Inflation ain’t coming, and other howlers…

September 23, 2009 at 04:46 | Posted in economics, Gold bug, inflation, Uncategorized | Leave a comment

Just found this in the Globe and Mail, one of our leading national newspapers. That’s why I read the National Post.

For special laughs, watch out for the hidden Phillips Curve reference…

Sorry, gold bugs, but the facts just don’t add up

Boyd Erman

It seems a shame to trash the party just when it’s finally becoming fun to be a gold bug.

Bullion is flirting with $1,000 (U.S.) an ounce and hoarding the metal is no longer just a pursuit for Eric Sprott and assorted conspiracy theorists with caches of canned food. Even the guy behind the bar at dinner the other night was long gold and happy to expound on why.

It’s all about inflation they say, and gold as a store of value. Except for one thing: The facts don’t back it. (Unless you’re an American buying bullion because you’re worried about the inexorable decline of your dollar. In that case, you should be worried.)

Almost every real measure of actual inflation pressure – as opposed to the inflation paranoia inherent in the gold price – shows little in the pipeline. One of the best long-term indicators of inflation expectations for the next decade, the price premium built into inflation-protected U.S. Treasury bonds, is indicating that prices will rise 1.75 per cent a year.

Yet the bullion pushers forge ahead. After 20 years of being wrong when gold was stuck around $350 an ounce through the 1980s and 1990s, they are nothing if not persistent.

The key to their argument is the man they call “Helicopter” Ben Bernanke, the head of the U.S. Federal Reserve, and all the cash he and his peers at central banks around the world are creating to revive growth in the world economy. At some point, that money will sluice out of the banks into the economy, inflation will be upon us like a tsunami, and gold will be treasured as a store of value.

The proof, as gold bugs see it, is in the price of gold. It rises when inflation is a risk, so inflation must be a risk. Get it?

The problem is one of simple math: Those helicopter-loads of cash, even if they were making it into the real economy, are not nearly big enough to fill the Sudbury-size crater in the global economy created by the crash in the world’s housing and stock markets.

The Fed balance sheet, a focal point of inflation hawks, has expanded by about $1.3-trillion as Mr. Bernanke pumped cash into the lending system. Added to that, the Obama administration has come up with close to $1-trillion in stimulus, the biggest of a global group of packages totalling about $5-trillion.

However, the decline in assets is much bigger. The value of global stocks has fallen by more $17-trillion since the markets peaked in 2007 and U.S. housing is down more than $4-trillion since topping out in 2006.

On top of that, the financial institutions that are supposed to push that cash into the economy aren’t doing it.

U.S. bank lending, by some estimates, is contracting at the fastest rate since the Depression. Bank credit in August in the U.S. shrank at an “epic” pace equal to 9 per cent a year, according to David Rosenberg, chief strategist at Gluskin Sheff.

The result is a real money supply that’s actually shrinking at the same time as the jobless rate is at a cyclical high and factories are idle.

Not surprisingly, executives scoff at the idea of raising prices any time soon, with one telling The Globe and Mail not so long ago that it would be “very cavalier” to even try. That utter lack of pricing power is clearly reflected in Friday’s numbers showing that underlying inflation is still slowing on both sides of the border.

To that, many gold bulls retort that central banks are going to miss the transition to hyperinflation when it comes, or be unwilling to fight it with higher interest rates because of political pressure from indebted governments.

That seems far-fetched. Central banks have become very good at keeping inflation anchored. In the 18 years since the Bank of Canada adopted the goal of keeping inflation centred between 1 and 3 per cent in Canada, consumer price increases have averaged a 2.1-per-cent pace. Not bad.

There will likely be plenty of warning before inflation takes hold, as capacity use creeps up and unemployment ebbs.

Those real facts go a long way to explaining why even though gold is at $1,000, inflation fears have yet to become mainstream, and discussion of exit strategies to pare back government stimulus programs before prices take off – talk that dominated the last big G20 meeting in April – has largely, and mercifully, fallen by the wayside.

Mercifully, because if the gold bulls and their view on inflation really held sway, the exit would already be on. Interest rates would already be rising and the world would be well on its way back into recession. The bugs should be careful what they wish for.

Inflation Now, says The New America Foundation

September 18, 2009 at 08:27 | Posted in Christopher Hayes, economics, Mencken, New America Foundation | Leave a comment

 

No, it’s not a joke. Some people, such as that abominable fool Christopher Hayes, seriously think that inflation is the solution to our current economic crisis. Who said Keynes was dead?

I’m with you, Mogambo Guru, I’m with you – we are so FREAKING DOOMED!

Can our policy makers really all be this wrong? Isn’t there anybody with even the tiniest little bit of sanity and economic common sense? Maybe the critics are wrong, and the mainstream is right?

Well, I for one have complete faith in the unlimited capacity of people to act stupidly. Don’t forget: the Soviet Union was run (into the ground) by a group of very smart and highly-educated people who simply happened to be very, very wrong about everything that mattered. What makes us think our current form of government is less likely to experience the same? Because in a democracy, competition will result in the victory of best ideas? Yes, Popper thought so, too – but Popper never understood the fundamental difference between politics and science.

Mencken, on the other hand, had figured it out a long time ago:

I have alluded somewhat vaguely to the merits of democracy. One of them is quite obvious: it is, perhaps, the most charming form of government ever devised by man. The reason is not far to seek. It is based upon propositions that are palpably not true and what is not true, as everyone knows, is always immensely more fascinating and satisfying to the vast majority of men than what is true. Truth has a harshness that alarms them, and an air of finality that collides with their incurable romanticism. They turn, in all the great emergencies of life, to the ancient promises, transparently false but immensely comforting, and of all those ancient promises there is none more comforting than the one to the effect that the lowly shall inherit the earth. It is at the bottom of the dominant religious system of the modern world, and it is at the bottom of the dominant political system. The latter, which is democracy, gives it an even higher credit and authority than the former, which is Christianity. More, democracy gives it a certain appearance of objective and demonstrable truth. The mob man, functioning as citizen, gets a feeling that he is really important to the world – that he is genuinely running things. Out of his maudlin herding after rogues and mountebanks there comes to him a sense of vast and mysterious power—which is what makes archbishops, police sergeants, the grand goblins of the Ku Klux and other such magnificoes happy. And out of it there comes, too, a conviction that he is somehow wise, that his views are taken seriously by his betters – which is what makes United States Senators, fortune tellers and Young Intellectuals happy. Finally, there comes out of it a glowing consciousness of a high duty triumphantly done which is what makes hangmen and husbands happy.

