Trillion Dollar Bash: Paul Krugman & the Coin That Will Rule Us All

It's amazing to think that there are large numbers of Serious People on the sophisticated left (these are the ones who always chortle over the Republican "war on science") who see a way out of the debt ceiling via the minting a trillion-dollar coin that the gov't could deposit - TA DA! - with the Federal Reserve. Paul Krugman - who won a Nobel Prize and is widely viewed as the leading apostle of Keynsean economics ca. now - thinks this is just what the doctor ordered.

Enter the platinum coin. There’s a legal loophole allowing the Treasury to mint platinum coins in any denomination the secretary chooses. Yes, it was intended to allow commemorative collector’s items — but that’s not what the letter of the law says. And by minting a $1 trillion coin, then depositing it at the Fed, the Treasury could acquire enough cash to sidestep the debt ceiling — while doing no economic harm at all.

Krugman et al. have sort of thought this through except for one detail: it's completely crazy, not to mention a mockery of the law and the Constitution. I mean, you have to love the idea of a "loophole" that allows you to mint a trillion-dollar anything. After a deafening round of mockery from the right, Krugman doubles down with a rousing defense of the concept:

What the hysterics see is a terrible, outrageous attempt to pay the government’s bills out of thin air. This is utterly wrong, and in fact is wrong on two levels. 

The first level is that in practice minting the coin would be nothing but an accounting fiction, enabling the government to continue doing exactly what it would have done if the debt limit were raised. 

Remember that the coin is supposed to be deposited at the Fed, which is effectively just a semi-autonomous government agency. As the federal government proper drew on its new Fed account, the Fed would probably respond by selling off some of its $3 trillion balance sheet. In effect, the consolidated federal government, including the Fed, would be financing its operations by selling debt instruments, just as always. 

But what if the Fed decided not to shrink its outside balance sheet? Even so, under current conditions it would make no difference — because we’re in a liquidity trap, with market interest rates on short-term federal debt near zero. Under these conditions, issuing short-term debt and just “printing money” (actually, crediting banks with additional reserves that they can convert into paper cash if they choose) are completely equivalent in their effect, so even huge increases in the monetary base (reserves plus cash) aren’t inflationary at all.

Krugman has an out for any blame that may come the left's way should this inflationary coin come to light: the Republicans made me do it!

For those new to this, here’s the story. First of all, we have the weird and destructive institution of the debt ceiling; this lets Congress approve tax and spending bills that imply a large budget deficit — tax and spending bills the president is legally required to implement — and then lets Congress refuse to grant the president authority to borrow, preventing him from carrying out his legal duties and provoking a possibly catastrophic default. 

And Republicans are openly threatening to use that potential for catastrophe to blackmail the president into implementing policies they can’t pass through normal constitutional processes.

...
This still leaves the question of whose face goes on the coin — but that’s easy: John Boehner. Because without him and his colleagues, this wouldn’t be necessary.

John Boehner's mind control is so total he is planting ideas that are literally out of a Simpson's episode (one featuring Fidel Castro!) in the minds of the brilliant among us.

Fiscal Conservative Humor: Sheila Bair's Modest Proposal

Sheila Bair has a funny piece in the Washington Post that is well worth your time. 

Are you concerned about growing income inequality in America? Are you resentful of all that wealth concentrated in the 1 percent? I’ve got the perfect solution, a modest proposal that involves just a small adjustment in the Federal Reserve’s easy monetary policy. Best of all, it will mean that none of us have to work for a living anymore. 

For several years now, the Fed has been making money available to the financial sector at near-zero interest rates. Big banks and hedge funds, among others, have taken this cheap money and invested it in securities with high yields. This type of profit-making, called the “carry trade,” has been enormously profitable for them. 

So why not let everyone participate? 

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.) 

Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years.

Hilarious! (And much funnier than anything I've seen from the Matt Taibibis of the world). You should read the whole thing.


