Saturday, January 31, 2009

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.

Friday, January 30, 2009

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

Thursday, January 29, 2009

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

Wednesday, January 28, 2009

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.

Monday, January 26, 2009

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)

Sunday, January 25, 2009

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.

Saturday, January 24, 2009

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.

Sunday, January 18, 2009

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."

Friday, January 16, 2009

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

Wednesday, January 14, 2009

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)

Sunday, January 11, 2009

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.

Friday, January 9, 2009

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

-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.

Thursday, January 8, 2009

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!

Tuesday, January 6, 2009

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...

Sunday, January 4, 2009

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.

Saturday, January 3, 2009

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