All these forms of happiness, of course, are illusory. They don’t last. The democrat, leaping into the air to flap his wings and praise God, is for ever coming down with a thump. The seeds of his disaster, as I have shown, lie in his own stupidity: he can never get rid of the naive delusion – so beautifully Christian – that happiness is something to be got by taking it away from the other fellow. But there are seeds, too, in the very nature of things: a promise, after all, is only a promise, even when it is supported by divine revelation, and the chances against its fulfillment may be put into a depressing mathematical formula. Here the irony that lies under all human aspiration shows itself: the quest for happiness, as always, brings only unhappiness in the end. But saying that is merely saying that the true charm of democracy is not for the democrat but for the spectator. That spectator, it seems to me, is favoured with a show of the first cut and calibre. Try to imagine anything more heroically absurd! What grotesque false pretenses! What a parade of obvious imbecilities! What a welter of fraud! But is fraud unamusing? Then I retire forthwith as a psychologist. The fraud of democracy, I contend, is more amusing than any other, more amusing even, and by miles, than the fraud of religion. Go into your praying-chamber and give sober thought to any of the more characteristic democratic inventions: say, Law Enforcement. Or to any of the typical democratic prophets: say, the late Archangel Bryan. If you don’t come out paled and palsied by mirth then you will not laugh on the Last Day itself, when Presbyterians step out of the grave like chicks from the egg, and wings blossom from their scapulae, and they leap into interstellar space with roars of joy.

I have spoken hitherto of the possibility that democracy may be a self-limiting disease, like measles. It is, perhaps, something more: it is self-devouring. One cannot observe it objectively without being impressed by its curious distrust of itself—its apparently ineradicable tendency to abandon its whole philosophy at the first sign of strain. I need not point to what happens invariably in democratic states when the national safety is menaced. All the great tribunes of democracy, on such occasions, convert themselves, by a process as simple as taking a deep breath, into despots of an almost fabulous ferocity. Lincoln, Roosevelt and Wilson come instantly to mind: Jackson and Cleveland are in the background, waiting to be recalled. Nor is this process confined to times of alarm and terror: it is going on day in and day out. Democracy always seems bent upon killing the thing it theoretically loves. I have rehearsed some of its operations against liberty, the very cornerstone of its political metaphysic. It not only wars upon the thing itself; it even wars upon mere academic advocacy of it. I offer the spectacle of Americans jailed for reading the Bill of Rights as perhaps the most gaudily humorous ever witnessed in the modern world. Try to imagine monarchy jailing subjects for maintaining the divine right of Kings! Or Christianity damning a believer for arguing that Jesus Christ was the Son of God! This last, perhaps, has been done: anything is possible in that direction. But under democracy the remotest and most fantastic possibility is a common-place of every day. All the axioms resolve themselves into thundering paradoxes, many amounting to downright contradictions in terms. The mob is competent to rule the rest of us—but it must be rigorously policed itself. There is a government, not of men, but of laws – but men are set upon benches to decide finally what the law is and may be. The highest function of the citizen is to serve the state – but the first assumption that meets him, when he essays to discharge it, is an assumption of his disingenuousness and dishonour. Is that assumption commonly sound? Then the farce only grows the more glorious.

I confess, for my part, that it greatly delights me. I enjoy democracy immensely. It is incomparably idiotic, and hence incomparably amusing. Does it exalt dunderheads, cowards, trimmers, frauds, cads? Then the pain of seeing them go up is balanced and obliterated by the joy of seeing them come down. Is it inordinately wasteful, extravagant, dishonest? Then so is every other form of government: all alike are enemies to laborious and virtuous men. Is rascality at the very heart of it? Well, we have borne that rascality since 1776, and continue to survive. In the long run, it may turn out that rascality is necessary to human government, and even to civilization itself – that civilization, at bottom, is nothing but a colossal swindle. I do not know: I report only that when the suckers are running well the spectacle is infinitely exhilarating. But I am, it may be, a somewhat malicious man: my sympathies, when it comes to suckers, tend to be coy. What I can’t make out is how any man can believe in democracy who feels for and with them, and is pained when they are debauched and made a show of. How can any man be a democrat who is sincerely a democrat?

The Federal Reserve on… The Federal Reserve

September 15, 2009 at 13:36 | Posted in Economic Theory, economics, Federal Reserve | Leave a comment

 

http://www.federalreserveeducation.org/fed101/fedtoday/FedTodayAll.pdf (check for yourself if you don’t believe it)

 

Page 29:

Myth:

When the Fed prints money for banks it increases the national debt.

[Nice Strawman, should have stuck to that…]

REALITY:

Federal Reserve Banks do not print money, they manage the inventory of the existing stock of
currency. Money is printed by the Bureau of Printing and Engraving, an agency of the U.S.
Treasury Department. Government debt is generated by government borrowing.The amount
of bor rowing, measured by the deficit, is not decided by the Fed.The government’s debt and
deficit are the result of the budgetary decisions of the Congress and President.

 

Ok, then…

Myth:

The Fed is not a good supervisor of banks because it allows banks to keep only a fraction of
their deposits on hand.

REALITY:

The fact that banks are required to keep on hand only a fraction of the funds deposited with
them is a function of the banking business. Banks bor row funds from their depositors (those
with savings) and in turn lend those funds to the banks’ borrowers (those in need of funds).
Banks make money by charging borrowers more for a loan (a higher percentage interest rate)
than is paid to depositors for use of their money. If banks did not lend out their available funds
after meeting their reserve requirements, depositors might have to pay banks to provide
safekeeping services for their money.
For the economy and banking system as a whole, the practice of keeping only a fraction of
deposits on hand has an important cumulative effect. Referred to as the fractional reserve
system, it permits the banking system to “create”money.

Bob Murphy’s Response to Cochrane (who responded to Krugman)

September 15, 2009 at 13:07 | Posted in Bubbles, economics, Financial Crisis, Krugman, Robert Murphy | Leave a comment
 

Here’s why I like Bob Murphy, and why it pains me to see him go off the deep end so often when it comes to non-economic issues.

Monday, September 14, 2009

==========
Cochrane Threatens Austrians More Than Krugman Ever Did
By Robert P. Murphy

Although some Austrian economists (e.g. Mario Rizzo) expressed disappointment with Chicago University economist John Cochrane’s response to Paul Krugman’s infamous NYT Magazine piece, for the most part the people on "my side" have high-fived Cochrane for kicking sand in Krugman’s face.
This is a very short-sighted view. Just because someone gets in a fight with someone who we can’t stand–and I’ve criticized Krugman enough to have credibility on that score–doesn’t mean we should endorse any old arguments. There was quite a bit in Cochrane’s response that should alarm an Austrian economist, and in fact his views are arguably more dangerous to the Austrian alternative than Krugman. After all, all Krugman did was ignore us. But Cochrane ignored us and defended himself from Krugman in a way that "proves" Austrian economics is a collection of second-rate ideas. I don’t see how any Austrian economist can overlook all of that, just because he likes Cochrane’s conclusions that "Keynesian economics is awful" and "Paul Krugman is a jerk," true those conclusions may be. In this brief essay I’ll quote from Cohrane and show how his ostensible attack on Krugman actually takes down Austrian economics as collateral damage.

Most of all, [Krugman’s article is] sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a stalwart that maybe continents don’t move after all, or that smoking isn’t that bad for you really.