You may recall Charles Murray wrote a short book a few years ago called In Our Hands that made basically the same point about welfare spending. He ran the numbers and found that if you took all of the money spent annually on welfare and just divided it equally between each and every American, we would all receive checks of about $10,000 per year. (and Murray wasn't counting entitlement spending for Medicare or Social Security). Along with being infinitely more egalitarian, Murray's "modest proposal" would also have the virtue of being cheap to administer. There's no need to funnel money to the HUD's, EBT's, AFDC's, of the world, not to mention innumerable non-profits (AKA left-wing advocacy groups), if everyone's getting the same benefits. We'd put the left-wing money laundering scheme out of business overnight!


The point of Murray's exercise, and Bair's, is that we are spending an inordinate amount of money on ourselves, in the most inefficient manner possible, and to very little result. The numbers are stark, not to mention enormous; but, in our stunted political-media world, any Republican who dares to suggest anything resembling the above gets the full blown "war-on-women" treatment until he retreats back to private life. The Democrats' fantasy math is what rules our world, and the only way you can attack it is through humor and satire. 

Stat Heads: How The Progressive Left Adds Up The Numbers

Down in Argentina, President Cristina Kirchner is running for re-election. As is traditional when leftist politicians run for office, she is pulling out all the stops: passing around walking around money, cooking the books, and, of course, using the powers of the state and the media to intimidate anyone who gets in her way: 

As Cristina Kirchner heads for an expected landslide re-election in Sunday's presidential voting, few Argentines are resting more uneasily than 12 economic consultants who face sanctions from her government for contradicting its calculation of the inflation rate.

In a bitter showdown, the 12 consultants are fending off government investigations, accompanied in most cases with fines of 500,000 pesos ($119,000) under an obscure consumer-protection statute called the "commercial loyalty law." Three of the most outspoken consultants have been singled out for additional criminal charges under a financial-speculation law. Their offense, in the eyes of the government, is insisting in press interviews or in their own published reports that Argentina's real inflation rate is between two and three times the official government rate of 9.9% annually.

Needless to say, Argentina's inflation numbers are not credible at all. In fact, there is no agreed upon method for calculating the country's inflation rate because no one believes the Kirchner government:  

The government has announced plans to develop a nationwide inflation index, with some advisory input from the International Monetary Fund, which might eventually supplant the current index, which is compiled based on prices in the Buenos Aires area only. But the relationship between Argentina and the IMF has been stormy for years. Argentine officials were recently angered when an IMF official suggested that, in trying to assess inflation in Argentina, the fund relied partially on estimates of provincial governments and other outside sources—none of which necessarily match the federal government rate. For the IMF to focus such scrutiny on Argentine statistics at a time of grave crisis in Europe and other wealthy countries "seems to me very much like the captain of the Titanic checking to see how the violin plays in the orchestra," Economy Minister Amado Boudou told Argentine reporters.

To protect themselves from government reprisals, many of the consultants have started disseminating their inflation data via opposition members of Congress, who then release the average for what is dubbed the "Congressional Consumer Price Index." The congressional index was 1.89% for September, compared with 0.8% for the official index.

Even some parts of the federal government, as well as groups loyal to it, no longer rely on the official inflation index. Many courts now use private inflation estimates for cases such as worker compensation claims requiring judges to set an indemnization. And even unions that are allied to the government cite the inflation estimates of private consultants during salary negotiations.

The state begs to differ, of course, with its toadies/official economists saying the inflation rate produced by Congress is "unpresentable," whatever that means. This being Argentina, there is a precedent for this sort of thing. Back in President Nestor Kirchner's administration, they raised the manipulation of statistics, and the intimidation of the statisticians, to the level of art. It's no different now. The former First Lady just lacks the subtlety of her husband.


Kirchner, btw, is expected to coast to victory. Partly that's because the opposition is fractured (hear that third partiers?) but mostly it's because the electorate can't resist a glamorous leftist who can get away with all manner of lies and intimidation, so long as she has the media, the trade unions, and the urban poor behind her. There's probably a lesson - not to mention a warning - in that. 

