Bankers: The Height of Evil and Stupid

It's been 3 weeks, so maybe I should make another post!

The subject line really does appear to be one of the popular political lines drawn these days, though it's rarely explicitly laid at as such.

For instance, consider the following links:
1. Bankers are immoral
2. Bankers are stupid

Alright, I'm mis-characterizing #2 a little bit. The larger point of the IF post is that we need to regulate maximum bank size, because big banks have negative side-effects that carry real costs, without much obvious benefit. But one line does stand out:

Bankers are famous lemmings, and a whole lot of small banks who pile into the same poor investment can fail together like one really big bank

I am not entirely sure that this is going to be an effective rallying cry. First, one can hardly call the bankers "immoral" and then blame the lack of their morals for the current economic crisis. Now, certainly, there may be bad eggs among them, but the same could be said for any industry (Doctors still have to evaluate the moral importance of this guy, after all). The difference being that, in finance, a few bad regulations and a few bad apples can lead to major problems. In finance, one guy can lose $7 billion. It's very difficult for a single doctor, even if he is exceedingly incompetent, to start an epidemic. He would have to be consciously evil and stealing biological weapons from the US government.
There is also the obvious issue of making a bad bet. Let's say that the financiers were perfectly socially conscious. They might find their securitization of subprime loans to be a great social good, because they honestly thought that they were reducing risk while also providing houses to people who historically could not afford them. The African-American home ownership rate probably went up quite a bit during the Housing boom. That's a good thing, right?
Well, it's not a good thing if you realize that the bets you were making were bad. But then the error isn't of morals, but of information. Our bankers didn't cause a massive system collapse because they were immoral: they caused it because they were wrong.

There is also the issue of incentives; people were paid to do things that were wrong. Mortgage originators and their employees were paid by volume, leading to them selling lots of mortgages in an attempt to make more money. The same applies to other professions as well: doctors pushing drugs because they are paid to by drug companies, for example, or Arthur Andersen helping to cook the books at Enron. It's hard to be good when people are dangling a big paycheck to be evil. But that doesn't mean the industry as a whole failed because they were bad people, so trying to instill a sense of "wider social purpose" would be bad. We want them to be smarter.



And that's not to say bankers are totally stupid, either. For this, I'll outsource the arguments to Megan McArdle

"A Vast Remaking"

So Sayeth the New York Times.

The summary of the article can be basically expressed as this in the layman's sense:

“These jobs aren’t coming back,” said John E. Silvia, chief economist at Wachovia in Charlotte, N.C. “A lot of production either isn’t going to happen at all, or it’s going to happen somewhere other than the United States. There are going to be fewer stores, fewer factories, fewer financial services operations. Firms are making strategic decisions that they don’t want to be in their businesses.”

Or, this in the slightly more technical sense:

For decades, the government has reacted to downturns by handing out temporary unemployment insurance checks, relying upon the resumption of economic growth to restore the jobs lost. This time, the government needs to place a greater emphasis on retraining workers for other careers, these economists say.

Basically, the idea is that the crisis is exposing a lot of major cracks in how the American economy has been working over the past several decades, and there ain't no more Internet-Real Estate Bubble-Caulk to pretend the holes aren't there anymore. We fundamentally produced wrong: we are too focused on building new homes, new cars, and selling financial services. So now the recession is showing how weak we are, we need to reallocate our workers and our resources to other industries to get our economy on sounder footing.

To some extent, yes. The bigger issue isn't just what we produce, though, it's how we consume. Our savings rate has steadily been declining, and people have been taking on greater and greater debt loads to increase their own personal consumption. We wouldn't be building so many houses and so many cars if people actually saved more money instead of spending: they wouldn't be able to afford such massive extravagances.

So, yes...while we have to retool our industries, we also need to be thinking about how to ratchet down our consumption, so we go back to an economy based on the sound principles of productivity, capital, hard work, and growth.

Pledge Classes Begin Again-Economic Thoughts, Hazing included

Alpha Kappa Psi-Eta Rho Chapter begun teaching new pledges this past week.

Pledging for a fraternity can be a tough experience, even if you are attempting to pledge a chapter that ISN'T hazing you. And trust me, you don't want to be hazed, because it can be quite brutal. Some of the "milder" examples:
-Having to hold a match while saying the Greek Alphabet multiple times
-Underwear inspections to ensure you are not "wearing the colors" (pledges are not allowed to wear the official colors in some frats/sororities).
-Being forced to run many miles before an initiation ritual in order to induce exhaustion.

And hazing can even result in deaths.


We don't do any of that at AK Psi, but it's still tough. Here's what we require:
-Passing of 5 quizzes and 1 exam (about 70 questions)
-Attendance of at least 2 events of the following type: fundraising, social, philanthropy, professional
-Completion of a "signature book," meaning the pledges must get 2 signatures from every member of the local chapter
-Completion of a pledge project

And did I mention this all has to get done in 5 weeks? Eta Rho traditionally has an accelerated pledge program (5 weeks is actually the minimum allowed by the fraternity).
It can be very stressful. Not everyone makes it, and some that do are often extremely tense during those 5, 6, 7 week periods.

The reason we do this is obvious: we wish to impose high costs on potential members, so we can identify people that are not committed and weed them out. It's significantly easier to kick a pledge out of the program than to expel a full member who isn't pulling his/her weight, and in a school organization, there is actually a lot of weight that needs to be pulled. Particularly when it comes to fundraising. Our chapter has had some real disasters in the past with trying to procure funds, and it's not something we want to repeat.

One might think that pledges would be willing to drop out of the process, but historically this has not been the case. I should know: I've been the pledge educator at the Eta Rho chapter for a year, and I pledged myself. We usually have one or two people drop out in a semester, and we usually have more pledges that are cut from the program by vote of the full members. One pledge who was cut from the program is even back again!
So, it really does show that our pledges do actually have a high perceived value of the fraternity.

So, to think of it:
MBpledge>MCpledge>MCbrother. We work our pledges harder than our Brothers to ensure they are committed, but they are committed regardless.

Hazing actually takes this concept and applies it to some extent, but warping it. Hazing imposes a REALLY high marginal cost, implying that people that jump through those hoops must be REALLY committed.
However, my impression is that hazing really acts more through the mechanism of cognitive dissonance. People who have already jumped through the hoops find out that the frat they joined really ain't that hot...this confuses them and makes them feel uncomfortable, but they end up resolving this dispute in their mind by thinking "THIS FRAT IS REALLY UBER-COOL!"
Actually, that was a study cited in the first edition of "The Social Animal." People who had to sacrifice a lot to get into a dinner meeting of high people evaluted the dinner as great, whereas people who walked right in thought of it as "boring."
In essence, hazing is really more about mind-warping than proving your worth.
So it's a damn good thing our frat doesn't do it.


Plus, why would you want to hurt your family?

Underemployment

If this doesn't qualify, I don't know what does!