I don’t need to dwell on why Austrians should dismiss this opening salvo from Cochrane. This is the incredibly naive Whig theory of history. Cochrane could just as easily blow up any Austrian who thinks Human Action contains better economic analysis than the latest edition of Mankiw.
(What’s really ironic is that later in the essay, Cochrane says, "Occasionally sciences, especially social sciences, do take a wrong turn for a decade or two. I thought Keynesian economics was such a wrong turn. So let’s take a quick look at the ideas." So I’m not sure what to make of his opening paragraph. It seems Cochrane finds it "sad" that today’s Keynesians would dare to use arguments that Cochrane had deployed against yesterday’s Keynesians. A bit like the US government saying other countries shouldn’t have nuclear weapons, because after all some evil regime might use them against civilians one day.)
After lamenting the sad day when someone would dare to criticize Nobel laureates (isn’t Krugman a Nobel laureate?), Cochrane then says:

And that’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and “spend like a drunken sailor” are pretty superficial compared to all the fascinating things economists are writing about it these days.

What is Cochrane talking about? Krugman has written boatloads on what could have prevented the current financial crisis. For example, Krugman has pointed to various types of (what he labels) "deregulation." And as for the "drunken sailor" wisecrack, Krugman has put up formal models showing his views on aggregate demand and so forth.
Don’t get me wrong–I think Krugman is completely wrong (bordering on "insane" if that word is to have any meaning in reference to academics) in his views. But Cochrane’s rude dismissal of Krugman is just as much a lie as anything Krugman said about Cochrane. So again, for those Austrians who can’t stand what a dishonest thug Krugman is, you can’t very well think Cochrane did a great job taking him down. Unless it’s OK to lie for free markets (or in Cochrane’s case, significantly-less-socialized markets).
But the next paragraph is what really made me lose it:

It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer.

How in the world can the proponents of the EMH continue to justify their belief in the EMH…by appeal to the EMH?!! I occasionally stop the radio channel seek on Christian stations, and it’s hilarious during the short spots when they say things like, "A lot of people wonder how we can trust the Bible. But they need to read First Corinthians 5 where Paul writes…" (I am a Christian, by the way.)
There were plenty of economists (especially the Austrians–see e.g. Mark Thornton back in 2004) who "called" the housing boom. I don’t know what exactly the EMH theorists make of this. Yes, you could argue that at any given time, you will have no shortage of economists (all of whom are ignorant of the EMH and the limits of their knowledge) shouting out all kinds of predictions, and then simple statistics show that some of them will be "proven right."
But on the other hand, what more could opponents of the EMH do than to point to the recent housing bubble?! When Cochrane says the EMH is the "best tested proposition in the social sciences," it is only because it is a tautology. Really, think about it: Do we need to go test the proposition that "if someone is making a bunch of money doing an activity, then other people will copy him and whittle away his returns, unless there is some reason that they don’t"? (I’m exaggerating slightly, but when you read the actual empirical defenses of the EMH against its typical objections, you realize that it is a way of viewing the world. It is not a conclusion derived from the facts; it is a way of organizing the facts.)

Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. This is a canard that Paul knows better than to pass on, no matter how rhetorically convenient….Data from the great depression has been included in practically all the tests. In fact, the great “equity premium puzzle” is that if efficient, stock markets don’t seem risky enough to deter more people from investing! Gene Fama’s PhD thesis was on “fat tails” in stock returns.

I am a bit out of my league here, but I still suspect that Cochrane is once again defining away his opponents. Again I ask: What would the world look like if the EMH were false? Wouldn’t there be giant bubbles, during which many participants knew (or were quite sure) there was a bubble in progress–and invested and profited accordingly? (Of course that happened; don’t let Cochrane fool you into thinking otherwise with his "best tested proposition in the social sciences" bluff.)
As far as the equity premium puzzle, proponents of Mandelbrot’s "non-Gaussian" approach to financial markets say that it is the standard neoclassical use of a Gaussian distribution (calibrated with historical stock returns, yes including the Great Depression) that makes investors appear far too risk averse than we think they really are. What is happening is that the actual stock market is far more volatile than the calibrated models suggest. The housing bubble that just burst–as well as the 1987 crash–should have been "once-in-a-thousand-year events," according to the standard models that Krugman is attacking. (Of course I am making up that number. But the basic point is right.) That’s one of the main themes in Nassim Taleb’s work, that the value-at-risk and other risk measures used by Wall Street quants gave a false sense of security. I’m not accusing Cochrane of being ignorant of this fact, but at best he is throwing out a non sequitur to evade the very real problem that Krugman pointed out.
Oh wait, it turns out Cochrane isn’t so sure about the usefulness of the EMH after all:

It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time, and is sharply lower in bad economic times. As Gene Fama pointed out in 1972, these are observationally equivalent explanations at the superficial level of staring at prices and writing magazine articles and opeds. Unless you are willing to elaborate your theory to the point that it can quantitatively describe how much and when risk premiums, or waves of “optimism” and “pessimism,” can vary, you know nothing. No theory is particularly good at that right now. Crying “bubble” is no good unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row.

There you have it, folks. After telling us that Krugman is attacking the best tested proposition in the social sciences, Cochrane falls back on, "Yeah we don’t know anything, but neither do you. Until you can predict when a bubble will burst, stop complaining about my theory that predicts bubbles are impossible." (Again I am slightly exaggerating to make the point–but not much.)

In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more. They will buy the new government debt and leave all spending decisions unaltered. Is this theorem true? It’s a logical connection from a set of “if” to a set of “therefore.” Not even Paul can object to the connection.

Nope. Again I’m a bit out of my league here, but I am pretty sure that Cochrane is completely full of it on this point. Ricardian equivalence says that if the government finances a tax cut by running a higher deficit, while holding total government spending constant, that this won’t change aggregate consumption, GDP, private sector investment, or interest rates. Rational taxpayers realize they will face higher tax bills in the future, and so they put aside the tax refund to roll over at interest and pay the bills. Thus, what the government gives back with the left hand, it borrows out of the private sector with the right. (Interest rates don’t change because the extra saving by the private sector cancels out the extra borrowing by the government.)
Now there are all sorts of caveats in my argument above; it matters if it’s a lump-sum tax cut versus a reduction in marginal tax rates, it matters if the current generation of workers will die before the higher taxes hit, etc. That’s the tweaking of assumptions that Cochrane is referring to.
However, as Brad DeLong and Krugman have pointed out many times (in justified exasperation) on their blogs, Ricardian equivalence does not say that an increase in government deficit spending will be perfectly offset by the private sector. Think about it: The government decides to borrow and spend $100 billion more. Now for Ricardian "equivalence" to kick in, it means that the private sector must reduce its current consumption by $100 billion and increase savings by that amount, at the same interest rate. [UPDATE: I am assuming that the extra $100 billion in government spending is classified as "consumption" and not "investment."] In other words, faced with a higher future tax bill, the present generation decides to deal with it by slashing current consumption by $100 billion, while maintaining all future levels of consumption at their pre-announcement levels. Well why the heck would they do that? It would make a lot more sense to assume that consumers originally try to cushion the blow by reducing consumption across all future time periods. Then interest rates have to rise in the present in order to force consumers to make present consumption (and private-sector investment) channel an extra $100 billion into the government’s coffers. So you can see, there is nothing "equivalent" going on here at all. Don’t misunderstand–Krugman and DeLong are totally wrong in my opinion for thinking it’s a good idea to boost "aggregate demand" (measured in nominal terms) by having the government borrow money and spend it. But Cochrane is totally wrong for invoking Ricardian equivalence to show that, to a first approximation, such a maneuver wouldn’t boost aggregate demand in the present. (This is what Krugman is complaining about in the 7th paragraph here.)
Uh oh, now the Austrian reader isn’t sure he can continue down this path with me. Suuuure, I didn’t actually endorse deficit spending, but I suspiciously agreed with Krugman and DeLong when they claimed to defang one of the most popular Chicago School critiques of it (namely, that private sector reactions perfectly offset it in a frictionless world). Well maybe I can win you back with this final quotation from Cochrane:

Third, and most surprising, is Krugman’s Luddite attack on mathematics; “economists as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” Models are “gussied up with fancy equations.”…
Again, what is the alternative? Does Krugman really think we can make progress on his – and my – agenda for economic and financial research — understanding frictions, imperfect markets, complex human behavior, institutional rigidities – by reverting to a literary style of exposition, and abandoning the attempt to compare theories quantitatively against data? Against the worldwide tide of quantification in all fields of human endeavor (read “Moneyball”) is there any real hope that this will work in economics?
No, the problem is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose. The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick. Frictions are just bloody hard with the mathematical tools we have now.

