "Bernanke saved us all" messaging was good enough for government work, his reconfirmation apparently blows a hole in my recent conspiracy theory. I had guessed that the last-minute upset was the way to get the architect of a dollar collapse safely out of power, so that the resulting inflation wouldn't be the fault of the sitting Fed chair.

Isn't it perfectly obvious what happened? The shadowy bankers read my last post, then told key senators to switch their votes in order to discredit me.

These guys are good. I had no idea what we were up against.


Bernanke Almost There...

According to CNBC:
Federal Reserve Chairman Ben Bernanke won a key procedural vote in the Senate, clearing the way for his confirmation for a second term running the world's most powerful central bank.

The Senate is now moving to final confirming vote.

Bernanke was expected to win the Senate's backing despite the stiffest opposition to any nominee for Fed chairman in the nearly 32 years the Senate has voted on the position.
So it's not quite official yet, but it looks like it will go through. They needed 60 votes to end debate (or whatever) and now they just need 51 to confirm him.

I think some senators are voting to end debate but then will vote against confirmation, so they can say, "I voted against Bernanke!" in the fall.

As Robert Wenzel points out, the Senate's vote occurs after the markets closed, perhaps to avoid embarrassing the Printer in Chief.



* Josiah Neeley sends this article on "6 Enlightened Ideas Brought to You By Evil Empires." The premise is that yeah these regimes were mass murderers and ate their own children and such, but gosh they were kinda progressive in a modern way too. Rather than concluding that things like mandatory schooling or bans on smoking are suspect, of course the writer concludes that maybe these regimes weren't unadulterated evil after all. (Note that I am not saying I have a problem with women being allowed to own property, which is one of the examples.) Note that there are some naughty words in the article.

* I haven't done any research to confirm or deny, but David R. Henderson had an interesting blog post arguing that Republicans purposely allowed ObamaCare to advance in December, so they'd have a great thing to run against in November. (This was before the Scott Brown election.)

* Here's a weird thing: A guy got charged with DUI when his car wouldn't even start.

* Richard Ebeling saw that I survived, and so he too faced Wendell Jones and Godfrey Eneas on Platform TV in the Bahamas.

* RatherBFlying sends me this rather ominous RAND report, "Does the United States Need a New Police Force for Stability Operations?" Here's the conclusion from their summary:
Weighing all considerations, the researchers concluded that the best option would be a 6,000-person hybrid force headquartered in the U.S. Marshals Service. The personnel in reserve status could be employed in state and local police forces so they would be able to exercise police functions in a civilian population daily and could be called up as needed. The Marshals Service was deemed to have many of the requisite skills. However, its training and management capabilities would need to be expanded to take on this large mission, and it would have to recruit additional personnel as well. The annual cost, $637 million, is reasonable given the capability it buys. The cost savings in relieving military forces of these duties could be greater than required to create the SPF [Stability Police Force].

The Military Police option was attractive for a number of reasons, especially its capacity, training, and logistical capabilities, but its inability to engage in policing activities when not deployed was a major stumbling block. The Posse Comitatus Act precludes military personnel from exercising police functions in a civilian setting, and legislative relief might be difficult to get. Even if such relief were forthcoming, it is unclear where and how routine police skills might be honed.

Creation of a civilian SPF would not affect the roles that other elements of the U.S. government would play. Rather, it would complement other agencies such as the departments of Defense and State. But the SPF would provide a necessary capability, and the U.S. Army should support its creation.
Note that the report, as written, seems to be exclusively focused on deploying the new SPF to foreign theaters; I skimmed it and didn't see any mention of US operations. However, as I put in bold above, the SPF would obviously be trained on US soil. If you don't see the potential trouble, please watch Star Wars Episode III.

Wednesday, January 27, 2010


What Would It Take For Americans to Realize They Are Not Free?

I was having lunch with someone today (name being withheld in case he doesn't want this broadcast) and we were musing over the contradiction in the average American's mind. On the one hand, if you asked Americans to rate professions in terms of their morality or decency, politicians would come in at or near dead last, and if they beat out lawyers, that wouldn't be much help--most politicians are lawyers.

But at the same time, when it comes to the life-and-death decisions that U.S. politicians make, most Americans give them the benefit of the doubt--often ridiculously so. Sure, they might have made a mistake in, say, invading Iraq, but it really was always about protecting Americans and freeing Iraqis from a brutal thug. The CIA guys just goofed, that's all.

So anyway, my buddy asked something like, "At what point are Americans going to wake up and realize they can't trust their government?"

My answer, "When it's too late for them to do anything about it."

Note that I wasn't just trying to say something dramatic, at which point the snare drums kick in and lightning cracks in the background. I meant it quite seriously: The people in charge have to keep up appearances so long as it's necessary for the overwhelming majority to actually trust that the system basically works. In contrast, in more totalitarian regimes, the average person a large portion of the population knows full well that the rulers are evil, and they are kept in place by fear and helplessness. (They also might think there are no better alternatives.)

So with that in mind, let's quote from today's post by Glenn Greenwald. We have already learned that Americans won't revolt--heck, won't even vote against an incumbent--just because of worldwide CIA secret prisons and systematic torture of POWs. OK fine. What about this?
The Washington Post's Dana Priest today reports that "U.S. military teams and intelligence agencies are deeply involved in secret joint operations with Yemeni troops who in the past six weeks have killed scores of people."...

But buried in Priest's article is her revelation that American citizens are now being placed on a secret "hit list" of people whom the President has personally authorized to be killed...

Just think about this for a minute. Barack Obama, like George Bush before him, has claimed the authority to order American citizens murdered based solely on the unverified, uncharged, unchecked claim that they are associated with Terrorism and pose "a continuing and imminent threat to U.S. persons and interests." They're entitled to no charges, no trial, no ability to contest the accusations. Amazingly, the Bush administration's policy of merely imprisoning foreign nationals (along with a couple of American citizens) without charges -- based solely on the President's claim that they were Terrorists -- produced intense controversy for years. That, one will recall, was a grave assault on the Constitution. Shouldn't Obama's policy of ordering American citizens assassinated without any due process or checks of any kind -- not imprisoned, but killed -- produce at least as much controversy?

Obviously, if U.S. forces are fighting on an actual battlefield, then they (like everyone else) have the right to kill combatants actively fighting against them, including American citizens. That's just the essence of war....But combat is not what we're talking about here. The people on this "hit list" are likely to be killed while at home, sleeping in their bed, driving in a car with friends or family, or engaged in a whole array of other activities. More critically still, the Obama administration -- like the Bush administration before it -- defines the "battlefield" as the entire world. So the President claims the power to order U.S. citizens killed anywhere in the world, while engaged even in the most benign activities carried out far away from any actual battlefield, based solely on his say-so and with no judicial oversight or other checks. That's quite a power for an American President to claim for himself.
Sure, if you want to argue that we're not there yet--after all, people would flip out if they learned that the CIA was killing people in their beds in Hackensack--go right ahead and make that point. But we're sure a lot closer now, than any of us would have guessed 10 years ago, wouldn't you say? Could you possibly have imagined 10 years ago, that in a decade it would be common knowledge that the US tortured its prisoners, and that the president drew up lists of American citizens to be killed without any kind of process or review? Oh and that after he made up his list of who's naughty and dead, that the president would then review the balance sheet of the two Detroit car companies that he owned?