Nine months ago he lost his job as the security manager for the western United States for a Fortune 500 company, overseeing a budget of $1.2 million and earning about $70,000 a year. Now he is grateful for the $12 an hour he makes in what is known in unemployment circles as a “survival job” at a friend’s janitorial services company. But that does not make the work any easier.

People have always been talking about the "real" unemployment rate in our society, going back to the early jobless recovery years of the Bush administration. A lot of talk about "hamburger flipper" jobs instead of actual well-paying jobs in the economy.

Tyler Cowen recently commented about underemployment as well, wondering whether if "unemployment" was still a good measure of a recession.

Tyler does appear to be right. When a society has a lot of different workers with different skill-sets, underemployment becomes a lot more "real" than a society where everyone is a front-line factory worker. And we supposedly have a lot of different skill-sets today. That's part of the reason over Robert Reich's concerns that stimulus money not go entirely to white construction workers.

However, I wonder how "heterogeneous" our labor supply actually is. I'll take a comment from an internet forum I frequent:

I think it's generally understood that college teaches you very little real world skill. Recruiters hire you out of college because you're young and you've proven you can accomplish something but not because you actually know what you're doing.

I remember when my ex girlfriend was completing her MBA and we ended up at the local bar with the recruiter for IBM. He said no companies he knows hires PHD's anymore only graduate students. Primarily because PHD's will analyze a problem way past the point where action against it is even relevant. They wanted smart people who can act.

He understood that people right out of college really have their heads up their asses. No real world experience. But they wanted young people with energy, people who at the very least, proved they can accomplish something difficult. That's what your degree is worth. Getting a good job afterwards relies on your charisma.

I didn't agree with everything, but there is anecdotal evidence that a lot of people end up in jobs that they didn't study for in college at all. Obviously, this isn't as big of a concern for "specialized" majors like engineering, but a lot of the education system is supposed to provide a more generalized knowledge that builds up your "transferrable skills." Basically, it teaches how you to do any job well, but not enough specific skill to be super-awesome-employee right out of college.

That's hardly heterogeneous!




On the other hand, we are probably more specialized than we were in the post. The investment bankers on Wall Street aren't going to be having too many more finance jobs in the future, since the economy needs to adjust away from finance. The point isn't that we don't face any underemployment, though. It's that I believe a lot of people are underestimating the flexibility of the labor force.
And, secondly, we need to ask ourselves what this is really a function of: are we having more specialized jobs (finance) because our economy is naturally tending towards that direction, or because our regulatory system helps create bubbles that then become the basis of real economic activity.
Tricky, tricky.



The second part of Tyler's argument, which is arguably more important, is spot-on. Basically, Tyler is saying that the unemployment measure isn't what it used to be, because these days the labor market is faster and people can fill up any vacant jobs at Target a lot more quickly than we could in the 1960s. This produces a lower measured unemployment rate, but that doesn't mean the recession isn't that bad: it just means that people that are unemployed can find SOME work.

Fixed Costs vs. Variable Costs

Colleges unlikely to cut financial aid, because they need enrollment to bring in money

Students considering a wide range of private schools, as well as those who are already enrolled, can expect to get more aid this year, not less.

The increases highlight the hand-to-mouth existence of many of the nation’s smaller and less well-known institutions. With only tiny endowments, they need full enrollment to survive, and they are anxious to prevent top students from going elsewhere.

Falling even a few students short of expectations can mean laying off faculty, eliminating courses or shelving planned expansions.

This makes sense, I suppose. Most of your costs at a college should logically be relatively fixed: it's probably a lot harder to lay off your professors than it is for non-unionized companies to lay off line employees. And that labor cost likely is a big portion of the budget: then you have your normal fixed costs (like buildings).

But what's surprising is that these students receiving aid, on the margin, are not costs to the university...they are actually assets, because the marginal cost of adding a few more students isn't very significant. What's the extra cost of moving a lecture from 100 to 101 students, after all? Sure thing, we'll take $10,000 per year in tuition for that!

It's a result that surprised me, anyways.

And US Growth revised downwards!

Remember when I mentioned that Europe was falling faster than the US? Turns out that was wrong!

From the BEA:

Real gross domestic product -- the output of goods and services produced by labor and property
located in the United States -- decreased at an annual rate of 6.2 percent in the fourth quarter of 2008,
(that is, from the third quarter to the fourth quarter), according to preliminary estimates released by the
Bureau of Economic Analysis.

And in other news, more free money for Citi

Swap Data on European Bank

Via the Baseline Scenario


It's costing a lot to insure debt at some major European banks. This isn't surprising because, as is commonly known by now, European banks are highly leveraged compared to major American banks.

Obama's Savings

Health Care Savings -$316
Limit Tax Deductions for High Earners -$318
Carbon Permit Auctions -$646
Close Tax Loopholes -$354
End War in Iraq -$1,490
Allow Upper-Income Tax Cuts to Expire -$637
Deficit-Reducing Policies -$3,761

From CRFB

I commend President Obama for his plan to cut the deficit, but the War in Iraq savings are partially inflated. As has been mentioned many times over the past couple days:

Assuming that war spending will continue at FY2008 levels (adjusted for
inflation) – an amount even beyond what President Bush’s policy would have
required – strikes us as a gimmick to build up the spending amount in order to
reduce it and claim “savings”. We believe the Administration should have
included war costs at the levels they are proposing.

New Treasury Plan: Just as bad as the old one?

Well, we all know what a total cluster**** TARP turned out to be. $350 billion doled out with virtually no strings attached, not even the requirement that banks actually be able to account for the money that they took. Several months later, we learn that banks paid out large bonuses, acquired other banks and financial services companies, and didn't really increase lending at all.

Oops!

Well, the new Treasury plan, hopefully, would have gotten around some of that.

Unfortunately, it doesn't. Rather than giving the government the right to convert the preferred stocks into common shares, the new program seems to actually give banks the right to convert government equity into common shares, opening up the possibility for all sorts of shenanigans.

Of course, I'm not overwhelmingly concerned...the goal of the plan is to recapitalize banks by giving them money after all. I'm increasingly wondering whether there is a point to that strategy anymore, though.

GM sacrifices to the Money God

Or at least that's what the headline should read.

General Motors lost $31 billion last year, a much greater loss than was expected, largely due to a truly horrific 4th quarter. That shouldn't be surprising to anyone, after Japan posted a more than 10% drop in GDP (annualized) for the same period. But the magnitude of GM's issues is a bit concerning. Consider the following:

Output at GM’s European plants was 53 per cent lower in the fourth quarter than a year earlier

Demand really is plunging. And worse, GM's pension is now underfunded by $12.4 billion, which the US taxpayer is probably going to be on the hook for.

Another bad year like this and it wouldn't be surprising to see $50 billion in cash being devoted to keeping GM afloat. GM's market cap, for comparison's sake, is presently $1.45 billion.