Save Us: Bemoaning The Rise of the American Saver

One of the most obvious trends during the Little Depression has been that the average American's has greatly reduced his consumption of goods and services and increased his savings - or, more likely, made an effort to pay down debt. It's not hard to see why. If you observe enough of your friends and neighbors overwhelmed by debt after losing their job, it's enough to scare anyone into thrift. But, Keynsians are apparently throwing up their hands in despair over the "paradox of thrift," which provides that an increase in the savings rate will slow down or stall any economic recovery. If that's really the case, I must be too stupid to understand economics:     

Since the financial crisis erupted, millions of Americans have ditched their credit cards, accelerated mortgage payments and cut off credit lines that during the good times were used like a bottomless piggybank. Many have resorted to a practice once thought old-fashioned—delaying purchases until they have the cash.

As a result, total household debt—through payment or default—fell by $1.1 trillion, or 8.6%, from mid-2008 through the first half of 2011, according to the Federal Reserve Bank of New York. Auto loan and credit-card balances in August had their biggest drop since April 2010, the Federal Reserve said. 

The national belt-tightening, known as deleveraging, comes as the U.S. economy struggles to fend off a double-dip recession. Paying off bills slows consumer spending on appliances, travel and a slew of other products and services. Home sales, the engine of past economic recoveries, remain depressed.

...

Deleveraging should help the U.S. economy in the long-run, putting households on a sounder footing and easing the nation's reliance on the savings of Chinese and other foreign nationals. But there are short-term dangers.

During the Great Depression, economist John Maynard Keynes warned of a so-called paradox of thrift: When everyone turns frugal, everyone suffers. Synchronized thrift slows the economy, according to Keynes, which hobbles income growth and makes people even stingier in a pernicious cycle.


Some experts worry that is happening now. Since the recession ended in mid-2009, the U.S. economy has expanded at a 2.5% annual rate, far slower than the average growth of 4.3% during the first two years of the previous four recoveries.

I've been hearing all my life (pretty much) from nagging liberals about how the American public is a "greedy" bunch that takes on too much debt, consumes to many resources, and doesn't save enough money. In fact, remember how people used to rail (falsely) against George Bush for telling people to "go shopping" after 9/11? "Where's the grand calls for sacrifice?" moaned the Paul Krugmans of the world. Now that Americans are actually doing these things, they are destroying the economy! (and now that the times really do require sacrifice by members of the leftist coalition, they are suddenly taking it to the streets. Where's your sacrifice now, Krugman?)


It's not hard to look around the world and see what is working, and what isn't. Countries that bit the bullet, let banks fail, reduced public expenditures, and paid down debt are stable and growing. Countries that are bailing out banks and trying to keep the welfare checks flowing are beset by riots and the looming specter of default and worse. In America, it's clear that the general public knows what will pull us out of this mess, but the people with their hands on the economy's levers are stuck pontificating about paradoxes.


A president who, in 2008-2009 could have spoken bluntly about the short-term pain of budget cuts and bank failures, and then guided the nation through a year of real austerity measures, would be a hero overseeing a growing economy. But, that's not the sort of president we had back then. We can only hope that whoever is taking the oath of office in 2013 will be up to the task of repairing the damage, not just to the economy, but also to our society. 

Yesterday & Today: The LP Comes Back (Again)

Forbes takes a look at an unexpected phenomenon in the music biz. While gadflies have perpetually declared vinyl LP's to be on the verge of a come-back, last year actually did see a significant increase of LP sales, with many indie music stores receiving a significant amount of income from yesterday's sound system.

Much has been made of the decline of recorded music, and indeed, much has declined. According to Nielsen SoundScan, total album sales dipped from 373.9 million to 326.2 million last year, a drop of 12.7%. The 2010 sum is less than half the 2004 total of 666.7 million. But vinyl sales rose a healthy 14% — the third straight year of gains for the format — and this year’s 2.8 million total was the highest in the post-1991 SoundScan era.

“Vinyl will always be there,” says David Shebiro, owner of Rebel Rebel Records in Manhattan’s West Village. “It’s the way artists intend music to be.”