* Stimulus Tracker: CNNMoney clocks it at $4.7 trillion in total stimulus so far. It's a neat little graphic breaking it all down. (Hint: Most of it is via the Fed.)

* What really made me skeptical about the White House's "support" for Bernanke and Geithner, was this anonymous email that uses the word "honestly" twice. Sort of like when Obama says, "Let me be clear," which I am pretty sure means, "The following is false..."

* Jeff Kvistad sends this WSJ op ed that epitomizes our Keynesian, inflationist age. Note the part at the end where now "central bank independence" means "willingness to print money like crazy." (Recall that it used to mean the opposite.)

* Rich Wilcke sends along this very entertaining journal article [.pdf] on Ag Econ (really!).


"End the Fed" Rap Video

I must be out of touch. For the last 6 months I have been working on a remake of The Hollies' "Pay You Back With Interest" thinking it would be a fantastic and cutting edge critique of Paulson and Geithner. The video was going to feature girls with dresses showing their ankles, people driving around without seatbelts, and even a guy smoking a cigarette in a restaurant. I thought it would be seriously hardcore. But apparently rap is where it's at. (HT2EPJ)

Tuesday, January 26, 2010


Progressives Starting to Realize That George Carlin Was Right...

...the game is rigged, you don't have a choice. Hmm, McCain or Obama? One would ramp up military adventures in the Middle East while pledging fiscal responsibility while actually running unprecedented deficits, whereas the other candidate would...oh shoot.

What's interesting is not so much Paul Krugman's discussion of Obama and Hoover (and his failure to mention that Hoover disowned Mellon's reported remarks about liquidation), but rather the disillusioned Obama voters in the comments.

I'm not gloating, I'm glad they are wisening up. Now what happens? Are they going to vote for Obama again to keep out President Palin (or Brown)? Or will they go anarcho-communist?

Or will they find Free Advice in time?


Bernanke Will Be Distracted at the FOMC Meeting

Yikes, Senator Jim Bunning let out a bombshell today (HT2LRC):
A Republican senator said Tuesday that documents showing Federal Reserve Board Chairman Ben Bernake covered up the fact that his staff recommended he not bailout AIG are being kept from the public. And a House Republican charged that a whistleblower had alerted Congress to specific documents provide "troubling details" of Bernanke's role in the AIG bailout.

Sen. Jim Bunning (R-Ky.), a Bernanke critic, said on CNBC that he has seen documents showing that Bernanke overruled such a recommendation. If that's the case, it raises questions about whether bailing out AIG was actually necessary, and what Bernanke's motives were.

A letter Bunning sent Monday to Banking Committee Chairman Chris Dodd (D-Conn.) also refers to an "[e]mail exchange regarding restructuring of assistance to AIG, initiated by Treasury Secretary Timothy Geithner" in March 2009.

Senators will be voting on Bernanke's confirmation for a second term in the coming days. But only senators on the Banking Committee have had access to documents that illuminate just what decisions he made and how he made them. And that access only came after Bunning publicly complained that Dodd and Sen. Richard Shelby (R-Ala.) were the only members of the committee could see them.
Hmm. I think to understand this properly, we'd need to be like federal investigators and put up pictures of Bernanke, Geithner, et al. on a big board and just research everyone full time. By the end we'd look like Glenn Beck.

I earlier offered my theory that this was all staged, that the important people knew all along that Bernanke wouldn't be reconfirmed. However, it's hard for me to reconcile that theory with the White House's apparently obvious attempts to round up support for Bernanke.

Let me simply say this: The mere fact that Rahm Emanuel and others are "reportedly" twisting arms behind the scenes, doesn't prove that Obama really wants Berananke confirmed. I mean come on, these guys are professional liars. Their entire careers have been based on telling the public one thing, then doing the exact opposite.

I admit that there are always power struggles going on, that not everyone in DC has the same objective, and that Occam's Razor suggests that we take the events at face value, rather than assuming everyone is putting on a show. Yet all conspiracy doubters must admit at least this: The reasons the various senators give for their intended votes, are bogus. We all know full well that Bernanke's not making the rounds tomorrow assuring senators he will follow the Taylor Rule, or will implement a 2.7% NGDP growth target based on his careful study of Scott Sumner's work.


Art Laffer Publicly Says Bernanke Should Go

C'mon now, in contrast to some of the other big gun economists, Laffer isn't afraid to state the obvious. I think some of you should cut him slack for the Schiff stuff now. From a letter to the editor in the WSJ (HT2 Peter Klein):
Ben Bernanke is a good person, a fine academic and a well-respected professor. But those traits have no bearing on whether he should be reconfirmed as Federal Reserve chairman ("The Bernanke Nomination," Review & Outlook, Jan. 25).

It's normal practice in business, professional football and politics that the leaders of a losing organization also lose their jobs, even when fault is nigh on impossible to prove. The Obama administration has obsessed on accountability, whether it's TARP recipients paying bonuses, or the firing of GM's CEO Rick Wagoner. It wants businesses and banks to be held accountable.

Applying accountability principles, there's no way Chairman Bernanke should be reconfirmed by the Senate, let alone reappointed by the Obama administration. Over the past six years, during the U.S. economy's biggest train wreck since the Great Depression, Ben Bernanke has been involved in policy at the highest levels. He was a member of the Federal Reserve Board and Alan Greenspan's right-hand person from 2002 to June 2005. He then became chairman of President George W. Bush's Council of Economic Advisors from June 2005 to January 2006, and finally Federal Reserve chairman from February 2006 to the present. He's been at the helm from the very beginning of this Great Recession. That alone warrants a "no" vote on reconfirmation.

In addition, the Fed's behavior over the past 15 months has put America on a very dangerous path. The Fed has increased the monetary base (high-powered or wholesale money) by the largest amount ever, from colonial times to the present, times 10. Without an exit strategy, inflation is a virtual certainty over the coming decade, while an effective exit strategy virtually assures a further weakening of the U.S. economy. Chairman Bernanke has put the U.S. economy in a lose/lose situation. So on substantive grounds he also should not be reconfirmed.

And lastly, on a more personal note, he doesn't have the gravitas of a Paul Volcker, Alan Greenspan or William McChesney Martin. In this day and age of crisis management, gravitas is essential. Almost anyone would be better than Mr. Bernanke.

Arthur B. Laffer

Nashville, Tenn.


A Helpful Nag From Uncle Bob

Hey kids, just to refresh your memory, I still think we are the opening stages of what will become known as the second Great Depression. (I think they will hold off on calling it "Great Depression II" because then people might get worried there will be a whole series.) On top of that, I expect large price inflation in the near future.