One wonders if there is even a point anymore, and whether we should just go ahead with full-scale nationalization.

Europe falling faster than the US

EDIT: Picture removed
From the Atlantic Business Channel



Some in the past were suggesting that the EU would be able to scoot past this crisis, but unfortunately it looks like they've been tangled up even worse than the US.


Looks as if I copy-paste, the picture directly links to the Atlantic Business Channel display graph on their site.


Woops!

More on Required Classes

The last post was to address what the professors seemed to concern about. This post is what I think needs to be improved.

First, I thing there needs to be more emphasis on risk management, especially in light of recent economic events. We don't actually deal with a whole lot of risk and uncertainty in our business classes. The most the business core ever really requires students to understand is the concept of "standard deviation" in our advanced quantitative classes (to you non-UIC people, that means math classes!) with a bit of sensitivity analysis in IDS 355 Operations Management.
I had never heard the term "Sharpe Ratio" before my Finance 472 real estate class.
Business majors need to have an understanding of how to handle uncertainty, because no plan survives first contact with the enemy/the economy. UIC should pay some more attention teaching us that. I would suggest some more effort in looking at risk in different ways, much like finance classes look at profitability of projects in different ways.

Second, Econ 221 Intermediate MacroEconomics should be a required course. Business majors should have a more solid understanding of macroeconomics than what it is offered in Econ 130. Specifically, they should be more aware of the debate between Neo-classical economists and Keyensian economists, since both have arguments that apply at different points in time. Econ 221 provides a higher level of analysis than Econ 130, and pays attention to these debates. Understanding the arguments should lead to a better understanding of the economic environment underlying the business environment, hopefully beyond "tax cuts=higher growth!" and "No, government spending=higher growth!" kind of thinking.

Third, it seems the business core pays little attention to ethics. It is rarely mentioned beyond the passing phrase "ethics are good" and "don't be Enron!" with some attention paid to the subject in Management 350 (which mostly seems to be a Business Law course, so ethics are not exactly the topic of the class). Perhaps a 1 hour per week class on ethics with a workload similar to BA 100 would be a good idea, or requiring every student to attend to an ethics workshop prior to graduation.

Finally, I would reevaluate IDS 200. This is not meant to offend the professors, but I remember so little about the class that I wonder how much it actually accomplished. This may be a result of my own bias (I have never taken an IDS course beyond the required curriculum). However, from what I recall, it seems that the topic of the class was the effect of digital technology on the business environment. This is a topic that is hammered to death in every class, and I think discussing the effects of the Information Revolution is better addressed in those general classes than having a class specifically devoted to the Information Revolution. Eg: I think I can learn a lot more about the role of IT in marketing while attending a marketing class than studying it in IDS 200.
Of course, there ARE some aspects of the class that aren't covered in other ones...there was a lot more specific information on types of networks and different programming languages, for instance. To be certain, students lose something if we don't teach them this, but I am not sure what it is.
I'm not saying we should drop the class. I simply think it needs to have some more attention paid to it.

Core Business Classes

Summary and Recommendations at bottom

Our Finance professor, Mary Brown, commented in class yesterday that she was on a committee responsible for reviewing the Business core curriculum.

A core curriculum consists of the classes that every business major must take. The idea is to ensure that every student has a good understanding of every field of business, so he/she can make good business decisions in a management capacity (or just from a business perspective). Professor Brown specifically mentioned two things:

1. UIC students apparently aren't performing well on case presentations. This is when someone gives you a big file about a problem a company is having, and you have to make a recommendation

2. Teachers wonder how much UIC students are actually retaining of the core curriculum.


2 makes sense if 1 is a problem. After all, maybe the reason that students can't analyze a business case is because they don't actually remember anything about business! That would be very disappointing, and would cast some doubts about UIC's current teaching style.

Now I can't really SOLVE the problem, in part because I don't know the problem fully. I would have to obtain a lot more information if I was going to try to make UIC students astoundingly better. I have some ideas which I like floating around with Alpha Kappa Psi members sometimes (because I can more directly influence AK Psi than I can UIC), but nothing very concrete and well-researched.

Still, Professor Brown asked for thoughts. And there is no such thing as a BAD thought, so I figure I'll give it a go.



If they think retention is a problem, they are probably right. Information learned but not used is not retained very well, especially when it is only studied for a test. That's not to say that it is totally lost: for instance, I took psychology 3 years ago, and if I took a psyc test on the spot right now, I'd fail. But I can still talk about positive reinforcement a bit, and since I once learned "shaping" back then, I can pick it up faster now.

The problem is that business majors can't immediately access all of the information they have because they don't use it often enough. But they probably still have the fundamentals down to some extent, so they can relearn quickly if they need to.
On a case, though, they need to know it RIGHT NOW. They don't have time to relearn it all. So the thing we want to do is increase their understanding more than right now, preferably through making them use it often.


Another possibility: it might be the case that 2 is not really the problem. Rather, the issue might be that students can't think very well. They UNDERSTAND how marketing works, they understand how finance works, and they understand how accounting works. They just can't put it all together, and they can't analyze information put in front of their face and put what they know to work.

While I think retention is a problem, I also think this other problem, which I will call "critical thinking," is a major one. First, cases can be extremely intimidating, especially if you have never ever studied one.
For example, if you've spent your entire life writing essays and giving lectures, you might be thrown totally off-guard when you take a test for the first time. Just as you can learn good test-taking skills, so can you learn good case skills.
UIC, though, has pretty much NO case studies. All my experience in them comes from two sources:

1. AP tests in high school, which had things called Document Based Questions. They weren't business cases, but somewhat like them.

2. Consumer Behavior (Marketing 462, I believe) with Professor Rosa. The entire class consisted of one Mid-Term, two case studies, and a consumer interview.


UIC business classes, on the other hand, teach a lot like other academic classes. You are lectured 2 or 3 days a week, and have an exam once every few weeks. You have homework assignments in some classes, you have papers in a lot of other classes. My gut instinct is that this is a bad approach, and generally leads to our students being unable to do cases because they are trained more like professors than decision-makers.

There are two counter-arguments to this:

1. The Document Based Question-item, which is something that non-business people do with ease, is a lot like a case.

2. The papers students do in class should train them to think critically.

The first is very true, but those types of questions were rather difficult for high school students, enough so that our history teacher, Matt Whipple, gave us an example question before the exam so we should be prepared. It wasn't something that came naturally to us, because tests are about converging on a right answer, while cases are more about diverging, analyzing, and choosing. You need to think of possibilities (diverging), figure out the merits of each one (analyzing), and pick the best one (choosing).