I rest my case. Paul Krugman is a jerk and offers horrible policy advice. But John Cochrane’s response is no friend-of-the-court brief in the Austrian critique of Keynesianism.
Robert P. Murphy holds a Ph.D. in economics from New York University. He is the author of The Politically Incorrect Guide to the Great Depression and the New Deal (Regnery, 2009), and is the editor of the blog Free Advice.

How did Paul Krugman get it so Wrong?

September 12, 2009 at 12:34 | Posted in Economic Crisis, economics, Keynes, Krugman, stimulus | Leave a comment

 

John H. Cochrane[1]

Many friends and colleagues have asked me what I think of Paul Krugman’s New York Times Magazine article, “How did Economists get it so wrong?”

Most of all, it’s sad. Imagine this weren’t economics for a moment. Imagine this were a respected scientist turned popular writer, who says, most basically, that everything everyone has done in his field since the mid 1960s is a complete waste of time. Everything that fills its academic journals, is taught in its PhD programs, presented at its conferences, summarized in its graduate textbooks, and rewarded with the accolades a profession can bestow, including multiple Nobel prizes, is totally wrong. Instead, he calls for a return to the eternal verities of a rather convoluted book written in the 1930s, as taught to our author in his undergraduate introductory courses. If a scientist, he might be a global-warming skeptic, an AIDS-HIV disbeliever, a creationist, a stalwart that maybe continents don’t move after all.

It gets worse. Krugman hints at dark conspiracies, claiming “dissenters are marginalized.” Most of the article is just a calumnious personal attack on an ever-growing enemies list, which now includes “new Keyenesians” such as Olivier Blanchard and Greg Mankiw. Rather than source professional writing, he plays gotcha with out-of-context second-hand quotes from media interviews. He makes stuff up, boldly putting words in people’s mouths that run contrary to their written opinions. Even this isn’t enough: he adds cartoons to try to make his “enemies” look silly, and puts them in false and embarrassing situations. He accuses us of adopting ideas for pay, selling out for “sabbaticals at the Hoover institution” and fat “Wall street paychecks.” It sounds a bit paranoid.

It’s annoying to the victims, but we’re big boys and girls. It’s a disservice to New York Times readers. They depend on Krugman to read real academic literature and digest it, and they get this attack instead. And it’s ineffective. Any astute reader knows that personal attacks and innuendo mean the author has run out of ideas.

That’s the biggest and saddest news of this piece: Paul Krugman has no interesting ideas whatsoever about what caused our current financial and economic problems, what policies might have prevented it, or what might help us in the future, and he has no contact with people who do. “Irrationality” and advice to spend like a drunken sailor are pretty superficial compared to all the fascinating things economists are writing about it these days.

How sad.

That’s what I think, but I don’t expect you the reader to be convinced by my opinion or my reference to professional consensus. Maybe he is right. Occasionally sciences, especially social sciences, do take a wrong turn for a decade or two. I thought Keynesian economics was such a wrong turn. So let’s take a quick look at the ideas.

Krugman’s attack has two goals. First, he thinks financial markets are “inefficient,” fundamentally due to “irrational” investors, and thus prey to excessive volatility which needs government control. Second, he likes the huge “fiscal stimulus” provided by multi-trillion dollar deficits.

Efficiency.

It’s fun to say we didn’t see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going – neither benevolent government bureaucrats, nor crafty hedge-fund managers, nor ivory-tower academics. This is probably the best-tested proposition in all the social sciences. Krugman knows this, so all he can do is huff and puff about his dislike for a theory whose central prediction is that nobody can be a reliable soothsayer.

Krugman writes as if the volatility of stock prices alone disproves market efficiency, and efficient marketers just ignored it all these years. This is a canard that Paul knows better than to pass on, no matter how rhetorically convenient. (I can overlook his mixing up the CAPM and Black-Scholes model, but not this.) There is nothing about “efficiency” that promises “stability.” “Stable” growth would in fact be a major violation of efficiency. Efficient markets did not need to wait for “the memory of 1929 … gradually receding,” nor did we fail to read the newspapers in 1987. Data from the great depression has been included in practically all the tests. In fact, the great “equity premium puzzle” is that if efficient, stock markets don’t seem risky enough to deter more people from investing! Gene Fama’s PhD thesis was on “fat tails” in stock returns.

It is true and very well documented that asset prices move more than reasonable expectations of future cashflows. This might be because people are prey to bursts of irrational optimism and pessimism. It might also be because people’s willingness to take on risk varies over time, and is lower in bad economic times. As Gene Fama pointed out in 1970, these are observationally equivalent explanations. Unless you are willing to elaborate your theory to the point that it can quantitatively describe how much and when risk premiums, or waves of “optimism” and “pessimism,” can vary, you know nothing. No theory is particularly good at that right now. Crying “bubble” is empty unless you have an operational procedure for identifying bubbles, distinguishing them from rationally low risk premiums, and not crying wolf too many years in a row.

But this difficulty is no surprise. It’s the central prediction of free-market economics, as crystallized by Hayek, that no academic, bureaucrat or regulator will ever be able to fully explain market price movements. Nobody knows what “fundamental” value is. If anyone could tell what the price of tomatoes should be, let alone the price of Microsoft stock, communism would have worked.

More deeply, the economist’s job is not to “explain” market fluctuations after the fact, to give a pleasant story on the evening news about why markets went up or down. Markets up? “A wave of positive sentiment.” Markets went down? “Irrational pessimism.” ( “The risk premium must have increased” is just as empty.) Our ancestors could do that. Really, is that an improvement on “Zeus had a fight with Apollo?” Good serious behavioral economists know this, and they are circumspect in their explanatory claims so far.

But this argument takes us away from the main point. The case for free markets never was that markets are perfect. The case for free markets is that government control of markets, especially asset markets, has always been much worse.

Krugman at bottom is arguing that the government should massively intervene in financial markets, and take charge of the allocation of capital. He can’t quite come out and say this, but he does say “Keynes considered it a very bad idea to let such markets…dictate important business decisions,” and “finance economists believed that we should put the capital development of the nation in the hands of what Keynes had called a `casino.’” Well, if markets can’t be trusted to allocate capital, we don’t have to connect too many dots to imagine who Paul has in mind.