So in addition to cutting back on your spending in order to either pay down (variable rate) debt and/or invest in things that respond well to price inflation, I also strongly suggest that you start diversifying your income sources.

In particular, it's important that you get your foot in the door now as opposed to (say) 6 months from now when everybody knows we are in this for the long haul. So if you want to start doing freelance writing, or want to start cleaning houses on the weekends, or start walking people's dogs, or...whatever fits your skills and desires, then you should get going on that now. If and when the market crashes or the dollar tanks, every temp agency is going to be overwhelmed with new applications, and Craig's List etc. is going to be overwhelmed with newly-laid off people looking for one-off jobs. So you want to get your foot in the door now, before the rush.


What Is This Harvard Student Smoking?

Mark Weber passes this NYT story along, explaining that Hayek is spinning in his grave. At first I didn't see what a story about Mexican drug cartels had to do with Hayek, but then it hit me:
It may seem strange to examine this shadowy world with equations. But mathematics is transforming the social sciences. In the same way that physicists can predict the movement of atoms in space, we can use mathematics to model how individuals and groups will make decisions and interact in a society.

It used to be that social scientists relied on intuition to understand social problems. But human intuition can go wrong. It is difficult to keep track of every factor in the interaction of millions of human beings. Human logic can be deceived by personal points of view, and, as psychological research has shown, humans see false patterns even when randomness is the norm. Mathematics is cold-headed; it cannot go wrong.

So here I am, waiting at the border, on a mission to understand, with my equations, who is at risk of becoming a drug trafficker, how labor incentives affect crime rates and violence, why kidnapping and extortion and homicide have spiked in recent years.
But wait, it gets better, such that I looked back at the top to make sure this was a real article:
In this violent world, with the man in the blue Chevy whispering at me behind the window, math is my shield. Speaking up about drugs is in these parts a dangerous game. But not if you speak in the language of sigma and conditional expectations. Math protects me from the immediacy of the violence, and it protects me from them.
I don't know what to say. Math has protected this writer from my wit.


Telly Savalas Listening to Doug French?

Oh no. I am putting in a Doug French lecture on money for the junior high curriculum, and there seems to be an oblong spheroid hovering in the lower right corner of the screen throughout his entire lecture...


Murphy Twin Spin

At LRC I have a revised version of my critique of Landsburg's case against the existence of God. At I have an article explaining why Haiti is not in anarchy:
If many Americans thought it was "just the right thing to do" to send guys with big guns to Haiti in order to make sure everyone played by the rules, then why did the US federal government have to get involved at all? The Americans who thought it was a good idea could have volunteered themselves, or paid for others to go and do this moral work. There was no reason Barack Obama had to chime in with his own thoughts on the matter, except to say that he was strapping on an M16 to cover Michelle as she handed out bottled water to orphans.

Obviously, I am being facetious. The reason the US federal government "had to" coordinate the rescue efforts in Haiti is that it would violently punish any private group that tried to field a comparable effort with adequate defense for its participants. If foreign arms dealers began trying to sell grenade launchers, tear-gas canisters, riot gear, and other equipment to nongovernmental groups in Haiti, the US Navy would almost certainly interrupt their shipments as wildly "destabilizing."

Upon reflection, we see that there never was any hope for the blossoming of Rothbardian defense agencies in Haiti. For an analogy, if the US Air Force bombed any nonapproved Haitian farms while the US Navy intercepted any incoming shipments of food, then statists could "prove" that a free market in agriculture is a horrible idea that leads to preventable starvation.

Monday, January 25, 2010


Economic Wisdom, Old School

In preparing an economics curriculum for junior high / high school students, I was reminded of just how amazing Bastiat's "The Petition of the Candlemakers" and Leonard Read's "I, Pencil" are. If you have never read them and are interested in free market economics, I highly recommend that you print them out and sit by yourself at lunch.


Hayek/Keynes Rap Video

[UPDATE #2 below.]

[UPDATE below.]

I think my job requires me to blog this, much as I had to teach the multiplier theory to my macro students. What interested me most about this video is that the hotel receptionist apparently skipped work in order to get in the limo with Keynes. Now that's a smooth economist.

I was tempted to make fun of this but apparently it worked in getting the message through to at least one person.

UPDATE: I should probably add that this video is amazing, for what it is trying to do. I am just surprised that they tried to do this. Perhaps it's my checkered past of actually listening to rap music, but I am not sure the Beastie Boys actually pulled off white rapping.

UPDATE #2: OK in retrospect, I underestimated the potential benefits of this video. My first reaction, to be honest, was that I couldn't believe how much money they must have spent on this, when it (a) isn't really s study guide for people who like Hayek and (b) wouldn't really convince a Keynesian to abandon his ideas. And since it is an intentionally goofy video of two geeky guys rapping, the video obviously wouldn't win a layperson over, because its terminology and references would be way over his head.

However, I have read reactions elsewhere, and I forgot that grad students would be a great target audience for this. They would of course get the Keynesian C+I+G stuff, and they would at least be able to make sense of what "Hayek" says in the video. Coupled with the drunken imagery...It's a crazy plan, but it just might work.


Doug French on the Japanese Lesson

One of the crazier aspects of our financial and economic discourse is that the Great Depression is cited as the result of laissez-faire, when in fact Hoover and then FDR intervened more heavily in a recession than any prior presidents in US history.

By the same token, we are told that the U.S. government needs to run huge deficits, and the Fed needs to provide easy money, in order to avoid the fate of Japan. From this "moral" you would understandably infer that Japan's "lost decade" must have been characterized by balanced budget and super-high interest rates. Not so, as Doug French explains (HT2 Carlos Lara):
After the bubble popped in Japan, that government pursued a relentless Keynesian course of fiscal pump priming and loose fiscal policy with the result being a Japan that went from having the healthiest fiscal position of any OECD country in 1990 to annual deficits of 6 to 7 percent of GDP and a gross public debt that is now 227 percent of GDP. "The Japanese tried to cure an alcoholic with heroin," writes Bonner. "Now, they're addicted to it."

Japan's monetary policy was to aggressively lower rates to .5 percent between 1991 and 1995 and has operated a zero-interest policy virtually ever since.

Between 1992 and 1995, the Japanese government tried six stimulus plans totaling 65.5 trillion yen and they even cut tax rates in 1994. They tried cutting taxes again in 1998, but government spending was never cut. Also in 1998, another stimulus package of 16.7 trillion yen was rolled out nearly half of which was for public-works projects. Later in the same year, another stimulus package was announced, totaling 23.9 trillion yen. The very next year an ¥18 trillion stimulus was tried, and, in October of 2000, another stimulus for 11 trillion was announced. As economist Ben Powell points out, "Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession," with Japan's nominal GDP growth rate below zero for most of the five years after 1997.
Now of course, Krugman & Friends can come back and say, "Japan didn't do enough!" But even if that were true, doesn't this same cynical Krugman realize that no politicians are going to do exactly what his models suggest (thank goodness)? In other words, if Krugman & Friends know that the 85% Keynesian Solution pushed through by politicians will lead to the worst economic performance ever (in the 1930s in America and the Lost Decade in Japan), then maybe Krugman & Friends should stop pushing it?