On the second, papers HELP, since they are much less about convergent thinking than tests are. A student can, if he/she chooses, dazzle a professor with brilliance. However, papers tend to be graded a bit softly for my tastes. I can remember writing numerous papers on the night before a due date and getting near-perfect scores. The only teachers that have actually graded harshly are Professor Thompson (who I had for Compensation Management) and Professor Rosa (who I had for Consumer Behavior, as previously mentioned).
We need to grade tougher if we want students to develop better writing skills, and we need MORE. Just like other skills, writing improves when practiced. My own writing skills have been honed through countless hours of posting on internet forums and internet blogs, something that most other students simply don't have.
Another problem with papers is that they aren't really integrative. Writing a paper for my management class doesn't usually require me drawing upon my marketing and finance knowledge, which doesn't make much sense if we want our students to understand business as a whole.


The other aspect of "critical thinking" is that students just don't seem to have good reasoning abilities. Their arguments are SOMEWHAT sensible, but they are not really good enough or developed enough. So...all they really have is an idea, not a truly defensible position, and it would crumble upon closer inspection. See, for instance, my remarks on my experience with the bank simulation.

If students can't construct logical arguments because they simply don't have those skills, then they will fail even if they are trained in cases and retain knowledge. So UIC needs to be more concerned about developing those skills.
I find the best method to doing this is taking a student's position and simply pointing out all the logical flaws and why they are logical flaws. Learn through experience.


Summary
So...if we want our students to do better...we actually have three different problems:
1. Students retain knowledge, but not well enough to access it on demand.
2. Students do not have much experience putting different business ideas together.
3. Students do not have strong reasoning abilities.


Remedies
There are a couple different approaches we could take, but as my time is running out, I will simply say what I would do.

First, I would require case competitions every year by UIC students, to be done in very small teams (2-3 people max). They will be required to come up with some sort of product idea and explain how they would sell it. This would be graded and put on the transcript, like any other course. Guidance would be minimal: sink or swim on your own.
Hopefully this will keep students integrating and using new knowledge every single year. That helps out with problems 1 and 2. Small teams are a must to ensure that there are no shirkers (which occurs in every group, but especially among any group above 4 people in my experience at UIC).

This may be difficult to accomplish, so I would be perfectly happy with an addition to 495, but a class devoted entirely to case studies of actual strategic management. These case studies would be done individually.

Second, to address problem #3, I would make a new, required class (BA 250?). Every day, a different student will be required to give a presentation on a topic that the professor assigns. The other students will then be required to agree or disagree, with the professor facilitating discussion towards the "disagree" side. The onus will be on the presenter to both identify the weakness in his/her own arguments and be able to address any questions or counter-points other students would have. I imagine a 3 hour, twice a week course would be sufficient for this.

Margins and Profit

Before you go any farther, going to let you know up-front: This isn't economics or politics. It's business.

But it's a simple business concept that everyone should understand.

Let me explain the situation. Around a week ago, I met up with some group-mates from my finance class in a lounge around campus. After munching on some delicious Wendy's burgers, we got down to work: we were responsible for running a bank through a simulated economy against the other groups in our class. And we planned on taking it seriously, for a couple reasons.

1. The project is a large portion of our grade. It doesn't matter if we LOSE money, but we need to explain how we arrived at the decisions we did.
2. The winner (IE, the group with the highest stock price at the end) will not have to take the final, and will get to meet the head of the Finance department...hopefully leading to some job connections!

I had spent the previous day staring at the financial statements of the bank for the previous two quarters. And, believe me, it was confusing for a long time. Even if you know the basics of the financial statements, new parts that you've never seen can confuse you if they aren't explained properly. Considering we were just handed statements with numbers on them, yep, I was confused.

But I managed to figure out what was going on with the statements. Our bank didn't seem particularly strong (we were hemorrhaging deposits, losing 5% every quarter. Those are basically personal bank accounts people put in your bank that you use to make money elsewhere), but there was a good opportunity for growth in retail banking by creating mortgages. This basically meant that we will have to open more branches, shift effort away from appealing to business customers, and start focusing and trying to get customer deposits back to get more money to invest,

The story we were given was that consumers are not price-sensitive, so I naturally said that we should advertise a lot, tell our bankers to spend more effort on getting more residential customers, and charge higher rates so we could have better margins.

My friend asked me "So we're going to advertise that we have higher mortgage rates?"

There ain't nothing wrong with asking the question and thinking like a businessman, which includes thinking competitively. It's so common sense that people all across the nation can think like this: cut prices, and that way you can attract more customers and beat your competition. But there are limitations to this kind of thinking.

For example, the most obvious one is that customers might not care about price very much. Starbucks can charge $4 for a cup of coffee, when I can make my own at home for 30 cents. Obviously, price isn't the biggest factor.

Scale can also be a big factor. Sure, by reducing your prices, you might get more customers. What happens if your store or bank cannot handle all those customers? Just as there are economies of scale, so there are diseconomies of scale. Once you are producing beyond a certain point, your costs actually start to rise.

For a bank, you might not have enough employees, so your quality of service suffers. That's REALLY bad if customers also care more about service than price, so you are driving them right in the arms of your competitors. You might also lose the ability to exercise due diligence on loans: you can't spend 6 hours vetting every single person asking for a mortgage when you have one guy to approve them and 1,000 people begging for loans because you are charing 6% whereas everyone else is charging 10%.

And you can't hire more workers either: your bank is only so big! Buying another bank? Extremely expensive, and can't do it because you can't make money when you are charging 6% for a mortgage and giving out 5% on savings accounts. Or, if you CAN make money, it's extremely risky...if you don't get as many loans as you want, your stuck with two banks. Which means you might very go well bankrupt. Plus, hiring more employees means you lose your own personal control. You can't watch over 30 managers as easily as you can watch over 10.


So, if your company is running into trouble, the idea of cutting your prices seems very attractive. Often times, though, it's really a trap and might put your company even more into the dumps.

On Moral Hazard

Thoma rounds up an excellent series of articles describing how concern about moral hazard is overrated.


From a psychological perspective, at least some of the argument about moral hazard seems fundamentally overstated: you will be more likely to undertake risky behavior if you are rescued by someone else, true. However, two points:

1. These banks are not really getting "bailed out." Rather, TARP gave money to the banks in return for preferred stock, most of which, I believe, carried rather high interest rates (10%). So, if BofA receives $50 billion from the feds, they will be paying out $5 billion to the federal government every year for the rest of time. It's not costless. And this is at the expense of other stockholders, because those dividends COULD have been going to the common stockholders.

2. We tend to focus a lot on our own personal losses. For instance, you might say that having rescue helicopters picking up hikers from mountains is "moral hazard" because they don't have a high chance of dying. Well, having a 20% chance of dying is still pretty high to me, and spending a couple months in a hospital isn't fun at all, either.
Some people suggest that we value gains only half as much as losses, meaning that we would need to gain $100 to off-set a $200 loss (in terms of making us happy). If true, that means most people are risk-avoiding, and perhaps a bit of "moral hazard" to encourage risk-taking isn't such a bad idea.