Shebiro has sold both LPs and CDs since opening the store in 1988. In the early days, LPs made up 90% of his sales. By 1998, the ratio had flipped, with CDs accounting for 90%. Today, he reckons, 60% of his sales are of the vinyl variety. He believes the main reason behind vinyl’s comeback is a desire to re-conjure the magic of buying music lost in the era of immediate gratification offered by Apple and Amazon.

“There used to be this anticipation when you bought a record,” he says. “You’d take it back with you on the subway and rip open the packaging, and you couldn’t wait to get home and play it. That magic of anticipation has gone with downloading, and that’s what people want to regain.”

I had actually noticed an increase in vinyl-only releases starting last year. I guess there's some kind of purist impulse at work, but I think there's an economic angle, too, one that Forbes didn't look too closely at. Where, five years ago every band and its dog was putting out a CD (even Psota put out an album), now you're much more likely to see an indie band with a 45, or an EP as their first release. Simply put, it's cheaper to record three really good songs, rather than try to fill up an album with material. In the Little Depression music scene, the "less is more" arises as much out of limited budgets, as out of aesthetics.

Incredibly, there are a lot of bands that put out cassettes. One of the music blogs I follow is Terminal Escape, which is dedicated entirely to tapes, and which never runs out of material to post on. Now, these are mostly DIY-style punk bands, so there's no doubt some crabby Luddite anti-corporatism at work, but still, it's been surprising to hear some of the best new music of the year on a cassette-only release.

The proponents of LP's are still pushing the "vinyl sounds better" line, about which I am agnostic. I'll agree that a lot of early CD reissues were poorly done, but the only album I regretted disposing of in favor of a disc was Blonde On Blonde, which really did sound better on vinyl. Even if LPs do sound better, you need some damn good equipment to bring out the best from the format. Forbes helpfully includes a list of the best current record players, which range up to $150,000. Not exactly the People's Choice. Not so with CD's where near-audiophile sound quality is available at a budget price. Music snobs are advised to give it a rest.

Inflation Confusion: Sarah Palin Schools the Wall Street Journal

It's been a while since one of Sarah Palin's comments was taken out of context so sophisticates could chuckle over her stupidity, but some reporter at the Wall Street Journal thought he'd caught her in a "durrrr" moment regarding quantitative easing and its effect on the inflation rate. Palin took to her Facebook page to set the guy straight.

Imagine my dismay when I read an article by Sudeep Reddy in today’s Wall Street Journalcriticizing the fact that I mentioned inflation in my comments about QE2 in a speech this morning before a trade-association. Here’s what I said: “everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump priming would push them even higher.”

Mr. Reddy takes aim at this. He writes: “Grocery prices haven’t risen all that significantly, in fact.” Really? That’s odd, because just last Thursday, November 4, I read an article in Mr. Reddy’s ownWall Street Journal titled “Food Sellers Grit Teeth, Raise Prices: Packagers and Supermarkets Pressured to Pass Along Rising Costs, Even as Consumers Pinch Pennies.”

The article noted that “an inflationary tide is beginning to ripple through America's supermarkets and restaurants…Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months.”

I saw that article, too. You know what was frustrating about it? (and what doubtless tripped up Sudeep Reddy?) The inflation articles were on the inside in the "Marketplace" section. But, on the front page, there was a big, above-the-fold story about the Fed's launching into quantitative easing to combat deflation. All you have to do is go to the grocery store, or the coffee shop, or the gas station to know that some consumer prices are on a definite upward trajectory. But, someone in DC thinks the opposite is true.

Maybe real estate or cars or surfboards or whatever are going down in price, but the basics for which people lay out their weekly budgets are going up. (yeah, I know food and gas are not included in the "core" inflation rate. Doesn't mean people aren't seeing rising prices) And, the Fed's worried about deflation? And "journalist" Sudeep Reddy is crowing over Sarah Palin's seeing inflationary ghosts? I'm beginning to worry that "we" know more about what's going on in the world than all of the "thems" who insist they are better able to act on our behalf.

My Interest Rates Are Rising...In My Pants!