Murphy Interview

Josiah Schmidt interviewed me on various economic issues. The platform is the political campaign of Gary Johnson, but I am not endorsing him. (I'm not condemning him either.) An excerpt:
Josiah Schmidt: Who is your biggest inspiration in writing your books and articles?

Robert Murphy: It’s a tie between Mises and his (unofficial) student Murray Rothbard. Mises was the greatest economist of the 20th century, but Rothbard was the best writer who could take these difficult ideas and teach the average reader.

Josiah Schmidt: Why, in your opinion, is the concept of a government stimulus a fundamentally flawed way to truly restore economic health to the country?

Robert Murphy: The government doesn’t create resources, it simply moves them around. The economy was in an unsustainable configuration in 2006, and workers and resources needed to move out of housing (and Wall Street) and go elsewhere. The government should have sat back and let this happen, instead of trying to prop up unsound enterprises. The longer the “stimulus” drags on, the longer the slump.

Josiah Schmidt: What is wrong with the notion that the correct response to a “liquidity crisis” is for the Federal Reserve to simply inject new credit?

Robert Murphy: The Fed doesn’t make us richer by printing up more green pieces of paper (or by adding numbers to someone’s checking account balance). Interest rates are prices that communicate important information to investors and entrepreneurs. When the Fed effectively wipes out that signal by pushing interest rates to zero, it makes it harder for people in the economy to recalibrate after the housing bust. It would be as if the Fed disabled everyone’s internet access and expected that to help the economy.


Not a Good Argument For Bernanke

James Hamilton is gung-ho in favor of Bernanke's reconfirmation, and says this (HT2MR):
I sometimes hear Bernanke's critics speak as if there is some kind of shallowness to his world view, as if he is somehow incapable of seeing what is obvious to those with common sense. If you want a bumper-sticker-size summary of what he's all about, here it is-- Bernanke believes strongly that a credit crunch can be devastating to regular people, and has done everything in his power to mitigate that damage. You may agree or disagree with his claim that the extraordinary steps taken under his leadership "averted the imminent collapse of the global financial system." But you must agree with two things: the global financial system did not collapse, and preventing its collapse is the reason Bernanke did what he did. If you think his motives were anything other than this, you have been sucked into a groupthink far shallower than the world view sometimes ascribed to Bernanke.
OK, as for the part I put in bold above, I think Hamilton has an odd opinion of the limits of Bernanke's powers. Scott Sumner has become world famous (in geeconosphere circles) for saying Bernanke needs to get his inflation on, for example by reversing his policy of paying banks to not make new loans.

Beyond that oddity, I don't like Hamilton telling me what I "must agree with." How about this equivalent statement?
I sometimes hear Dick Cheney's critics speak as if there is some kind of shallowness to his world view, as if he is somehow incapable of seeing what is obvious to those with common sense. If you want a bumper-sticker-size summary of what he's all about, here it is--Cheney believes strongly that a terrorist attack can be devastating to regular people, and has done everything in his power to mitigate that damage. You may agree or disagree with his claim that the extraordinary steps taken under his Vice Presidential leadership "averted another terrorist attack." But you must agree with two things: the U.S. was not attacked after 9/11 on Cheney's watch, and preventing such an attack is the reason Cheney did what he did. If you think his motives were anything other than this, you have been sucked into a groupthink far shallower than the world view sometimes ascribed to Cheney.
So who likes that argument? I realize some people would--Dick Cheney's supporters, for example--but I doubt that Hamilton would, or a lot of the people endorsing Hamilton's post.


The Policeman Is Not Your Friend, Guy-in-Nothing-But-Swim-Trunks-Takes-3-to-the-Chest edition

As I have said before, I only pass along the most outrageous stories about excessive police force. This one qualifies (HT2LRC):
Heilman was shot in the chest by Le Sueur County Sheriff's investigator Todd Waldron on Monday at Valley View Apartments after the Heilman car committed an alleged traffic violation and Heilman allegedly resisted arrest. Witnesses, friends and family members contend that the shooting was unjustified.

In a press conference on Tuesday, Bureau of Criminal Apprehension spokesman Andy Skoogman could answer some questions of reporters but said several pieces were still under investigation so declined to answer others.

Skoogman asked the public to reserve judgment until the matter is thoroughly investigated, which could take six to eight weeks.

Asked by a reporter at the press conference if Heilman saw that officer Waldron had a gun, Skoogman said that was still under investigation.

Asked when the backup squad car arrived, Skoogman said he wasn't sure but it was some time after the confrontation between Heilman and Waldron.

Skoogman told reporters that in cases such as this people need to look at the totality of evidence and that's what BCA investigators are doing. He said he believed there was indeed a physical confrontation that took place. However, to characterize that physical confrontation further gets at the heart of the investigation, and at this point, Skoogman was not comfortable doing that.

Asked at what point the Le Sueur County officer identified himself to Heilman, or if he ever did, Skoogman said he wasn't sure.

Asked if there was bad blood between Waldron and Heilman, Skoogman said he didn't know that.

Asked if a woman was nicked by a bullet, and if another bullet went into an apartment building, Skoogman said the preliminary investigation suggests that no one besides Heilman was injured. Skoogman said he believed the matter of whether a bullet went into the apartment building is still under investigation.

Asked if the badge being displayed on the investigator's belt is law enforcement protocol, Skoogman said that to clarify, Waldron was not undercover, he was a plain-clothed officer.

Asked if it would be protocol for an officer to identify himself as an officer, Skoogman said he would have to defer that question to to others. Skoogman said the badge was visible on Waldron's belt.

Asked if there are any witnesses at this point to say the officer identified himself as an officer before he fired shots, Skoogman said that's part of the ongoing investigation.
Skoogman said cases like this are complicated, need to be investigated thoroughly, there are balistics and toxicology, and it will take between six and eight weeks. The BCA is asking the public to withhold judgment until all of the facts are in.

Asked if there is anything the BCA wants to say to the public about the fact that Heilman was wearing only a swimsuit, and that shots were fired, and that there was really no chance of Heilman pulling a weapon out, Skoogman reitiated that everyone needs to look at the totality of the evidence and not pass judgement until all the facts are in. Cases such as this take time, Skoogman said.

Update 10 p.m. Tuesday - LE CENTER – Friends and family members of Tyler Heilman are gathered at the Le Sueur County Courthouse in Le Center to protest the shooting on Monday.

Witnesses who saw a Le Sueur County Sheriff's investigator fire up to four shots into the chest of Heilman are insisting that the investigator did not identify himself as an officer before he pulled the trigger.

Andy Skoogman of the Minnesota Bureau of Criminal Apprehension urged all to reserve judgment until the shooting incident has been thoroughly investigated. Skoogman also said Heilman resisted arrest.