Anti-Business Attorney General

It seems like it is a distinct possibility

The memo encourages companies to withdraw legal support from employees accused by the federal government of crimes, lest they be considered "uncooperative" and face further punitive measures from Uncle Sam themselves. If you believe the government is wrongly prosecuting your employees, in other words, you'll pay a price if you fight back.

This is very concerning. We don't want the government to be an adversary of business, yet this would be a major step in that direction, as government would be exercising its sizable power against all resisters.

Well...this isn't good

So, US GDP fell at a 3.8% annualized rate in Q4.

Problem being that economists expected a much worse report, and the reason it wasn't as bad as we thought is because businesses had more inventory.

Essentially meaning that businesses produced a heck of a lot of product that they weren't able to sell.


Guess we are going to be seeing a lot more layoffs...

Fannie and Freddie to halt Foreclosures

Well, we knew that was coming. It seems that Fannie essentially will act as a landlord, with people living on month-to-month leases (IE, the status quo). But they're coming up with new plans to keep the houses in better repair, among other things.

House Parties for Stimulus!

If you like the stimulus, invite some friends and get drunk!

The strategists on Friday called on supporters to host ``economic recovery house meetings" next weekend, marking the first call to action for the network in support of the White House policy agenda.

The email was sent today by Mitch Stewart, director of the network that was recently renamed Organizing for America, a takeoff of Obama's presidential campaign, which was called Obama for America.

Wish I had thought of this, though "partying for the stimulus!" seems like a very stupid idea: we're supposed to blow cash on extravagance when we might lose our jobs tomorrow...and need to spend almost a trillion dollars to revitalize the economy? Okay, maybe we need to spend more, but perhaps on something other than a party?

Plus, I don't think "stimulus parties" are going to be very popular...

Fear: How do we kill it?

According to a lot of economists, one of the biggest problems (if not the biggest problem) in the economy right now is a massive feeling of uncertainty in the economy. You may remember that I mentioned it a little while ago, suggesting that the stock market will fall because there is no actual recovery yet.

Well, uncertainty is the subject of a roundtable discussion at the Economist today. Here is IMF Chief Economist Olivier Blanchard leading the discussion:

At the start was the realisation that many of the new complex assets were in fact much riskier than they had seemed. This realisation has now morphed into a general worry about nearly all risky assets, and about the balance-sheets of the institutions that hold them. “Better safe than sorry” is the motto. Unfortunately, while the motto may make sense for individual investors, it is having catastrophic macroeconomic consequences for the world. It is triggering enormous spreads on risky assets, a credit crunch in advanced economies, and major capital outflows from emerging countries.

So, the solution to the crisis is to eliminate some of the uncertainty in the economy, and, more generally, fear of losses.

The REAL question is the following: How the hell do you accomplish that?


That's the subject of the economists responding to the article, who seem to largely agree with Blanchard.

Some of the economists agree with the general concept with a sizable stimulus package, and agree that we shouldn't be too concerned about what might happen down the right (at least in terms of over-stimulating the economy).
The fiscal stimulus would send the message that the government is committed to solving the crisis.

Many also agree with focusing on restoring the health of the financial system, though Thoma says that isn't actually enough.

Tyler Cowen says if we are just going to have policies to make things LOOK better, we should apply a cost-benefit test towards their symbolic value and try to find highly visible-yet-cheap projects that make it seem that the economy is getting better and government is committed to keeping it that way. That's a LOT different from the idea that we should build roads because they improve the economy: Instead, we should build a single road paved with gold, because that is REALLY indicative of a recovering economy (that example is mine, not Tyler's). Boosting things like unemployment insurance would be a good idea, too, since they are automatic stabilizers...meaning that the government is automatically increasing the money it is spending in a crisis, instead of sitting around talking about massive stimulus packages


One commenter added that we perhaps insuring all loans made across the country would be a good idea. I believe this is what was used in Sweden, but I am not entirely sure.




So, how do we reduce uncertainty?

That's a toughy and involves a lot of psychology. Quite frankly, it's not something we're trained to think about at the undergraduate level (and any solution I could come up with is probably much worse than what academic economists propose).

I would devote a lot of effort into the financial system. At this point, I have absolutely no idea how to get this done in an acceptable manner. We could simply buy back all the assets, but that could take an outlay of $4 trillion, and is a bit of a giveaway to banks. Direct recapitalization is a more plausible measure, but it doesn't look like it worked very well with TARP.

Nationalization is probably out of the question.
Forced liquidation (IE, seizing the banks, selling off the good assets to good banks and keeping the bad assets in a government chartered "bad bank") might set the financial system back decades by destroying a lot of banks and scaring private investors away from investing in new banks.

But the financial system is ground zero and that's where we need to be focused. I don't moving them off the balance sheet would be very good at all: a bank that is insolvent is still going to be insolvent, and it will just scare investors even MORE since they don't know which banks have the bad assets.



I would have a sizable, diversfied fiscal stimulus (IE, not just giving jobs to white male construction workers). That will get more people back to work across a broader swathe of the economy...hopefully reducing uncertainty to some extent.

I would increase unemployment insurance as well. Not entirely sure how it works, but tagging it to your income prior to being fired seems pretty reasonable in an economic downturn (IE, you get 60% of your former income from the government). In a strong economy, not so good of a plan. In a downturn, making sure people don't keep too much money on hand because they are scared they will lose their jobs is more important than worrying about people not going back to work because they are living on the government dole.

Unorthodox monetary policy by the Fed is also important

Broader government insurance of loans may be feasible, too. Perhaps not insuring EVERY loan in the country, but offering to sell insurance to private companies on high-rated debt would probably encourage more lending.



Of course, if housing prices continue to plummet and we end up with 2/3 of the nation's households with more mortgage debt than house value, I have no idea if any of the above are going to be enough

Differences in Colleges

The first row of my Latin American History class: students who have their heads buried in books, reading the chapter we're discussing next week


The first row of my business classes: about as crowded as a church service during the Super Bowl



God I love it

But why should they LEND it?!

Or at least that's what Rebecca Wilder says

TARP definitely has its problems, but it was developed to prevent a systemic crisis, and not to force lending. Were it not for TARP, more banks may have failed, and lending would be negligible, if not falling precipitously.

She then goes on to say that:

A necessary condition for an economic recovery is not a fully functioning credit system, but rather the other way around. In order for the credit system to heal, it must be on firm economic ground.

So we have a bit of a chicken-and-egg scenario...we really need a strong economy before banks are willing to hand out money. That's why these banks aren't lending out money, because the economy sucks and they will likely lose cash.

Yet, how can we have an economic recovery when people can't even get credit? It's no surprise that automakers were pounded all through 2008 and housing similarly suffered: both have a large chunk of their customers relying on credit to afford product, and with credit markets shutting down, there was no way to buy product. For a long time, the rest of the economy was chugging along just fine while autos and housing and financials were getting absolutely pounded.

If the crisis in the economy is really a crisis of confidence, then perhaps that means the banks are under-estimating the returns they will get on new loans...forcing them to do so and then a realization that "hey, it ain't so bad" will convince other people to dive into the credit pool and we'll start getting the economy back on track.