Dominique Strauss-Kahn is the quintissential Euro-insider: head of the IMF, "Socialist," married to a glamorous journalist, potential president of France. And, of course, he has a way with the ladies. In fact, according to a recently published book, you could say his attitude towards extra-marital sex reflects a very loose and accommodative policy: Dominique Strauss Khan In Sex Book Claims

The book claims the 61-year-old Mr Strauss-Kahn – married to Anne Sinclair, a famous French TV presenter - has had a string of extra-marital affairs and that photographs exist of him coming out of a wife-swapping club.

Frédéric Lefebvre, a Sarkozy adviser, boasted in 2007 that he had seen photographs of DSK, as the French call him that would wreck any presidential bid. "He wouldn't last a week," Mr Lefebvre said. "We'll circulate them." The book, Secrets of a Presidential Contender, is by an anonymous French author calling herself Cassandre, and who claims to be in DSK's inner circle of advisers.

She writes: "He is always on the hunt for new women.

"He is a pleasure seeker. Like all great political animals, he has trouble controlling himself.

"His eye for women is sharp as a laser. When he enters a cafe, an office or any public place, the ritual is the same.

"He does a little survey, turning his head almost imperceptibly to the left, then to the right, while carrying on talking. It lasts only a few seconds, just enough time to evaluate his chances.

"After identifying his prey, he bombards them with text messages, usually with the opening salvo 'I want you'.

Hubba Hubba. Careful readers of the financial press may recall that DSK got in trouble during the depths of the crash of '08 when he had an affair with a (married) economist who worked with him. Not only was DSK accused of favoritism towards his paramour, the affair was seen at the time as diminishing his credibility at a time when it was needed most. Plus, how can you trust a central banker whom you couldn't trust around your own wife? But, that's the magic of being a "socialist." You can live like an old-fashioned potentate, so long as you mouth the right words about equality and justice.

And for you young bucks who think becoming a central banker opens up a world of sensual delights, here is a photo of Piroska Nagy, the Hungarian economist who got DSK in trouble:

Better stick with becoming a rock star.

Don't Panic

Today's calm soothing sounds come courtesy of Paul Krugman, who has surveyed the wreckage of the European entitlement state, and wants Americans to know something very important: We Are Not Greece

That said, we do have a long-run budget problem. But what’s the root of that problem? “We demand more than we’re willing to pay for,” is the usual line. Yet that line is deeply misleading.

First of all, who is this “we” of whom people speak? Bear in mind that the drive to cut taxes largely benefited a small minority of Americans: 39 percent of the benefits of making the Bush tax cuts permanent would go to the richest 1 percent of the population.

And bear in mind, also, that taxes have lagged behind spending partly thanks to a deliberate political strategy, that of “starve the beast”: conservatives have deliberately deprived the government of revenue in an attempt to force the spending cuts they now insist are necessary.

Meanwhile, when you look under the hood of those troubling long-run budget projections, you discover that they’re not driven by some generalized problem of overspending. Instead, they largely reflect just one thing: the assumption that health care costs will rise in the future as they have in the past. This tells us that the key to our fiscal future is improving the efficiency of our health care system — which is, you may recall, something the Obama administration has been trying to do, even as many of the same people now warning about the evils of deficits cried “Death panels!”

So here’s the reality: America’s fiscal outlook over the next few years isn’t bad. We do have a serious long-run budget problem, which will have to be resolved with a combination of health care reform and other measures, probably including a moderate rise in taxes. But we should ignore those who pretend to be concerned with fiscal responsibility, but whose real goal is to dismantle the welfare state — and are trying to use crises elsewhere to frighten us into giving them what they want.

Reassuring! ... Especially the part where Krugman says we need "health care reform" to cut into the unsustainable deficits of the future! I wish I lived in Paul Krugman's house, where every day is the first day of Year Zero.

UPDATE: John Stossel takes a look at Krugman's charts and concludes: Krugman Misleads on Greece.