Kris Hoehn, a friend who was with Heilman during the shooting, said his friend is a good wrestler and managed to get the upper hand before he knew he was tangling with a law officer. Once Heilman learned that was the case, he backed off, Hoehn said. But the officer came up shooting, Hoehn said.

Friends of Heilman have pitched a tent near the courthouse.

Le Center is the county seat in Le Sueur County, and the courthouse is headquarters of the courts and sheriff's office. Kasota is located in Le Sueur County, just across the river from Nicollet County.

Heilman was not alone while swimming in the Minnesota River on Monday afternoon. The Heilman vehicle was seen driving up Firemen's Hill, the sledding hill in town.

The Le Sueur County undercover investigator, Todd Waldron, was driving an unmarked Dodge Durango and saw the Heilman vehicle swerving around. Authorities say Waldron, who was investigating a separate incident in the Kasota area, called for a marked squad car to come and question the driver of the Heilman vehicle.

Before that marked squad arrived, Waldron in the Durango followed the Heilman vehicle into the parking lot of Valley View Apartments in Kasota, got out, and the altercation between ensued.

Hoehn said neither he nor Heilman realized that the man in the Durango was an officer until it was too late.

Heilman and his girlfriend had a 3-year-old son.

LE CENTER – Questions were many, but answers were few during a July 21 press
conference concerning the July 20 shooting death of a 24-year-old Kasota man.

Tyler Heilman was shot and killed Monday afternoon by a sheriff's deputy in Kasota.

Minnesota Bureau of Criminal Apprehension spokesman Andy Skoogman delivered a statement and fielded questions on the lawn of the Le Sueur County Law Enforcement Center in Le Center shortly before noon.

Skoogman identified the deputy involved in the shooting as Todd Waldron, 37, a 10-year veteran of the LeSueur County Sheriff's Office.

Skoogman said Waldron was in Kasota at approximately 3:30 p.m. when he noticed a vehicle driving erratically at a high rate of speed. At one point the vehicle left the roadway and drove up a steep embankment.

Waldron was driving an unmarked Dodge Durango when he followed the suspect vehicle, during which time he called dispatch for backup. The vehicle pulled into the parking lot of the Valley View Apartments. Heilman exited the vehicle and was confronted by Waldron who was wearing plain clothes but had a sheriff's badge hooked to his belt.

After a verbal exchange between the two men, the confrontation became physical. Waldron fired four shots and Skoogman would not disclose how many of those shots hit Heilman. He did say Waldron suffered non life-threatening injuries and no weapons were found in Heilman's car.

Beyond that, Skoogman declined to provide further details. "This is a complicated matter which needs to be investigated thoroughly," Skoogman said. "I'm telling the community to withhold judgement until the facts are in."


Tom Woods on Bank "Fee" Etc.

This is such a difficult issue on which to comment. On the one hand, you don't want to say, "Free market, ra ra!" because that's obviously not what's going on here. On the other hand, the new "fee" and regulations obviously won't shore up the financial sector. Here's Tom Woods' attempt to walk this fine line (HT2LRC):


Jon Stewart Realizes If He Doesn't Call Out Keith Olbermann, No One Will

I really wonder if Jon Stewart thinks, "This is ridiculous. Why do I have to be the referee in our political discourse?"

But he does. For maximum effect, first watch Keith Olbmerann's "Special Comment" on Scott Brown the night of the election (I think). Then watch Stewart's response. (HT2LRC)

The Daily Show With Jon StewartMon - Thurs 11p / 10c>
Special Comment - Keith Olbermann's Name-Calling
Daily Show
Full Episodes
Political HumorHealth Care Crisis

Sunday, January 24, 2010


Things Make So Much More Sense in Context

I don't have anything too profound to say today. Let me just mention to those of you who have tried to read the Bible before, but found portions of it--especially from the Old Testament--to be either incomprehensible, boring, or whacko, that it makes a lot more sense if you start at page 1 and just plow forward.

Personally I have tried to read one chapter a night, in sequence. Sometimes when I hit discussions of genealogy I skim. And there are still plenty of geographical and cultural discussions that leave me clueless.

Even so, when I hit Job (for example), it now makes tons more sense than when I tried to read it a few years ago, after I had become a born again Christian.

I realize this post might sound odd to some of you, who have been reading the Bible your whole lives. But I came from a background where personal reading of the Bible was not stressed. In fact I have hit upon books that I know I never read before in my life. I was surprised to discover some of the stylistic variety in the Old Testament; it's not just creation and the Israelites leaving Egypt, then a bunch of sinning until Jesus shows up. It is that, of course, but it's so much more!


Haiti or Bust

For a while I have felt that I should go on a "missions trip" with my church, which (if you don't know) means that a church will send people to a foreign country for some humanitarian project, but which also serves to spread the gospel. So an obvious thing would be to go build a physical church building in a poor country, but my own church has also sent people to help with shelters for girls in Moldova, to work with families that literally live in a huge garbage dump in Nicaragua, and so forth.

Soon after I attended an informational meeting at my church on this year's missions, the earthquake hit Haiti. Ever since, I have strongly felt that I am supposed to go to Haiti to help there. At first this struck me as insane, but I decided that if I'm going to Haiti, I'd rather travel by airplane than inside a whale.

I have discussed the matter with my wife and she is OK with it, so now the next step is for me to register with some type of agency. I did a little research and right now the situation is still so volatile that only professional emergency responders are going there. But various relief agencies are taking information from interested "average" people so that when the time is appropriate, they will be contacted about getting to Haiti to help.

So, does anyone have any personal experience with a Christian organization with which I could register? Obviously I want to make sure I am dealing with reputable people before buying a ticket to Haiti. And as far as the Christian preference, it's not that I want to proselytize the Haitians. It's just that I would personally feel a lot more comfortable taking orders from a private person who is serving God, rather than a staffer at a more bureaucratic organization who is technically taking orders from George Bush.

Saturday, January 23, 2010


"Banks Face Capital Constraints, Not Liquidity Constraints"

I have heard the above statement several times since the financial crisis began. The indefatigable von Pepe was ensconced at the library today and sent me several quotes from the work of Gerald O'Driscoll, including this:
The credit crunch continues because many banks are capital-impaired, not illiquid. Treasury's policy shifts and inconsistencies under both administrations have sidelined potential private capital. Treasury became the capital provider of last resort. It was late to recognize the hole in banks' balance sheets and consistently underestimated its size. The need to provide second– and even third-round capital injections proves that.

In another email von Pepe sent me a quote where O'Driscoll says that banks don't "lend out" their capital, but rather the capital is a fund with which to absorb future losses.

In a previous post I went over the basics of recapitalization, but I thought it might be worth summarizing the discussion von Pepe and I had, just to make sure we agreed on exactly what O'Driscoll is talking about.

(A quick caveat: If you feel the need to say "duh!" in the comments, fine go ahead. With this stuff the issue was never that we doubted the truth of these claims, but rather that we wanted to just double check with each other to make sure we really understood them, and also to relate them to other concepts we had filed away. It's a good safety measure to occasionally test whether you can reconcile one thing you "know" with other things you "know.")