To reach this conclusion, you need evidence, experience, or any realistic hope that the alternative will be better. Remember, the SEC couldn’t even find Bernie Madoff when he was handed to them on a silver platter. Think of the great job Fannie, Freddie, and Congress did in the mortgage market. Is this system going to regulate Citigroup, guide financial markets to the right price, replace the stock market, and tell our society which new products are worth investment? As David Wessel’s excellent In Fed We Trust makes perfectly clear, government regulators failed just as abysmally as private investors and economists to see the storm coming. And not from any lack of smarts.

In fact, the behavioral view gives us a new and stronger argument against regulation and control. Regulators are just as human and irrational as market participants. If bankers are, in Krugman’s words, “idiots,” then so must be the typical treasury secretary, fed chairman, and regulatory staff. They act alone or in committees, where behavioral biases are much better documented than in market settings. They are still easily captured by industries, and face politically distorted incentives.

Careful behavioralists know this, and do not quickly run from “the market got it wrong” to “the government can put it all right.” Even my most behavioral colleagues Richard Thaler and Cass Sunstein in their book “Nudge” go only so far as a light libertarian paternalism, suggesting good default options on our 401(k) accounts. (And even here they’re not very clear on how the Federal Nudging Agency is going to steer clear of industry capture.) They don’t even think of jumping from irrational markets, which they believe in deeply, to Federal control of stock and house prices and allocation of capital.

Stimulus

Most of all, Krugman likes fiscal stimulus. In this quest, he accuses us and the rest of the economics profession of “mistaking beauty for truth.” He’s not clear on what the “beauty” is that we all fell in love with, and why one should shun it, for good reason. The first siren of beauty is simple logical consistency. Paul’s Keynesian economics requires that people make logically inconsistent plans to consume more, invest more, and pay more taxes with the same income. The second siren is plausible assumptions about how people behave. Keynesian economics requires that the government is able to systematically fool people again and again. It presumes that people don’t think about the future in making decisions today. Logical consistency and plausible foundations are indeed “beautiful” but to me they are also basic preconditions for “truth.”

In economics, stimulus spending ran aground on Robert Barro’s Ricardian equivalence theorem. This theorem says that debt-financed spending can’t have any effect because people, seeing the higher future taxes that must pay off the debt, will simply save more. They will buy the new government debt and leave all spending decisions unaltered. Is this theorem true? It’s a logical connection from a set of “if” to a set of “therefore.” Not even Paul can object to the connection.

Therefore, we have to examine the “ifs.” And those ifs are, as usual, obviously not true. For example, the theorem presumes lump-sum taxes, not proportional income taxes. Alas, when you take this into account we are all made poorer by deficit spending, so the multiplier is most likely negative. The theorem (like most Keynesian economics) ignores the composition of output; but surely spending money on roads rather than cars can affect the overall level.

Economists have spent a generation tossing and turning the Ricardian equivalence theorem, and assessing the likely effects of fiscal stimulus in its light, generalizing the “ifs” and figuring out the likely “therefores.” This is exactly the right way to do things. The impact of Ricardian equivalence is not that this simple abstract benchmark is literally true. The impact is that in its wake, if you want to understand the effects of government spending, you have to specify why it is false. Doing so does not lead you anywhere near old-fashioned Keynesian economics. It leads you to consider distorting taxes, how much people care about their children, how many people would like to borrow more to finance today’s consumption and so on. And when you find “market failures” that might justify a multiplier, optimal-policy analysis suggests fixing the market failures, not their exploitation by fiscal multiplier. Most “New Keynesian” analyses that add frictions don’t produce big multipliers.

This is how real thinking about stimulus actually proceeds. Nobody ever “asserted that an increase in government spending cannot, under any circumstances, increase employment.” This is unsupportable by any serious review of professional writings, and Krugman knows it. (My own are perfectly clear on lots of possibilities for an answer that is not zero.) But thinking through this sort of thing and explaining it is much harder than just tarring your enemies with out-of-context quotes, ethical innuendo, or silly cartoons.

In fact, I propose that Krugman himself doesn’t really believe the Keynesian logic for that stimulus. I doubt he would follow that logic to its inevitable conclusions. Stimulus must have some other attraction to him.

If you believe the Keynesian argument for stimulus, you should think Bernie Madoff is a hero. He took money from people who were saving it, and gave it to people who most assuredly were going to spend it. Each dollar so transferred, in Krugman’s world, generates an additional dollar and a half of national income. The analogy is even closer. Madoff didn’t just take money from his savers, he essentially borrowed it from them, giving them phony accounts with promises of great profits to come. This looks a lot like government debt.

If you believe the Keynesian argument for stimulus, you don’t care how the money is spent. All this puffery about “infrastructure,” monitoring, wise investment, jobs “created” and so on is pointless. Keynes thought the government should pay people to dig ditches and fill them up.

If you believe in Keynesian stimulus, you don’t even care if the government spending money is stolen. Actually, that would be better. Thieves have notoriously high propensities to consume.

The crash.

Krugman’s article is supposedly about how the crash and recession changed our thinking, and what economics has to say about it. The most amazing news in the whole article is that Paul Krugman has absolutely no idea about what caused the crash, what policies might have prevented it, and what policies we should adopt going forward. He seems completely unaware of the large body of work by economists who actually do know something about the banking and financial system, and have been thinking about it productively for a generation.

Here’s all he has to say: “Irrationality” caused markets to go up and then down. “Spending” then declined, for unclear reasons, possibly “irrational” as well. The sum total of his policy recommendations is for the Federal Government to spend like a drunken sailor after the fact.

Paul, there was a financial crisis, a classic near-run on banks. The centerpiece of our crash was not the relatively free stock or real estate markets, it was the highly regulated commercial banks. A generation of economists has thought really hard about these kinds of events. Look up Diamond, Rajan, Gorton, Kashyap, Stein, and so on. They’ve thought about why there is so much short term debt, why banks run, how deposit insurance and credit guarantees help, and how they give incentives for excessive risk taking.

If we want to think about events and policies, this seems like more than a minor detail. The hard and central policy debate over the last year was how to manage this financial crisis. Now it is how to set up the incentives of banks and other financial institutions so this mess doesn’t happen again. There’s lots of good and subtle economics here that New York Times readers might like to know about. What does Krugman have to say? Zero.

Krugman doesn’t even have anything to say about the Fed. Ben Bernanke did a lot more last year than set the funds rate to zero and then go off on vacation and wait for fiscal policy to do its magic. Leaving aside the string of bailouts, the Fed started term lending to securities dealers. Then, rather than buy treasuries in exchange for reserves, it essentially sold treasuries in exchange for private debt. Though the funds rate was near zero, the Fed noticed huge commercial paper and securitized debt spreads, and intervened in those markets. There is no “the” interest rate anymore, the Fed is attempting to manage them all. Recently the Fed has started buying massive quantities of mortgage-backed securities and long-term treasury debt.

Monetary policy now has little to do with “money” vs. “bonds” with all the latter lumped together. Monetary policy has become wide-ranging financial policy. Does any of this work? What are the dangers? Can the Fed stay independent in this new role? These are the questions of our time. What does Krugman have to say? Nothing.