Comprehensively Speaking

While the Dow Jones Industrials were going to Hell and back, the Senate continued work on the (ta-daa!) Comprehensive Financial Reform Bill. You may recall last week that the dastardly Republicans were filibustering "reform" as part of their multi-generational effort to oppress widows and orphans. But, a funny thing happened; after Dems squeaked about Goldman Sachs, etc. Dodd started caving, er, negotiating in earnest. The results might surprise you: Dodd-Shelby Compromise

The Dodd-Shelby compromise gave Shelby almost everything he wanted in terms of reducing the government's ability to bail out bank creditors and near-insolvent financial firms:

The agreement abandons a $50 billion resolution fund that would have covered the costs of a major financial collapse. Instead, if the amendment is adopted, as expected, the Federal Deposit Insurance Corporation would have the ability to liquidate large firms, and could likely use a credit line from the Treasury Department to cover any costs. Any losses the FDIC encounters would be recovered as the agency sells off the assets of the failed firm.

Using the FDIC, rather than creating a brand-new resolution fund makes sense since (1) everyone knows how the FDIC works and (2) now we don't have to have a $50 billion slush fund sitting around attracting moral hazard like flies to sherbet. As Steven Spruiell notes in the linked article, the GOP - led by Richard Shelby, with an assist from Bob Corker - got virtually everything they wanted:

Shelby's near-total victory on the bailout issues is worth emphasizing because the politics were so stacked against the Senate GOP that even some conservatives started wondering why they were filibustering and holding out for so long, especially after Reid started opportunistically forcing vote after vote. It's because the bailout provisions of the bill were really bad — you can catch up here — and thanks to senators such as McConnell, Shelby and Corker who wouldn't let go of this issue, those provisions are now much improved. Liberals who tried to spin it all as an evil Frank Luntz talking-point conspiracy have reason to feel a little bit foolish today. Dodd was willing to let the administration have the flexibility it wanted to do bailouts until Republicans filibustered the bill. Dodd caved, and the fixes were approved 93-5.

Pretty neat trick for what it supposedly a despised minority.

Meanwhile, the "audit the Fed" movement is also going to be part of the final bill, incredibly enough. "Socialist" Bernie Sanders - he wouldn't last five minutes in a real socialist system - worked out a deal with Dodd to allow the GAO to review the Fed's lending during the crisis: Fed Audit Deal Reached In Senate

Notwithstanding any other provision of law, the Board of Governors shall publish on its website, not later than December 1, 2010, with respect to all loans and other financial assistance it has provided during the period beginning on December 1, 2007 and ending on the date of enactment of this Act under the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Term Asset-Backed Securities Loan Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Term Securities Lending Facility, the Term Auction Facility, Maiden Lane, Maiden Lane II, Maiden Lane III, the agency Mortgage-Backed Securities program, foreign currency liquidity swap lines, and any other program created as a result of the third undesignated paragraph of section 13 of the Federal Reserve Act.

This isn't a complete audit, as it would not touch the Fed's regular non-emergency dealings. Ron Paul for one is crying "sell out!" By a "socialist?" I'm shocked!

So, it looks like we will finally have "comprehensive" financial reform, nearly 20 months after the original Bear Stearnes bailout. And, apparently no one yet has the guts to do anything to reform Fannie Mae and Freddie Mac, which were only ground zero for the whole freakin' crisis. Step by step, I guess.

Everyone's been talking about how they want to get this right because they expect this bill to provide the legal framework for US finance for decades to come. That's nice, but wasn't it a problem that bankers, especially those in the shadow banking system, were able to work around the old system - and everyone knew they had an advantage precisely because they were able to develop work-arounds? Seems like rather than trying to legislate "for all time," it would be much better to recognize that the law in this area needs to adjust to market conditions as they evolve. What, is that too much work?

Weathervane

Archein has a funny preview of Paul Krugman's upcoming intellectual crusade in favor of "comprehensive" finance reform. Here's a taste (h/t Naked Capitalism): Krugman As Failure

First few columns: "These bankers are greedy bastards and Wall Street really needs to be fundamentally changed."

Next few columns: "We really need this, this, and this. It's imperative, to do anything else would be a sham on the American people and destructive to the American economy."

Columns once the bill is pretty much intact: "All this is not nearly enough, they didn't do anything, but there's still time to make a couple good changes."