So anyway this might help some of you clarify your thoughts on this: Let's say a bank is very liquid but undercapitalized. E.g. maybe it has $999 million in liabilities and $1 billion in assets (which include loans). So that means there is only $1 million in shareholder's equity--"capital"--in the operation. If the bank's assets fall in value by anything more than 0.1%, the shareholders are wiped out and the firm is insolvent.

In this scenario, having the ability to borrow large amounts of money at 0% interest doesn't really do that much. E.g. let's say the bank borrows $1 billion from the Fed at 0% interest, and uses it to buy one-year Treasurys yielding 0.5 percent interest. Then initially the bank's liabilities go up to $1.999 billion, and its assets go up to $2 billion. The shareholder equity has been even further diluted, because the bank's leverage has just doubled.

After the year passes, so long as everything else stays the same, the bank collects $1.005 billion from the Treasury and pays off the Fed loan. So now the bank's liabilities are back down to $999 million and its assets are up to $1.005 billion, the difference being the small spread it earned borrowing from the Fed and lending to the Treasury for a year. But the bank is still way way undercapitalized.

In contrast, suppose that the initial bank doesn't borrow money (from the Fed), but instead seeks outside investors to buy stock in the bank. So the bank takes in $1 billion in new capital by issuing new shares of stock. The moment after the new stock issuance, the bank has $999 million in liabilities and $2 billion in assets, $1 billion of the original assets (loans etc.) and the new $1 billion in cash. The shareholder's equity has jumped from $1 million to $1.001 billion.

Now, the bank can go ahead and lend out that new $1 billion; it's not that doing so will all of a sudden "drain away" the new capital they took pains to raise. After lending out the $1 billion in cash that the new investors pumped in, the banks liabilities are unchanged at $999 million, while the assets are still $2 billion. All that the lending has done is transform $1 billion of assets in cash, into $1 billion of assets in loans. The bank's leverage is no problem at all in this scenario, and the bank would gladly lend out these funds, not just to the Treasury but even riskier projects if the potential return is high enough.

I think the real trick in all this is to realize that when a bank borrows money (from the Fed or anybody else), its liabilities go up because it has to pay back the loan. Thus, if a bank is trying to dig itself out of hole through earning the spread on interest rates, it will necessarily increase its leverage.

In contrast, if the bank raises new capital, its assets increase but its liabilities don't. (The balance sheet still balances, of course, because remember that Assets = Liabilities + Shareholder's Equity.) So the very act of raising new capital decreases the bank's leverage. Then, when the bank lends out the newly-raised funds, this act doesn't increase its leverage (though it reduces its liquidity). All that happens is that the composition of the assets changes.

I am writing this late at night and I have other work to do, so I reserve the right to fix anything dumb I have said above. It should go without saying that any errors are my fault and not von Pepe's. But I hope the above discussion has helped some of you.


If the Mises Institute Did Not Exist, We Would Have to Invent It, part 349

Mario Rizzo laments the size of our government and the difficulty of having discussions about particular governmental measures in the context of Leviathan. He says:
What we need is to create or restore a secular “religion” or dogma. We need a dogma of laissez-faire. As long as John Maynard Keynes’s argument in “The End of Laissez-Faire” is accepted (that is, we should put away the old classical liberal dogmas and decide each issue on its own merits), the special interests will be there to convince a “pragmatic” public that their policies are the ones that, on the merits, warrant support.

I am not arguing for a non-rebuttable dogma, but a strong presumption. Government officials and politicians should feel a sense of trepidation when they propose schemes for our betterment.

Unfortunately, it is not possible simply to construct such a public attitude. Nevertheless, I think that intellectuals can do their part. We should discard the idea that it is more “scientific” or more “objective” to follow an issue-by-issue approach to politics. We ought to recognize the instability of the “on its own merits” policy regime. We need to focus on general rules that inhibit state action. We need to accept the lessons of constitutional political economy, public choice theory and slippery-slope analysis. We need a secular “religion” of laissez-faire.
So of all the people out there discussing economics and politics, which comes closest to the strategy Rizzo recommends...?


Persons of Interest: Congresspeople Who Switched TARP Vote Then Left Office

[UPDATE below.]

For a while I have wanted to produce a stunning expose on how the financial sector took care of the Congressmen and women who lost their seats because they switched from "no" to "yes" on TARP back in October 2008. I have made some initial inquiries and paid someone to do the cross-referencing, but I don't have the time to dig into the people who fit the profile. Rather than sit on this for another few months, I decided to release my findings to the millions of internet journalists who may smell a rat.

Just to refresh everyone's memory, the House actually voted against the $700 billion TARP package the first time, on Monday, September 29, 2008. Then the Senate passed it, and the House voted again on Friday, October 3, 2008. This time it passed.

So what happened during that significant week? Obviously a bunch of representatives changed their votes. The following changed their initial "no" vote to "yes":

Abercrombie, Neil D-HI
Alexander, Rodney R-LA
Baca, Joe D-CA
Barrett, J. Gresham R-SC
Berkley, Shelley D-NV
Biggert, Judy R-IL
Boustany, Charles W. Jr. R-LA
Braley, Bruce L. D-IA
Buchanan, Vern R-FL
Carson, Andre D-IN
Cleaver, Emanuel D-MO
Coble, Howard R-NC
Conaway, K. Michael R-TX
Cuellar, Henry D-TX
Cummings, Elijah E. D-MD
Dent, Charles W. R-PA
Edwards, Donna F. D-MD
Fallin, Mary R-OK
Frelinghuysen, Rodney P. R-NJ
Gerlach, Jim R-PA
Giffords, Gabrielle D-AZ
Green, Al D-TX
Hirono, Mazie K. D-HI
Hoekstra, Peter R-MI
Jackson, Jesse Jr. D-IL
Jackson-Lee, Sheila D-TX
Kilpatrick, Carolyn C. D-MI
Knollenberg, Joe R-MI
Kuhl, John R. "Randy" R-NY
Lee, Barbara D-CA
Lewis, John D-GA
Mitchell, Harry E. D-AZ
Myrick, Sue Wilkins R-NC
Ortiz, Solomon P. D-TX
Pascrell, Bill Jr. D-NJ
Pastor, Ed D-AZ
Ramstad, Jim R-MN
Ros-Lehtinen, Ileana R-FL
Rush, Bobby L. D-IL
Schiff, Adam B. D-CA
Schmidt, Jean R-OH
Scott, David D-GA
Shadegg, John B. R-AZ
Shuster, Bill R-PA
Solis, Hilda D-CA
Sullivan, John R-OK
Sutton, Betty D-OH
Terry, Lee R-NE
Thompson, Mike D-CA
Thornberry, Mac R-TX
Tiberi, Patrick J. R-OH
Tierney, John F. D-MA
Wamp, Zach R-TN
Watson, Diane E. D-CA
Welch, Peter D-VT
Woolsey, Lynn C. D-CA
Wu, David D-OR
Yarmuth, John A. D-KY

In addition, McDermott, Jim (D-WA) switched from "yes" to "no," while Weller, Jerry (R-IL) initially didn't vote but then voted "yes."

