Lies and the Lying Liars...

Somes ultra-conservatives are saying fianancial deregulation never happend.

Here's a rejoinder that at least suggests partisan fibbing?

Regardless of what caused the crisis, the fact is that the crisis is happening and these bubble bursts appear to get worse over business cycles.  This seems to point to a need for at least some basic regulation of our financial markets - regardless of what was or wasn't regulated in the past.  

No doubt that the general "laissez-Faire" resurgence of the 1980-? fostered an enviornment of more and more risk-taking from all sides.  Deregulation DID happen - even if we assume (incorrectly) that it just happened in the goods and services market - all markets are interconnected.    As one industry gets lax it demands more debt, putting more and more pressure on the financial sector to do deals it should not.   

It makes no difference to me whether Republicans or Democrats or both de-regulated in the past. Let's focus on a solution instead of pointing blame (yes, that means you too Speaker Pelosi!)

Let He Who is Without Blame Cast the First Stone

Economists must therefore think they are in the clear.  

Economists blame the financial industry, the government....

I think there is plenty of blame to go around.  But I think it's high time that mainstream economists recognize that they are perhaps the most guilty of all.

Since the time of Adam Smith( with brief breaks during the Keynesian revolution) to today's classical counter-revolution, economists have been preaching about the general perfection of markets, the general quick-adjusting expectation of inflation and wages and prices, the general smooth operations of our financial markets.  They, in spite of evidence and theories to the contrary offered up by post-keynesians and others, stuck to their overly simplistic textbook models.  They not only stuck to their own models, but they virtually ignored any input or warnings offered by other schools of thought.  Instead of offering up reality, they offered up a lot of math-based models riddled with unrealistic assumptions - form over function ruled the day.     This lesson was learned by today's financial leaders.  This lesson was wrong.  

Let's hope the next generation is taught a little more reality.  

Why Companies Won't Buy Bad Assets

Mankiw thinks it's because they might be "irrationally pessimistic."

They seem to certainly be pessimistic, but that doesn't make them irrational.  There is nothing irrational, using either the economic or the psychology definition of the term at the micro level, for companies to not want to buy up the value of securities and assets whose values are virtually indeterminate - indeterminate because they are tied up and bundled into complex financial instruments, and indeterminate because of growing general market uncertainty and unease overall.   So if the private market doesn't want to be the first to wade out into the cold water (with the exception of maybe Warren Buffett), the government, who can absorb risk and uncertainty the easiest, will.  

Economists need to start getting away from using terms like "rational" and "irrational" to decide how to "classify" behavior.  Some behavior is gray area - it just IS.  Live with it.  

BTW, Hyman Minsky saw this coming a long time ago, back when economists of Mankiw's ilk were calling him "crazy." 

Biggest Regressive Tax in History?

The Paulson / Bernanke plan, as announced so far, seems to suggest a 700 Billion dollar (that's not a typo) price tag to bail out our financial system - this is on top of the aprox. 200 Billion provided already to Fannie and AIG, etc.   So, basically, the government wants to double the direct financial cost of the Iraq war to hedge a risk that we may go into a Depression if we do nothing. 

But what IS this plan?  Well the federal government basically will borrow the money (from citizens or China, etc).  This is equivalent to going to average US Joe tax payer of the future - including MEDIAN Joe taxpayer - including the POOR tax payer and borrowing from them.   The government will take that $700 Billion and turn around and give it to the elite, the rich, the entrepreneur class - but not just that - they would give it to the CORRUPT elite, the BADLY MANAGED rich, the FAILED entrepreneur.  

This, unless I'm mistaken, would be the single largest regressive tax (the debt required would be a tax on future generations as mentioned above) ever levied, anywhere.  

I don't necessarily disagree that this kind of intervention may be needed, but I definately feel that the evidence that Paulson / Bernanke have that suggest we NEED something this regressive, and this huge, is being hidden.  I am calling for more transparency.  Where is the transparency?  

If our government wants to take that much of our money - money from innocent citizens - to give to bad managers in the financial system - then we deserve real evidence for why.  

Keynesians to Classicals: "Told You So!"

"We're all Keynesians Now."  After the Great Depression, the wave of 'can-help' government took hold.  No longer were economists just bystanders watching the world go by and proclaiming "lookie there, ain't that free market pretty."  Now they were active participants recognizing that free markets can and do fail.

Revisionists from Austrians to New Classicals and Monetarists have gone back and said that if it weren't for the government in the first place, the Great Depression never would have occured.  

What are these same people saying now?  Where was the intervention that caused this huge housing crisis?  Is Greenspan, as part of the "government" - albeit an independent part - to blame for the entire crisis?  Few people put this all on the 1990s Fed, though it seems obvious that that the low real interest rates of the 1990s aided the bubble formation.  

It seems obvious to me that private industry failed:  failed to manage risk, failed to provide full and complete information (and unbiased) to their customers (people that wanted homes that couldn't afford it).  And, on the consumer's side, people you could say got wrapped up in the irrational excitement of home buying - and they made purchases that they never should have - and later came to regret.  Industry failed to oversee itself;  In a word, industry failed.   

Now replace the word "industry" with the word "market," and what you get is the most complete evidence that Keyensianism still has something very useful to teach us about the world.  