Krugman is trying to say that a cabal of obvious crackpots bedazzled all of macroeconomics with the beauty of their mathematics, to the point of inducing policy paralysis. Alas, that won’t stick. The sad fact is that few in Washington pay the slightest attention to modern macroeconomic research, in particular anything with a serious intertemporal dimension. Paul’s simple Keynesianism has dominated policy analysis for decades and continues to do so. From the CEA to the Fed to the OMB and CBO, everyone just adds up consumer, investment and government “demand” to forecast output and uses simple Phillips curves to think about inflation. If a failure of ideas caused bad policy, it’s a simpleminded Keynesianism that failed.

The future of economics.

How should economics change? Krugman argues for three incompatible changes.

First, he argues for a future of economics that “recognizes flaws and frictions,” and incorporates alternative assumptions about behavior, especially towards risk-taking. To which I say, “Hello, Paul, where have you been for the last 30 years?” Macroeconomists have not spent 30 years admiring the eternal verities of Kydland and Prescott’s 1982 paper. Pretty much all we have been doing for 30 years is introducing flaws, frictions and new behaviors, especially new models of attitudes to risk, and comparing the resulting models, quantitatively, to data. The long literature on financial crises and banking which Krugman does not mention has also been doing exactly the same.

Second, Krugman argues that “a more or less Keynesian view is the only plausible game in town,” and “Keynesian economics remains the best framework we have for making sense of recessions and depressions.” One thing is pretty clear by now, that when economics incorporates flaws and frictions, the result will not be to rehabilitate an 80-year-old book. As Paul bemoans, the “new Keynesians” who did just what he asks, putting Keynes inspired price-stickiness into logically coherent models, ended up with something that looked a lot more like monetarism. (Actually, though this is the consensus, my own work finds that new-Keynesian economics ended up with something much different and more radical than monetarism.) A science that moves forward almost never ends up back where it started. Einstein revises Newton, but does not send you back to Aristotle. At best you can play the fun game of hunting for inspirational quotes, but that doesn’t mean that you could have known the same thing by just reading Keynes once more.

Third, and most surprising, is Krugman’s Luddite attack on mathematics; “economists as a group, mistook beauty, clad in impressive-looking mathematics, for truth.” Models are “gussied up with fancy equations.” I’m old enough to remember when Krugman was young, working out the interactions of game theory and increasing returns in international trade for which he won the Nobel Prize, and the old guard tut-tutted “nice recreational mathematics, but not real-world at all.” How quickly time passes.

Again, what is the alternative? Does Krugman really think we can make progress on his – and my – agenda for economic and financial research — understanding frictions, imperfect markets, complex human behavior, institutional rigidities – by reverting to a literary style of exposition, and abandoning the attempt to compare theories quantitatively against data? Against the worldwide tide of quantification in all fields of human endeavor (read “Moneyball”) is there any real hope that this will work in economics?

No, the problem is that we don’t have enough math. Math in economics serves to keep the logic straight, to make sure that the “then” really does follow the “if,” which it so frequently does not if you just write prose. The challenge is how hard it is to write down explicit artificial economies with these ingredients, actually solve them, in order to see what makes them tick. Frictions are just bloody hard with the mathematical tools we have now.

The insults.

The level of personal attack in this article, and fudging of the facts to achieve it, is simply amazing.

As one little example (ok, I’m a bit sensitive), take my quotation about carpenters in Nevada. I didn’t write this. It’s a quote, taken out of context, from a bloomberg.com article written by a reporter who I spent about 10 hours with patiently trying to explain some basics. (It’s the last time I’ll do that!) I was trying to explain how sectoral shifts contribute to unemployment. Krugman follows it by a lie — I never asserted that “it take mass unemployment across the whole nation to get carpenters to move out of Nevada.” You can’t even dredge up a quote for that monstrosity.

What’s the point? I don’t think Paul disagrees that sectoral shifts result in some unemployment, so the quote actually makes sense as economics. The only point is to make me, personally, seem heartless — a pure, personal, calumnious attack, having nothing to do with economics.

Bob Lucas has written extensively on Keynesian and monetarist economics, sensibly and even-handedly. Krugman chooses to quote a joke, made back in 1980 at a lunch talk to some business school alumni. Really, this is on the level of the picture of Barack Obama with Bill Ayres that Sean Hannity likes to show on Fox News.

It goes on. Krugman asserts that I and others “believe” “that an increase in government spending cannot, under any circumstances, increase employment,” or that we “argued that price fluctuations and shocks to demand actually had nothing to do with the business cycle.” These are just gross distortions, unsupported by any documentation, let alone professional writing. And Krugman knows better. All economic models are simplified to exhibit one point; we all understand the real world is more complicated; and his job is supposed to be to explain that to lay readers. It would be no different than if someone were to look up Paul’s early work which assumed away transport costs and claim “Paul Krugman believes ocean shipping is free, how stupid” in the Wall Street Journal.

The idea that any of us do what we do because we’re paid off by fancy Wall Street salaries or cushy sabbaticals at Hoover is just ridiculous. (If Krugman knew anything about hedge funds he’d know that believing in efficient markets disqualifies you for employment. Nobody wants a guy who thinks you can’t make any money trading!) Given Krugman’s speaking fees, it’s a surprising first stone for him to cast.

Apparently, salacious prose, innuendo, calumny, and selective quotation from media aren’t enough: Krugman added cartoons to try to make opponents look silly. The Lucas-Blanchard-Bernanke conspiratorial cocktail party celebrating the end of recessions is a silly fiction. So is their despondent gloom on reading “recession” in the paper. Nobody at a conference looks like Dr. Pangloss with wild hair and a suit from the 1800s. (OK, Randy Wright has the hair, but not the suit.) Keynes did not reappear at the NBER to be booed as an “outsider.” Why are you allowed to make things up in pictures that wouldn’t pass even the Times’ weak fact-checking in words?

Well, perhaps we got off easy. This all was mild compared to Krugman’s vicious obituary of Milton Friedman in the New York Review of Books. But most of all, Paul isn’t doing his job. He’s supposed to read, explain, and criticize things economists write, and preferably real professional writing, not interviews, opeds and blog posts. At a minimum, this leads to the unavoidable conclusion that Krugman isn’t reading real economics anymore.

How did Krugman get it so wrong?

So what is Krugman up to? Why become a denier, a skeptic, an apologist for 70 year old ideas, replete with well-known logical fallacies, a pariah? Why publish an essentially personal attack on an ever-growing enemies list that now includes practically every professional economist? Why publish an incoherent vision for the future of economics?

The only explanation that makes sense to me is that Krugman isn’t trying to be an economist, he is trying to be a partisan, political opinion writer. This is not an insult. I read George Will, Charles Krauthnammer and Frank Rich with equal pleasure even when I disagree with them. Krugman wants to be Rush Limbaugh of the Left. I still want to be Milton Friedman, but each is a worthy calling.