Now of the above who switched from either an initial "no" or an initial "abstain" to a "yes" by the end of the week, which did not survive the 2008 election?

Only two: Knollenberg, Joe (R-MI) and Kuhl, John R. "Randy" (R-NY). (News accounts of their defeats here.) Clearly, if one suspects that the banking interests promised to take care of any representatives who were hurt by their TARP vote, Knollenberg and Kuhl would be the guys to investigate.

(Also of possible interest are Jim Ramstad [R-MN] who switched from "no" to "yes" but had already announced his retirement, Jerry Weller [R-IL] who initially didn't vote then said "yes" but had already announced his retirement, and Hilda Solis [D-CA] who switched from "no" to "yes" but was named Labor Secretary in the new Obama administration.)

Note that I didn't completely double-check the work of my assistant on this. I have made sure that Knollenberg, Kuhl, Ramstad, and Solis all switched their votes from "no" to "yes," and I have confirmed their fates as described above. However, I did not independently verify the long list above. So if you plan on doing your own work on this, before you run with a story it would be smart for you to verify everything yourself.

The way to do this is to check the Roll Call votes. Here is the list of Ayes (Yeas), Nays, Present, and Non Votes from the Monday vote (when TARP failed to pass), and here is the list from the Friday vote when it passed.

Also, if you want to verify who is still in office, use this.

Release the hounds!

UPDATE: There was some confusion because if you click on the link above for the roll call vote on the original TARP motion, it looks like I linked to the wrong thing. But I didn't. Here is the explanation (look at the "Note" for 9/29) in case you don't want to take my word for it. As is its wont, the House tried to tack on the TARP to a different bill, H.R. 3997.


The Big Picture, v. 3

In previous posts (here and here) I have offered ruminations on how the rich and powerful elites might run things. The following is a continuation in this series. --RPM


The Big Picture, v. 3
By Robert P. Murphy

If I were rich and powerful, and had no conscience, this is how I might behave...

First, let's look at how my grandfather and his associates set things up, back around the year 1910. They had amassed huge fortunes in their respective industries, and they wanted to solidify their dominance. So they decided to spearhead the creation of a central bank and a federal income tax, as well as to push the U.S. into the global empire business. They also bought the intelligentsia who were developing the rationalizations for incredible new powers for the government that my grandfather and his associates owned.

In a particularly clever twist, my grandfather and his associates allowed the rise of "anti-trust" powers, ostensibly to attack them. But in fact they knew that they could easily circumvent the new regulations, while fooling the general public. The real purpose was to make it impossible for new upstarts to challenge their domination of their respective industries. To that end, the income tax and especially a very high estate tax were particularly useful in crippling competitors who were starting at a disadvantage. In order to shield their wealth and keep it in our families, my grandfather and his associates established dynastic trusts, which were immune to the confiscatory tax rates they had designed for everyone else. Because of a legal formality, these trusts could only shelter the family estates for roughly 100 years, at which point they would be subject to full taxation. But such technicalities never stopped my family before; the other grandchildren and I knew what to do in order to roll over the money.

Ah yes, it's always difficult to predict these things in advance. So much of our work involves setting up roadblocks to anyone who could challenge our power, but then pulling the constraints out of the way whenever we decide they are hindering us more than our weaker competitors. For example, it was a brilliant stroke to strictly limit the amount of money outsiders could spend on political campaigns; since we own the government and major media, this ensured our complete control of what the voters saw in the year before an election. However, in the event of a "game changing" outburst of unpredicted voter behavior, we simply change the rules of the game two days later. This freedom allows us much more flexibility to massage the voters back on message by the 2010 elections, at which point they will conveniently demand that the politicians (whom we have installed because they "oppose" the previous batch we installed) reinstate the limits on campaigning.

The concentration of wealth and fixing elections are fairly easy. The part of my job that requires real finesse is moving the world toward a single fiat currency, the supply of which my associates and I strictly regulate. Naturally we have had to inculcate the concept of an all wise central bank chairman, but the downside is that if we want him to "bungle" it could spook the markets and end up costing us billions of dollars needlessly. (In contrast, we can very easily "accidentally" allow a would-be terrorist to launch an attack from a country we wish to invade, without fear that the American public will lose faith in their government's competence to protect them. It's a very nuanced job I have, indeed.)

But I digress. As I say, getting the American public to support our seizing control of yet another Middle Eastern country--and one with extensive water access--is easy; we've got that down to a science. But what's much riskier is fiddling with the central bank, as the financial traders can be moody.

The problem is how to get the Fed chairman to wreck the dollar, so that Americans will go for a common currency with a much larger region, and yet at the same time not spook the markets into thinking that the Fed chairman is incompetent. The solution is obvious, once we spell out the problem: We have one chairman pump up excess bank reserves to ridiculous heights, but keep them bottled up to prevent price inflation. Then we have every important academic and Nobel laureate (all funded and handpicked by us, of course) praise the chairman's brilliance.

Then, when the time comes for the massive inflation to hit, we tell our guy to start opening the spigots. At the same time, we all of a sudden have an "unthinkable" reversal in the fortunes of the Fed chair at the time of his renomination. We thus get a new guy in charge who can truthfully blame the resulting inflation on the mistakes of the last guy, and yet there is a very short window in which we have a lameduck Fed chair. It's basically the same trick we pulled with the previous guy--who was a maestro while in power and then was the fall guy for the housing bubble once he was out.

At some point I wonder why no one has caught on to this stuff, but I guess it's because no one really thinks people like me exist.

Robert P. Murphy holds a Ph.D. in economics from New York University. He is the author of The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009), and is the editor of the blog Free Advice.


Guy Demonstrates How to Get Bomb Parts Through Body Scanner

Tony sends along this video (HT2 Gizmodo). The surprising stuff happens at 2:07, but all I can really conclude is that the TSA shouldn't hire Germans.

Thursday, January 21, 2010


Myyyyy Kind of Town

Carlos Lara and I are headed to an undisclosed location in Chicago, to interview another suite of insurance executives for our forthcoming book. At the last minute I remembered to grab my winter hat before leaving the house.

Blogging will probably be sparse until the weekend, unless Obama decides to abolish the Fed or something.