Of course, this isn't really possible if the banks are facing massive losses. But if the banks are insolvent even after a massive $350 billion capital infusion, then:
A. The government should not be subsidizing banks buying other financial service companies. So far, 2008 and 2009 look like a movie called "How Bank of America and JP Morgan convinced the government to help them buy every bank in the US"
B. The banks should be nationalized out-right so we can essentially hit the "reset" button, without massive giveaways to the shareholders and creditors.





Either way, giving banks hundreds of billions of dollars just to sit on them seems, to me anyways, like a very bad policy.

The Baseline Scenario

An interesting webpage, pointed out by Tyler Cowen, which seems to be advocating the view point that this economic recession is going to be a lot more protracted than most seem to suggest (IE, several years, instead of turning around in mid-2009). You can read their worldview here.



They argue that the crisis was really started in the 1980s, with the Great Moderation. Having a more predictable economy made finance a much more attractive field and credit a lot easier to obtain, leading to a massive build-up in debt. This is seen in the graph below which has been making the rounds around the econ blogopshere:
EDIT: Apparently the right half of the picture is cut off. Click on it and you'll see the whole picture


Too much of a bubble leads to a clamp-down in credit, which is where we were up till Mid-September. But after AIG was taken over (essentially wiping out the shareholders and I guess the creditors too) and Lehman was allowed to fail, a panic was sparked, which has led to people, corporations, and governments all over the world starting to limit the amount of debt they have, and increasing their savings.

Essentially, we are in one massive, global, Paradox of Thrift situation. And it may be a llllooooonnnnngggg time before debt levels reach a new equilibrium, which means it will be a long time before the global economy starts to recover. And unlike Japan, we can't export our way out of this problem, since the Martian market for financial services really hasn't taken off yet.

Stimulus isn't enough: We need realignment

The Anglos had a party by living beyond their means, and Asia began to get rich while Germany got even richer. But the Anglo consumers were borrowing heavily against their credit cards and the equity in their houses to pay for the party. There was bound to be a moment when they couldn’t borrow any more. When it came last year, not only was their party over, but the whole world was suddenly plunged into crisis. It is because stimulus alone would simply perpetuate this unsustainable dynamic that rebalancing must be its companion.

This is easy to say, but readjusting aggregate global demand will be no easy task. Of course, the United States and the other deficit countries are already adjusting as their consumers stop buying and rediscover saving, hence their need for stimulus. But the surplus countries need to boost their domestic demand as well. Indeed, because they have excess production capacity that can no longer be easily exported, they actually need more stimulus than the trade deficit countries. And this is where things are getting very difficult.

That from the Smart Globalist.

In essence, we are paying excessive amounts of attention on the domestic situation. In reality, this problem is global in scope and is going to require economic cooperation on a hitherto unknown level to prevent crises like these from happening again. Unfortunately, it really looks like some nations don't want to play ball. Protectionism is on the rise, and nations like Germany don't even want to engage in fiscal stimulus (essentially meaning Germany will be free-riding on the backs of European and American taxpayers).

It's tough to imagine how this won't happen again in the future. We may be looking at the late 1800s and early 1900s all over again (which, of course, ended with the global economy getting shut down after depression, two world wars, and large trading barriers)

The American Freshman, Politics, and Engagement in the Obama Years

He/She is getting more political

A record number of incoming college students are politically engaged, with 85.9 percent reporting that they frequently or occasionally discussed politics inthe last year.

According to that self-reported statistic, freshmen have never been more politically active. They came close in the 1992 and 1968 elections, but 2008 still edges them out (continuing the trend of increasing involvement since the 2000 election).


But don't get too excited: even if they talk about politics, it doesn't actually mean that they actually care about political issues...

After a record low of 28.1 percent was reported in 2000, post-9/11 freshmen have shown increased interest in keeping up to date in political affairs, rising to 39.5 percent in 2008. At the same time, however, these students have not yet surpassed their parents’generation (baby boomers): Over 60 percent of students in 1966 reported that keeping up to date with politicalaffairs was an important personal goal.

See, talking about politics isn't the same as actually being politically engaged. To some extent, we should obviously expect this increase in political table conversation, given the historic significance of this past election: we had the first viable woman and black candidates running for President this election cycle. Plus, there was the opportunity for a major shift in political policy, as we have already seen in the first couple days of the Obama administration.


However, it's still rather disturbing to see such ambivalence about political issues among college students. Part of the promise of the Obama presidency was that it would re-engage parts of the political spectrum that had become depressed with the political scene. If college freshman are any indication, massive engagement is not really viable: all politics really consists of is table-talk, which becomes even more dangerous when you consider other trends:

Trends also indicate that fewer students today characterize themselves as middle-of-the road in terms of their overall political view. This category has steadily declined and is at an all time low (43.3 percent), returning to roughly the same percentage as in 1970.

Which isn't surprising. If you just talk about politics, but don't actually care to learn about issues, you probably just created an echo chamber.

We're all screwed!

Or at least that's what Megan says

The idea behind stimulus is basically that the government will step in and take up the responsibility for the borrowing and spending that was being done by consumers, except instead of a Wii we'll get a high-speed rail line between LA and San Francisco, and hopefully the potholes filled in front of my house. At 0% interest rates, proponents argue, plausibly, that this borrowing is hardly going to crush the taxpayer under its onerous weight.

But that 0% is not on 30 year bonds; it's on shorter term debt that will eventually come due. What will our interest rate be when it's time to roll that debt over? It won't be pretty if the government is still having to fill in the output gap with heavy borrowing.

Fiscal stimulus has no great evidence of working (hell, we've only had so many recessions since Keynes even wrote the General Theory), and we're up a creek of massive debt (or more like a raging rapid) without so much as lifejacket. Adding on a bunch of debt that's sure to be mighty expensive to repay (and, keep in mind, interest is already one of the largest expenditures today) for something of questionable value seems like a surefire way to mismanage a trillion dollars.

NY Times starts talking about buying Assets again

Several months, I expressed some reservations about the plan to recapitalize the banking industry. The idea, basically, was to give the banks a bunch of money so they would start lending, instead of doing the original plan, which was to buy up bad assets and simply remove them balance sheets.


Given the numerous difficulties this plan has been facing (namely, banks not actually lending the money that they have received), the NY Times is starting to talk about actually buying bad assets being on the table today.


Hopefully, buying away the bad assets will provide a cleansing effect, much like taking a bunch of antibiotics to cure an illness. The flip side is that we have no idea how to value these bad assets, and it doesn't punish the debtholders and stockholders of the banks anymore than they already have been. Essentially, a "give-away."

Bartlett's Advice for Republicans

He has an article on Forbes today:

nstead of defending the Bush tax cuts, most of which expire next year under laws that Republicans wrote, I think it would be better for them to abandon Bush's tax policies altogether. The evidence is pretty clear that they did little good for the economy. Therefore, getting rid of them will do little harm.