Alas, to Krugman, as to far too many ex-economists in partisan debates, economics is not a quest for understanding. It is a set of debating points to argue for policies that one has adopted for partisan political purposes. “Stimulus” is just marketing to sell Congressmen and voters on a package of government spending priorities that you want for political reasons. It’s not a proposition to be explained, understood, taken seriously to its logical limits, or reflective of market failures that should be addressed directly.

Why argue for a nonsensical future for economics? Well, again, if you don’t regard economics as a science, a discipline that ought to result in quantitative matches to data, a discipline that requires crystal-clear logical connections between the “if” and the “then,” if the point of economics is merely to provide marketing and propaganda for politically-motivated policy, then his writing does make sense. It makes sense to appeal to some future economics – not yet worked out, even verbally – to disdain quantification and comparison to data, and to appeal to the authority of ancient books as interpreted you, their lone remaining apostle.

Most of all, this is the only reason I can come up with to understand why Krugman wants to write personal attacks on those who disagree with him. I like it when people disagree with me, and take time to read my work and criticize it. At worst I learn how to position it better. At best, I discover I was wrong and learn something. I send a polite thank you note.

Krugman wants people to swallow his arguments whole from his authority, without demanding logic, or evidence. Those who disagree with him, alas, are pretty smart and have pretty good arguments if you bother to read them. So, he tries to discredit them with personal attacks.

This is the political sphere, not the intellectual one. Don’t argue with them, swift-boat them. Find some embarrassing quote from an old interview. Well, good luck, Paul. Let’s just not pretend this has anything to do with economics, or actual truth about how the world works or could be made a better place.


[1] University of Chicago Booth School of Business. Many colleagues and friends helped, but I don’t want to name them for obvious reasons. Krugman fans: Please don’t bother emailing me to tell me what a jerk I am. I will update this occasionally, so please pass on the link http://faculty.chicagobooth.edu/john.cochrane/research/Papers/#news not the document.

A Short History of Government Bailouts

July 7, 2009 at 12:22 | Posted in bail out, economics | Leave a comment

I would think that ProPublica can hardly be accused of being a nest of crazy economists on the Vienna Express to nowhere, so I thought their little history of government bailouts would be of some interest.

 

History of U.S. Gov’t Bailouts

Updated: April 15, 2009 12:02 pm EDT

With the flurry of recent government bailouts, we decided to try to put them in perspective. The circles below represent the size of U.S. government bailout, calculated in 2008 dollars. They are also in chronological order. Our chart focuses on U.S. government bailouts of U.S. corporations (and one city). We have not included instances where the U.S. government aided other nations.

Check out how the Treasury did in the end after initial government outlays. Also, check out our ultimate bailout guide. We’re tracking every taxpayer dollar, every recipient and every program in the current financial crisis. All searchable – and translated into English.

Want to receive an e-mail alert when we publish public data and documents on ProPublica? Sign up here.

2008 – Bear Stearns – $30 billion
Click bubble for more info

Industry/Corporation
Year
What Happened
Cost in 2008 U.S. Dollars


Penn Central Railroad
1970
In May 1970, Penn Central Railroad, then on the verge of bankruptcy, appealed to the Federal Reserve for aid on the grounds that it provided crucial national defense transportation services. The Nixon administration and the Federal Reserve supported providing financial assistance to Penn Central, but Congress refused to adopt the measure. Penn Central declared bankruptcy on June 21, 1970, which freed the corporation from its commercial paper obligations. To counteract the devastating ripple effects to the money market, the Federal Reserve Board told commercial banks it would provide the reserves needed to allow them to meet the credit needs of their customers. (What happened after the bailout?)
$3.2 billion


Lockheed
1971
In August 1971, Congress passed the Emergency Loan Guarantee Act, which could provide funds to any major business enterprise in crisis. Lockheed was the first recipient. Its failure would have meant significant job loss in California, a loss to the GNP and an impact on national defense. (What happened after the bailout?)
$1.4 billion


Franklin National Bank
1974
In the first five months of 1974 the bank lost $63.6 million. The Federal Reserve stepped in with a loan of $1.75 billion. (What happened after the bailout?)
$7.8 billion


New York City
1975
During the 1970s, New York City became over-extended and entered a period of financial crisis. In 1975 President Ford signed the New York City Seasonal Financing Act, which released $2.3 billion in loans to the city. (What happened after the bailout?)
$9.4 billion


Chrysler
1980
In 1979 Chrysler suffered a loss of $1.1 billion. That year the corporation requested aid from the government. In 1980 the Chrysler Loan Guarantee Act was passed, which provided $1.5 billion in loans to rescue Chrysler from insolvency. In addition, the government’s aid was to be matched by U.S. and foreign banks. (What happened after the bailout?)
$4.0 billion


Continental Illinois National Bank and Trust Company
1984
Then the nation’s eighth largest bank, Continental Illinois had suffered significant losses after purchasing $1 billion in energy loans from the failed Penn Square Bank of Oklahoma. The FDIC and Federal Reserve devised a plan to rescue the bank that included replacing the bank’s top executives. (What happened after the bailout?)
$9.5 billion


Savings & Loan
1989
After the widespread failure of savings and loan institutions, President George H. W. Bush signed and Congress enacted the Financial Institutions Reform Recovery and Enforcement Act in 1989. (What happened after the bailout?)
$293.3 billion


Airline Industry
2001
The terrorist attacks of September 11 crippled an already financially troubled industry. To bail out the airlines, President Bush signed into law the Air Transportation Safety and Stabilization Act, which compensated airlines for the mandatory grounding of aircraft after the attacks. The act released $5 billion in compensation and an additional $10 billion in loan guarantees or other federal credit instruments. (What happened after the bailout?)
$18.6 billion


Bear Stearns
2008
JP Morgan Chase and the federal government bailed out Bear Stearns when the financial giant neared collapse. JP Morgan purchased Bear Stearns for $236 million; the Federal Reserve provided a $30 billion credit line to ensure the sale could move forward.
$30 billion


Fannie Mae / Freddie Mac
2008
On Sep. 7, 2008, Fannie and Freddie were essentially nationalized: placed under the conservatorship of the Federal Housing Finance Agency. Under the terms of the rescue, the Treasury has invested billions to cover the companies’ losses. Initially, Treasury Secretary Hank Paulson put a ceiling of $100 billion for investments in each company. In February, Tim Geithner raised it to $200 billion. The money was authorized by the Housing and Economic Recovery Act of 2008.
$400 billion


American International Group (A.I.G.)
2008
On four separate occasions, the government has offered aid to AIG to keep it from collapsing, rising from an initial $85 billion credit line from the Federal Reserve to a combined $180 billion effort between the Treasury ($70 billion) and Fed ($110 billion). ($40 billion of the Treasury’s commitment is also included in the TARP total.)
$180 billion


Auto Industry
2008
In late September 2008, Congress approved a more than $630 billion spending bill, which included a measure for $25 billion in loans to the auto industry. These low-interest loans are intended to aid the industry in its push to build more fuel-efficient, environmentally-friendly vehicles. The Detroit 3 — General Motors, Ford and Chrysler — will be the primary beneficiaries.
$25 billion


Troubled Asset Relief Program
2008
In October 2008, Congress passed the Emergency Economic Stabilization Act, which authorized the Treasury Department to spend $700 billion to combat the financial crisis. Treasury has been doling out the money via an alphabet soup of different programs. Here’s our running tally of companies getting TARP funds.
$700 billion


Citigroup
2008
Citigroup received a $25 billion investment through the TARP in October and another $20 billion in November. (That $45 billion is also included in the TARP total.) Additional aid has come in the form of government guarantees to limit losses from a $301 billion pool of toxic assets. In addition to the Treasury’s $5 billion commitment, the FDIC has committed $10 billion and the Federal Reserve up to about $220 billion.
$280 billion


Bank of America
2009
Bank of America has received $45 billion through the TARP, which includes $10 billion originally meant for Merrill Lynch. (That $45 billion is also included in the TARP total.) In addition, the government has made guarantees to limit losses from a $118 billion pool of troubled assets. In addition to the Treasury’s $7.5 billion commitment, the FDIC has committed $2.5 billion and the Federal Reserve up to $87.2 billion.
$142.2 billion

====

Now for the real fun, check out their summary of ‘results":

What Happens After a U.S. Gov’t Bailout?