Anthony Gregory on Obama's First Year

This is really a top-notch job. I don't have to clone myself because Anthony Gregory is on the scene. There are no shocking revelations in this, but if you want to read a very thorough assessment of the "hope and change" of this past year--and not from a Republican sympathizer by any stretch--I heartily recommend Anthony's article. Two excertps:
In Afghanistan, the situation has been far worse than we could have probably expected under another year of Bush. This is all because, tragically, Obama has kept his promise: He has expanded the war from the beginning, and announced in November the deployment of about 30,000 additional troops, bringing the total number up to about three times what it was when he took office. 2009 became the worst year for the Afghan people since 2001 – more depredations of children’s rights and the most civilian deaths since the invasion, including in air strikes that are ripe with scandal and can only contribute to the terrorist threat. As commander of U.S. forces in Afghanistan, Obama picked General Stanley McChrystal, who became the target of controversy in the Bush years for the draconian handling of detention centers, the blocking of the Red Cross from these prison camps, and for his involvement in covering up the truth about Pat Tillman’s death. Needless to say, when McChrystal publicly contradicted the president’s assessment of what was needed for victory, he was not fired for insubordination. Obama and the Democrats always criticized Bush and the Republicans for "neglecting" Afghanistan. The Democrats’ due diligence has successfully made Afghanistan a far deadlier place than Iraq in the last year. About 300 U.S. troops have died there since Obama took office.
In May, Obama stood in front of the National Archives – in front of the Bill of Rights itself – and engaged in the most impressive example of doublespeak in our time. He spoke well about the principles of the rule of law and how important they are to our country, even as he unveiled a plan to try some detainees in court, try others in front of military commissions and keep some of them imprisoned indefinitely – a policy of "prolonged detention" that, in a sense, went beyond the Bush policy of executive detention in that it was now asserted to be a part of our legal fabric, not just an ad-hoc executive prerogative. This was akin to Bush’s saying he had to destroy the free market to save it, except it was much slicker and actually fooled many people.


Megan McArdle's Great Leap Forward Has a Snag

I really wasn't even going to comment on Megan McArdle's surprisingly specific recommendation for health reform (HT2MR):
Raise the Medicare tax by half a percentage point, and eliminate the tax-deductibiity of health insurance benefits for people making more than $150K a year in household income, $100K for singles. Then make the federal government the insurer of last resort. Any medical expenses more than 15% or 20% of household income, get picked up by Uncle Sam.
But then when I read "Megan McArdle Advocates 376,537.65% Marginal Tax Rate" by David R. Henderson, I had to pass it along. Here's David:
So now imagine that you're a married person with a family and you're making exactly $150K a year. Your employer pays $10K toward your health insurance. Of course, it's not subject to federal income tax, state income tax, or Social Security or HI tax. You and your spouse make a total of $150K, split roughly evenly, so both of you pay the marginal payroll tax rate of 7.65%. You also pay a marginal income tax rate of 25% and a state income tax rate of 5%. So your total marginal tax rate is 25 + 5 + 7.65 = 37.65%.

Now you earn one more dollar. What happens? That whole $10K employer contribution becomes taxable and so you pay tax on it at 37.65% or $3,765. You made an extra buck and you paid $3,765 extra in taxes. Oh, yes, plus $0.3765. So you paid $3,765.3765 in taxes. Your marginal tax rate on that dollar: 376,537.65%.
Is David right? I think so, but I went to the gym today--this figure's not natural, kids--and I am too tired to be sure. I will apologize to Ms. McArdle if tomorrow morning some of you have explained in the comments that David is wrong.

Wednesday, January 20, 2010


Regular WSJ Columnist Writes Incredible Article on Gold

...and I don't mean it as a compliment. I really can't even begin to describe my feelings on today's article by Thomas Frank. Here's an excerpt:
Supporters of President Obama like to point to recent TARP-loan payoffs, plus interest, as an example of federal success. His opponents, by and large, have long held that government should be run like a business; their former leader, George W. Bush, once announced that "government should be market-based."

It is a terrible idea. Were the government actually to begin understanding itself as a market-based, profit-maximizing enterprise, determined to bring down the deficit by whatever means present themselves, can there be any doubt what it would do?

It would sell gold. Oh, it would sell lots of gold. It would put Fort Knox on eBay. Mr. Obama could film the TV commercials.
The other day, as I watched the zillionth commercial for gold investments flicker by on Fox News, I thought to myself: What would happen to the American right if the price of gold suddenly tanked?

As anyone knows who has Googled the phrase, "FDR Gold Confiscation," gold has long been the obsessive investment choice of a certain species of antigovernment crank. Its allure is especially strong for the disaster cohort—for those who believe that hyperinflation is just around the corner; that default by the U.S. government is a real possibility; and that democracy itself is something of a fraud, a populist Ponzi scheme pulled off by slimy politicians and the central bankers they've hired to run the printing presses.

One reason gold has been bid to its current stratospheric heights is because more and more investors and fund managers have signed on to this dark belief that America's judgment day has finally come.

Were the administration to get started on the great gold dump, however, we'd come to a different judgment day very quickly. When the massively inflated price of that metal collapsed, it would probably take with it a hefty chunk of the portfolios of tea-party types, survivalists, Birchers, dittoheads, Objectivists and almost every imaginable species of secular end-timer.

Just for fun, the administration could then smooth the whole thing over with some tactical libertarian cant. It might declare that the price of gold had been propped up artificially for decades by the state's irrational hoarding. Privatization is a far better option, administration officials might purr. It lets the market speak.

And so, in an irony worthy of Oscar Wilde, it would be the gold-investing contingent of the right who would discover that they had risked their fortunes on the whim of the very government they distrust and despise.

But it is the opposite irony that probably ensures that a great gold-dump will not take place. In addition to denting the holdings of countless extremists, such a move would also deal a massive blow to the hedge funds that have reportedly made enormous bets on the barbaric metal. Their losses would then reverberate through the financial system, inevitably shaking the institutions deemed "too big to fail." And before long, government would have to ride to the rescue of those who have wagered so much on the government's collapse.
So just to boil down some of Frank's positions in this piece:

(1) The government actually has all the gold it says it has.

(2) The government doesn't sell gold to suppress its price.

(3) The government would never do something just to harm its political opponents.

(4) The government would never do something that would hurt the economy.

(5) People who think FDR committed a massive crime are cranks.

(6) People who think gold is a good investment are stupid.

I'm not sure I want what Frank is selling.


Peter Schiff on the Minimum Wage

I think most senators talk like this; Schiff would fit right in if he wins. (HT2 von Pepe)


You Get What You Pay For?

Someone help me out here. Krugman discusses a CBO report on government job creation efforts. If you look at the chart he reproduces, you see that the single most effective program of job creation--where the unit of measurement is "Years of Full-Time Equivalent Employment per Million Dollars of Total Budgetary Cost"--is "Increasing Aid to the Unemployed."

Now what in the world does that even mean? On the one hand, it seems like the very worst thing you could do to create jobs would be to pay people for not having a job. Note, that consideration alone doesn't mean unemployment checks are a bad thing, but they certainly don't "create jobs."

So I am thinking what that ranking really means, is that if you spend $1 million on expanding unemployment relief programs, then the recipients get more take-home money for their "job" of being unemployed, than if you spend $1 million on green jobs and then count how many more people have jobs making solar panels.

I'm not being sarcastic, I really think that's what this CBO report means. Can anyone confirm or deny?

This page is powered by Blogger. Isn't yours?

Subscribe to Posts [Atom]