Going forward, I think Republicans should try to be the party of investment, because Democrats are basically the party of consumption.

Basically, I would call this neo-supply side economics. Instead of thinking that mere tax cuts can actually drive growth, the Republicans should embrace the notion that the government can at least target tax cuts in such a way that growth can be enhanced. Bartlett suggests making a permanent Investment Tax Credit that will encourage companies to ramp up investment spending and increase GDP, whereas Democrats are mostly focused on more present-oriented consumption.

Not that I agree with him, and he's also ignoring the pull of social issues: standing strong against immigration reform and asking for the deportation of 12 million people probably isn't going to fly as we undergo "the browning of America." But it would be a helpful change from current Republican political orthodoxy if they could listen to this man.

Markets Recovering

At least for a little while. Today's news:

Dow 8,281.22 +68.73 (0.84%)
S&P 500 850.12 +6.38 (0.76%)
Nasdaq 1,529.33 +17.49 (1.16%


Not bad gains, all things considered. The Japanese and European markets finished with positive gains, too. Oil has recovered somewhat, gold prices are increasing, both of which we should expect in a recovery.


Problem is that financials finished down half a percent today, as Bank of America looks like it is getting a wallop over the head and isn't anywhere near as stable as it looked. Yields on treasury debt have been falling too: if private investment was really starting to look good, we would expect to see people start running out of Treasuries and back into the market, driving up yield rates.

Not the case: The 10 year is still at 2.32%, a very low level

More Bad News

So equity markets have taken a tumble around the world since I last wrote about the market. I was expecting to see a January rally, so this bust of sorts came earlier than I expected? Though we still may swing around for a January rally depending on how things go.


And, of course, we've had terrible news since then. 7.2% unemployment, Citigroup essentially being gutted, Alcoa being up a creek without a paddle, and even Bank of America needs more money.


But two things really stuck out to me:
Google laying off workers
House prices to continue to decline until late in 2010


Google is definitely down a lot off its peak of over $600, though the P/E is still pretty high at 19. A higher P/E seems reasonable if the company is expected to grow, but if they start laying off workers, it seems that they are starting to think growth isn't manageable.


And, on the second, if you think housing prices are the root of the problem, then we're still in the thick of this, with no light at the end of the tunnel.

The Broken Windows Fallacy Fallacy

No, not a type-o. Two fallacies, because it's a fallacy of a fallacy.


Making the rounds is the usual libertarian argument against Keynesian stimulus. It goes a little something like this:
1. Taxes destroy wealth
2. Destroying wealth is bad
3. Taxes are bad
4. Just because the economy is in recession doesn't change 3

And since debt is, essentially, a tax on the future, the stimulus will actually end up decreasing wealth.


The parable goes something like this:
A boy breaks a window of a baker. But people say this is a good thing, since the baker must replace the window, meaning work for a carpenter, who will then employ an automaker, who will employ a banker, etc etc.
But it ignores the fact that the baker would've used that money to instead hire a delivery boy, who then would have hired a carpenter for his house, who would employ an automaker, who will employ a banker, etc etc.

In essence, no matter how you look at it, the boy is still destroying wealth.

Doesn't apply in this situation, though. Because private investors are scared witless about economic prospects, they aren't willing to pump money into the economy, and are actually practically begging for government debt (which is relatively cheap in terms of interest right now). In this sort of environment, government can indeed use this to its advantage, by creating projects that will employ additional workers. There's no actual trade-off, because private investors are too afraid to invest: in fact, they actually PREFER government debt at the moment.

So, the real analogy would be more like the baker asking the boy to destroy his window because he wanted to do some remodeling anyways.

Tyler Cowen asks an important question

How long is the liquidity trap going to last?

The proposed fiscal stimulus is a big, irreversible investment, which may or may not be needed, and of course it takes some time to get rolling. The traditional economist's recommendation is to apply a very high hurdle rate to such commitments. One alternative is to wait and see if the liquidity trap ends in the near future.

I am not an optimist about the real side of the economy, but I would be surprised if we still were in a liquidity trap one year from now.

Here's the jist of it:

When the economy slides into a recession, the government needs to do something to get it back on track. This can be done through two different ways, monetary and fiscal policy. Monetary policy is basically playing around with the money supply, usually by having the Federal Reserve lowering and raising interest rates.

The problem is that we are in a "liquidity trap," meaning adding additional money to the economy isn't going to create any extra growth in the economy. Monetary policy doesn't work, which is why the Federal Reserve can dump hundreds of billion dollars onto banks without seeing another dime in lending.

So, in such a situation, we can use fiscal stimulus...IE, cutting taxes by a hell of a lot or increasing government spending by a hell of a lot. The problem being that fiscal stimulus carries with it all sorts of issues, like waste, crowding out private investment, etc. Plus, increasing spending tends to lead to permanently higher levels of spending. Once you give the Department of Transportation $2 billion extra because of a recession, it is hard to rein that spending back in.
Plus, there are timing problems. Even if we implement lots more spending now, we won't see gains until late 2009 at the VERY earliest. 2010-2011 is more likely.

So, if the liquidity trap ends within a year, then fiscal stimulus looks like a bad idea, particularly fiscal stimulus focused on spending (as opposed to stimulus focused on tax cuts)

Numbers Can Lie

One of the first things you should learn when you take a statistics class is how numbers can be twisted around to "prove" any number of theories. In part, this is a good thing: we want to look at the available evidence in as many different ways as possible, so we aren't missing out on the actual reality hiding underneath. For example, in 1800, who could've guessed that the speed of light in a vacuum was fixed? Two decades ago, who knew that diapers and beer are bought at the same time? Etc, etc, etc.

The problem is that we have a habit of jumping to conclusions based on the way a set of numbers look, even though the underlying reality is quite different than it would appear. A good example was a report released in late December, which had people panicking about rising homicide rates among young African-Americans. Numbers are the way we look at a fundamental reality, but we should never confuse those numbers WITH reality.



This was brought to my attention, when I was watching a rerun of ABC's new series "True Beauty." The show's premise is basically this: gather up 10 hotties, and have them go through tests that measure their physical beauty...but also put them through secret tests that test their kindness. At the end, the winner should be a "true beauty," or a person that has a beautiful body as well as a big heart.
The first test they were put through was a "science" test. A plastic surgeon measured their beauty according to their various facial and bodily attributes, compared them to a set of "ideal" numbers, and gave them an overall score between 1 and 100. All scored above the 85 "good-looking threshold," though only two met the 95 "star quality" threshold.

Within such a narrow range (5 points maximum, on a scale of 1-100), can we really be confident in our results? Because this man's "beauty equation" isn't actually reality. It's a model, or rather, a depiction of what reality SHOULD be. I'm not saying beauty can't be quantified: I'm saying that his model may not be accurate to actually discern the difference between a 90 and a 95, in the same way that most of our eyes really aren't capable of distinguishing between 15/16 of an inch and a full inch.