How Serious Are Republicans about Energy Strategy and the Environment?

Not really at all. 

The House bill that passed yesterday is a great compromise.  Republicans get off-shore drilling ability, Democrats get to take away subsidies for oil companies and add incentives for alternatives.  It seemed like a win-win to me.  

Republicans really show where their loyalties lie.  The President intends to veto the bill if it passes the Senate (which it probably won't) because the restrictions, in his view, are too high for oil drilling in the bill.  What restrictions: namely that oil drilling be kept a safe distance from our shores (seems reasonable), and that States can decide whether or not to allow the drilling after the bill removes the federal ban (wasn't the GOP founded on the idea of State over Federalism? - ironic isn't it!).  

My question:  what would a President McCain (and Palin as leader on energy issues) do?  What would an Obama do.  I think you all know which candidates focus on what issues.   

Fed Running out of Resources?

The Treasury announced the sale of T-Bills - proceeds are to provided directly to the Fed to cover it's massive liquidity injections to failing private entities (bailouts etc).

Just a little more national debt to add to our already record levels.  

Though, the Fed points out that the loan to AIG at least is backed with company collateral which US citizens now own 80% of via the government.  But one wonders how much these assets will be worth a year from now.  

Very Dire

Feds looking for another bailout.  

The tradeoff is: Do nothing and risk major recession or worse (the D word has been spreading).

Do something (some sort of bailout loan backed by tax dollars etc) and risk increasing an already present moral hazard that has been created - a kind of understanding that company's are learning they can take more and more risk because, if their ventures fail, the government will come in and rescue them.  This amounts to the socialization of risk. 

I don't know which tradeoff is worse.  The only thing I know for sure is that both have major downsides. 

We are in an ugly place, folks. 

Cap and Trade (Auctioned) is Not the Same as Carbon Tax

For those interested, I thought I’d briefly expand on my comments published in a very comprehensive article written by Bob Caylor of the Fort Wayne News-Sentinel. 

Cap-and-Trade is indeed more politically feasible to carbon taxation, as has been discussed before on this blog: not the smallest of reasons being that a carbon tax is a more “in your face” way of going about environmental policy. 

But many, including Pigou Club founder and macro blogger Greg Mankiw, attempt to explain cap-and-trade as being essentially the same as a carbon tax (for a more detailed and easy-to-follow understanding of auctioned cap-and-trade and carbon tax similarities, go here), only with corporate welfare (in the case where carbon permits are freely given) or at least with added regulation and beuracracy (regardless of whether permits are given or auctioned by government).

But, despite the tax hike-lovers statements, auctioned cap-and-trade not only is not the same thing as a carbon tax in name – it is not only not the same politically, or psychologically and to the consumer – it is also not at all the same economically/environmentally. 

Why?  Well price stability is a major economic goal, and while it’s true a cap-and-trade system would affect price volatility, at least it would do so within the confines of a market - one that can and hopefully would stabalize over time.  A tax leaves price volatility up to government – which could be scary (unless the so called “optimal” price, or timeline of gradual tax increases,  is set and left there a long time.   

More importantly, I’m not the first person to point this out I’m sure, but cap-and-trade gives company’s incentives directly to find better and new technologies, and depending on the cap phase-in, can provide an incentive to reduce overall energy usage!  Carbon (consumption) taxes, to the extent that it mostly causes  a shift from carbon based consumption to something maybe just as bad – has a much less beneficial effect. 

An extension of this difference is that cap-and-trade systems are not necessitated on / limited to controlling one type of pollution!  The system of permits can be set up to function as a general emissions cap on input compliments (maybe setting 1 “unit” sulfur dioxide = 1 “unit” carbon …).  Even if the government wanted to keep the cap systems separate by pollution type, once the system had time to work out kinks, it would surely be a better system than having a tax on carbon, a tax on sulfur, a tax on mercury… all it different levels … all that could be changed on a whim resulting in extreme volatility and messing with market expectations.    Some states are even considering cap and trade beyond just talking about “carbon” as if it were the only pollutant on Earth.

More and more, emissions of these pollutants are something (given our technology) we can accurately measure to some degree.  Measuring social cost (and setting up an “optimal”) tax is not something we can easily set up.   All this means the likelihood of setting up a carbon tax system that wouldn’t need a lot of tinkering with is unlikely.  

Greenspan on state of US economy

I can't recall a time in recent history hearing Alan Greenspan talk so pessimistic about the US economy.  This is either, A.  cause of great concern, or B.  a product of Greenspan being out of public office.  

Katrina V. Gustav

The contrast could not be clearer:  

With Gustav, people were prepared.  Suppliers and demanders both expected future prices to rise and gas was consumed just prior to the hurricane by people evacuating, and massive preparedness forces entering the city.   Prices soon fell back to normal as the storm passed, doing little damage to the city.  

With Katrina, US (and Indiana) prices surged as expectations about future prices rose, and as ACTUAL production in the gulf was cut to almost nill (temporarily).  Meanwhile, prices were relatively unchanged as New Orleans demand fell (people that survived didn't feel like swimming to the pumps) and supply of course fell.   Prices were nonetheless volatile.   Only after people were let back into the city did prices start rising in New Orleans (over a month after landfall).