Columns once it's clear even to Mr. Krugman the Democrats are in the tank for Wall Street and nothing good is going to come of it: "Well, this isn't a great bill, but we need to hold our nose and vote for it, to do nothing will be fatal for November."

Column when bill is passed: "This is historic, the Democrats are just great, we can improve it in the future."

I like the part where he says "The Democrats are just great, we can improve it in the future." It's funny 'cause it's true.

While conservatives can talk about "repeal & reform" and "November 2010," they need to realize that the problems we face cannot be solved solely by the political process. Even if we vote every bed-wetting progressive in Congress out of office, there will still be an army of truculent progressives in the media, academy, and non-profit worlds who will be able to exercise outsize power through their various sinecures, and they ain't going anywhere. Paul Krugman is a case in point: a loud-mouth ideologue who will argue against his own interest (not to mention his own academic work) if it will let him beat up on Sarah Palin for one more week.

The American Left cannot be beaten just in the political arena. It must also be defeated in the intellectual arena as well, but that is a much more arduous task, not because of the superiority of the Left's ideas, but because their intellectual institutions give a platform to people like Krugman, regardless of how objectively wrong Krugman's arguments have been over the years. One Paul Krugman on the back page of the NY Times is worth any 30 liberal back benchers in Congress. Until we are rid of the likes of him, the progressive project will always be ascendant.

Do You Know How I Know You Are A Bubble?

We often hear that speculative bubbles are impossible to forecast until after they have popped. Naked Capitalism points to Edward Chancellor's "10 Sign Posts of Manias and financial Crises" to make the argument that (1) you can identify bubbles and (2) if you want to see a live bubble in action, look to China (you should really click through to see the supporting links): Top 10 Reasons You Know China Has A Financial Bubble On Its Hands

1. "Great investment debacles generally start out with a compelling growth story."
2. "Blind faith in the competence of the authorities."
3. "A general increase in investment is another leading indicator of financial distress. Capital is generally misspent during periods of euphoria. Only during the bust does the extent of the misallocation become clear."
4. "Great booms are invariably accompanied by a surge in corruption."
5. "Strong growth in the money supply is another robust leading indicator of financial fragility. Easy money lies behind all great episodes of speculation from the Tulip Mania of the 1630s – which was funded with IOUs – onward."
6. "Fixed currency regimes often produce inappropriately low interest rates, which are liable to feed booms and end in busts."
7. "Crises generally follow a period of rampant credit growth."
8. "Moral hazard is another common feature of great speculative manias. Credit booms are often taken to extremes due to a prevailing belief that the authorities won’t let bad things happen to the financial system. Irresponsibility is condoned."
9. "A rising stock of debt is not the only cause for concern. The economist Hyman Minsky observed that during periods of prosperity, financial structures become precarious."
10. "Dodgy loans are generally secured against collateral, most commonly real estate."

Now some of these ("a surge in corruption") are simply part of the human condition, bubble or not. I would also add an 11th item to the Top 10: growing opacity in budgeting and accounting. The acceptance of Enron-style accounting methods in America's public and private financing should have been a warning that no one had any idea as to the solvency of the overall system. That should go double for China, which doesn't even bother to follow generally accepted accounting principles, but simply tosses out numbers that China bulls/acolytes accept without question (a level of blind faith they would never grant to their own countries, btw).

It's always dangerous to make any predictions about China because the only constant there has been the persistence of poverty and roiling social change. Right now, China looks like the wave the future. But, 20 years ago, it was a pariah because it was shooting student protesters. 20 years before that, it was in the throes of the Cultural Revolution, and was as isolated as North Korea is today. And 20 years before that it emerging from 20 years worth of civil war and foreign invasion. The popping of a speculative bubble may be the least of China's problems.