Models aren't always capable of discerning reality perfectly. Another good example comes from Mankiw's recent article:

If you hire your neighbor for $100 to dig a hole in your backyard and then fill it up, and he hires you to do the same in his yard, the government statisticians report that things are improving. The economy has created two jobs, and the G.D.P. rises by $200. But it is unlikely that, having wasted all that time digging and filling, either of you is better off.

GDP is A measure of economic well-being, but it is by no means all-encompassing.



Really, this should be common-sense: don't trust models and statistics all the time, especially without due diligence. But we do it all the time, especially when it comes to investing. "Let's buy a house because it'll be a good investment, even though real estate values can fluctuate wildly." "Apple's stock price has been rising recently, so let's hop on to the bandwagon!"

It's hard to resist this temptation, especially when you don't know the underlying reality.

What is this I don't Even

Words simply cannot express the epic fail

Limiting CEO Pay: Fighting Norms

One of the more notable aspects of various financial bailout plans these days is the outrage at CEO excess and general wasting of money

Examples:
-AIG's infamous "corporate retreat" after receiving $85 billion from the government*
-Auto company CEOs working for $1 a year
-Calls for CEOs to return their outsize paychecks




Basically, it comes down to this: if your company is being driven into the ground, you shouldn't be taking out a giant pay package, large enough to buy a private island . (Actually, according to that website, some of these CEOs have amassed fortunes large enough to buy several and clump them together to form tiny nations!)

And now we have Barney Frank proposing revisions to the TARP bailout to include more oversight, including provisions to limit CEO pay.


One of the likely arguments against this may be that CEO pay is actually a tiny portion of the $350 billion being lent out (actually, some CNBC commentators said that as Barney Frank was on Power Lunch, discussing the revisions). And, to be honest, those critics would be correct, at least on the surface.


However, letting the CEOs have their cake and eat it too may set a bad standard for the market place. If the government deems high CEO pay to be acceptable, then higher CEO wages will increasingly seem to be acceptable. You can look it as supply and demand, but where demand for CEOs increases dramatically simply because people think it should be rising and that it's okay to pay CEOs more.


We call it a "norm," or an unwritten social rule.


Then, rising CEO pay automatically starts factoring into wages of other high-earners (Vice Presidents?). You start to see a marked increase in inequality, and merely because we start to think of CEOs as rock stars.



So, if you think norms are an important part of the story in rising CEO pay, you can entirely be behind Barney's measure to limit CEO pay.






* And here are pictures of where that "corporate retreat" was





Note my previous post here. It's really more of a side issue.

Is Obama tacking towards the center?

Yes, yes he is

You know that Obama is starting to become more centrist when Democrats start blasting his stimulus plan.

Or even when Larry Kudlow spares a few nice words!

Why did the market crash? And will it crash again?

This link contains some interesting thoughts

The reason this part of the story matters, at least from the perspective of the stock market, is that even after Lehman Brothers failed (provoking the crisis that Paulson and Bernanke were talking about) stocks initially held up pretty well. While they tumbled right after Lehman failed, the talk of a rescue plan seemed to reassure investors, to the point that the day before the first vote in the House was taken, the S. & P. 500 was only slightly below where it had been before Lehman went under, at around 1213. It was only after Congress failed to pass the bill that the market went into free-fall, tumbling twenty-five per cent in the next ten trading days.

Even after the bailout passed, the market didn't recover. The author argues this is because

Congress’ failure (thanks primarily to House Republicans) to pass the bill was a massive blow to investor confidence, because it told investors that Washington did not understand the magnitude of what was happening and wasn’t ready to do what was necessary to alleviate the crisis...

So, basically, we have a crisis of confidence, because investors have figured that government really isn't totally committed to fixing the problem. Now that the Fed has pretty much pulled out a bazooka and the Obama administration is preparing to drop the fiscal policy equivalent of an atom bomb, markets are recovering somewhat and credit spreads are starting to fall. Since confidence is starting to increase a bit, the market rallies.

However, there are a lot of other actors at play here. For instance, the banks, which are just sitting on money. Unless they start lending again, there ain't going to be a recovery, and rounds of bad sales will start to hammer the economy even harder. Things will get especially bad when consumers start seriously cutting back their consumption in response to falling house prices and job losses, which they already are.




So, if the problem is a crisis of confidence, bad news: The recent market rally is in for a surprise when they realize there simply isn't a recovery yet.

China brings "steel" helicopters to the US

Or, that's what the headline SHOULD read.


Sorry, no link on this one: just an article out of the Jan 12th edition of Businessweek.


Apparently, since April this year, steel imports from China have been surging. Meanwhile, US steel plants have been operating at under 50% capacity because (duh), we're in a recession. So the US has filed a suit against China in the WTO, alleging that China has been illegally supporting exporters.



The lawyer for the Chinese says that most of the imports were pipes for oil-drilling equipment, and those contracts were signed months ago when prices were high.


Of course there's a nifty little graph here showing how exports in general have been surging all this year.


To me...if it looks like a duck and quacks like a duck...

What happens if Israel wins?

A bunch of analysts, including this NY Times article, are suggesting that the real reason behind the offensive in Gaza is to remove Hamas as a power in Gaza, as opposed to simply ending the rocket attacks.


In fact, the article argues, even if Israel doesn't WANT to remove Hamas, the mission will inevitably escalate to that point: leaving Gaza with Hamas still in charge would simply leave Hamas emboldened politically, and set themselves up as a lasting feature in Palestinian politics. Since this is obviously NOT what Israel wants, they really don't have a viable choice: Hamas has to go, and it has to go now, or else this fiasco will start looking like a repeat of the 2006 Lebanon war.


This leaves Israel with an interesting decision to make afterwards:

...Israelis may already be facing a kind of mission creep: after all, if enough of Hamas’s infrastructure is destroyed, the prospect of governing Gaza, a densely populated, refugee-filled area whose weak economy has been devastated by the Israeli-led boycott, will be exceedingly difficult.

IE, if Hamas goes down after Gaza has been so devastated, who is going to be left to rule the country? And if Israel doesn't submit an alternative government with real enforcement powers, misery continues, leading to more recruits for a future terrorist organization, and a power vacuum where it can easily arise again. Which is going to require another intervention down the road.


The only viable victory condition for this war is a detailed plan to win the peace afterwards. Unfortunately, Israel isn't motivated to put troops in Gaza for very long, and Fatah doesn't seem to have the ability to govern it. Nor are there any UN peacekeepers ready to pick up the torch.

In the end, this Gaza offensive won't accomplish much.

Oh it feels so bad to be wrong

Here's an article from Free Exchange, which makes me want to stick a boot up econ's collective behind.

Of course, I was one of the "don't worry, it's gonna be alright!" crowd, so I can't blame others for getting it wrong