September 25, 2008 4:56 p.m. EDT

With the flurry of recent bailouts, we decided to look beyond initial government outlays to see how the Treasury did in the end. The summaries that follow leave final judgment to you, in part because it’s difficult to nail down exact profit or loss. Moreover, no one can say what might have happened without government intervention. Our chart focuses on U.S. government bailouts of U.S. corporations. We have not included United States government aiding other nations. Figures reflect 2008 constant dollars.

To read a history of U.S. government bailouts, click here or on the year of each bailout.

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Industry/Corporation
Start of Bailout
After the Bailout, What Happened?

Penn Central Railroad
1970
In 1971, the government provided $676.3 million in loan guarantees (What’s this?A statutory commitment by the federal government to pay part or all of a loan’s principal and interest to a lender or the holder of a security in case the borrower defaults. The Federal Credit Reform Act of 1990 requires that the cost of guaranteed loans be included in the computation of budget authority and outlays. The congressional budget resolution includes loan guarantee totals. (Parliamentary Outreach Program, U.S. House of Representatives)). In 1976, the federal government consolidated the still struggling Penn Central with five other railroad companies that were also failing to form Consolidated Rail, or Conrail. The government spent $19.7 billion, including roughly $7.7 billion for the initial investment, to keep Conrail operating. By 1981, Conrail began to earn a profit. The government sold Conrail in 1987 for $3.1 billion. In addition to the sale price, the Treasury received a $579 million dividend from Conrail.

Lockheed
1971
By 1977, Lockheed had paid off its loans, and its dependency on the federal loan guarantees came to an end. The government earned about $112.22 million in loan fees.

Franklin National Bank
1974
As the story behind Franklin National’s failure unfolded, evidence emerged of corruption and shady business practices among the bank’s executives — several were eventually convicted. With the need for further intervention apparent, the FDIC stepped in as receiver that same year and sold Franklin National’s104 branches and other assets to European American Bank. By 1981 the FDIC had sold Franklin assets worth about $5.1 billion. The agency was still owed another $185.3 million in interest.

New York City
1975
Until 1986, the government continued using loan guarantees and direct loans to support the fiscally-troubled city. All the loans, loan premiums and fees have since been repaid.

Chrysler
1980
By 1983, seven years earlier than the scheduled deadline, Chrysler had paid back its loan with the aid of the guarantees from the U.S. government. The corporation bought back the 14.4 million stock warrants (What’s this?)A security entitling the holder to buy a proportionate amount of stock at some specified future date at a specified price, usually one higher than current market. This "warrant" is then traded as a security, the price of which reflects the value of the underlying stock. Warrants are usually issued as a "sweetener" bundled with another class of security to enhance the marketability of the latter. Warrants are like call options, but with much longer time spans — sometimes years. (Washington Post) given to the government in exchange for the loan guarantee. Because Chrysler’s finances had improved and its stock had bounced back — it reported $1.7 billion in profits for the second quarter of 1984 — the government netted a profit of more than $660 million from its bailout investment.

Continental Illinois National Bank and Trust Company
1984
It took the FDIC seven years to completely divest itself of Continental Illinois — the bailout plan had given the government 80 percent ownership over the bank — through the gradual sale of its share holdings. By 1991, Continental Illinois had been returned to the private sector, but the FDIC had suffered a $1.8 billion loss. Three years later BankAmerica Corp. acquired the bank.

Savings & Loan
1989
The Financial Institutions Reform Recovery and Enforcement Act authorized $293.8 billion dollars to finance the folding of numerous failed S&Ls. The final tab for the bailout was roughly $220.32 billion. Of that total, taxpayers were responsible for about $178.56 billion; the private sector covered the rest.

Airline Industry
2001
The Chrysler and airline bailout plans had a commonality: stock warrants. A provision inserted into the ATSS Act, which allowed the Treasury to purchase stock at below-market prices from any airline receiving a loan guarantee, allowed the Treasury to earn money. Reports varied on the total net profit, ranging from $141.7 million to $327 million. The loan guarantee program suffered one loss of about $23.2 million when ATA Airlines filed for bankruptcy protection.

The U.S. National Deficit – 1979 to 2009

July 4, 2009 at 19:48 | Posted in economics | Leave a comment

Source

Bury your gold?

June 28, 2009 at 23:37 | Posted in economics, LeftJab Radio | Leave a comment

Ok, so here I am listening to LeftJabRadio.com on Sirius 137 – approximately 7:35pm on Sunday, June 28 – and you won’t believe what one of the commentators (one of either Mike Walsh and David Goodfriend) claimed to have been told by somebody high-up in the Obama administration:

Apparently, some unnamed billionaires are so afraid of what is going to happen in the next few months, they have been burrynig gold ignots in their back yard. Their fear – and that of the unnamed source in the Obama administration: by the end of the year, it’s economic amargeddon for the US of A.
No, it wasn’t Glen Beck saying this. Those two are your run-of-the-mill social-democrat Obama admirers.
Oh, and even LeftJab Radio is running ads for Goldline…
Great.

A Former IMF Functionary on the American Gangster Economy

June 26, 2009 at 02:28 | Posted in economics, finance, Goldman Sachs | Leave a comment
Now, Simon Johnson is not as inclined to strong language as Mark Taibbi, but… same message.
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Mark Taibbi on the American Gangster Ecoromy

June 26, 2009 at 02:11 | Posted in Al Gore, bubble, Corruption, criminal, economics, Goldman Sachs, Obama, sub-prime | Leave a comment
This deliciously scathig article by Mark Taibbi on the unbelievable shenanigans of Goldman-Sachs, Al Gore, and pretty much the entire financial ‘regulatory’ system of the United States should be read while sitting down: it’s simply too much.
Of course, Taibbi misses out on some of the economic subtleties of what transpired during the events he describes – and thereby deprives himself of some real gems – but he has the politics down pat.
[And considering that Mark cut his journalistic teeth at the irreplaceable The Exile in Moscow during some of Russia’s wilder days, he probably has good reasons for using the term “gangster economy” to describe the current day U.S.A.]
In case any of you thinks Mark is hallucinating, I’ll put up a little gem from the Atlantic Monthly as well. Same economic blind-spots, same political acuity.

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