In The Doldrums

Armed and Dangerous takes an up close and personal look at unemployment as seen through the lens of two of his gaming buddies, one of whom has taken to living in a homeless shelter: Marginal Devolution

What these guys have in common is that they’re only marginally employable. What borderline mental illness has done to one, mediocre skills and the unintended consequences of anti-discrimination laws have done to the other. As long as I’ve known both (and that would actually be most of my years, for both of them), they’ve worked dead-end jobs and put their passion into science fiction and wargaming. They’re decent, honest, unambitious men who have never wanted anything but steady work, a normal life, and a hobby or two. They’re not stupid and they have respectable work habits; in fact they’re probably more conscientious and safe than average. Now they don’t quite fit; too old, too geeky, too male, too quiet. The job market has discarded one and the other is hanging by a thread.

When I look at these guys, though, I can’t buy the explanation most people would jump for, which is that they simply fell behind in an increasingly skill-intensive job market. Thing is, they’re not uneducated; they’re not the stranded fruit-picker or construction worker that narrative would fit. Nor does offshoring explain what’s happened to these guys, because their jobs were the relatively hard-to-export kind.

No. What I think is: These are the people who go to the wall when the cost of employing someone gets too high. We’ve spent the last seventy years increasing the hidden overhead and downside risks associated with hiring a worker — which meant the minimum revenue-per-employee threshold below which hiring doesn’t make sense has crept up and up and up, gradually. This effect was partly masked by credit and asset bubbles, but those have now popped. Increasingly it’s not just the classic hard-core unemployables (alcoholics, criminal deviants, crazies) that can’t pull enough weight to justify a paycheck; it’s the marginal ones, the mediocre, and the mildly dysfunctional.

A&D's personal solution is to call together his social circle and try to find jobs for these guys, which is certainly more useful and compassionate than simply passing the hat and giving them a few bucks (or petitioning the gov't to do so). A&D's broader point is even more important: gov't efforts to "solve" unemployment, and to deliver on grandiose chicken-in-every-pot campaign promises, often can have the opposite effect; yet we cannot conceive of a gov't that would not react quickly to demands that it stimulate growth and job creation.

For better or for worse, the New Deal provided a convincing template for voters to demand economic growth and for the gov't to deliver. Of course, that growth was dependent on piling increased regulatory and tax burdens upon employers until we reached the present point where jobs are devilishly hard to create, but, hey, at least there was a method at work that people could readily understand. The GOP can talk all they want about deregulation and the coming "conservative backlash," but there can be no revolution without a politically palatable method for creating jobs and nurturing growth. Otherwise, the "revolution" will do little more than reform the welfare state, leaving it ripe for rebirth.

Simple Minds

Here's Peter Boettke's plea for simplicity in economics as the key to reforming our troubled economy. Yes, I'm sure our technocratic overlords will get on that right away: Simple Economics Is Not Necessarily Simple Minded

In Extraordinary times, what we need most is ordinary economics. Crises such as the collapse of communism, the failure of development planning, the rise of tensions over globalization, the consequences of a major natural disaster, and financial collapse need to be met not by extraordinary theories designed to provide emergency room economics, but by a return to cool-headed and basic economic principles. Incentives matter even in the economic emergency room, and in fact, since we are dealing with an emergency to forget that basic point is perhaps even more costly than in normal time, perhaps so costly as to be deadly for the economy. Losing our heads as economists and violating the basic principles of the discipline is how we turn a market correction in to an economy wide crisis --- which in my view is what we have done over the last year and a half.

I can't disagree with any of that. But, when virtually everyone who is presently in a position to reform the system is a PhD with an Ivy League background, it is a faint hope indeed that they will enthusiastically embrace simplicity as a panacea. In fact, complexity is the only thing they will respect, and Americans who object to bizarrely convoluted "comprehensive" reform will be chided for their ignorance and childishness.

The Secret Agent, pt 2

The NY Times catches up to Free Will and publishes an op-ed from Harvey Shulman about the IRS rule that infuriated Joe Stack: Our Low-Tech Tax Code

The rationale for passing Section 1706 was that it would recoup tax revenue that the government was losing from self-employed technology workers who were allegedly cheating when they filed. It was also claimed that few of these workers would qualify as self-employed under the common-law test, so the safe haven should be eliminated for them.

Over the past 20 years, there have been several studies dismissing the factual and legal grounds asserted for the rule, and more than 60 senators — from Daniel Patrick Moynihan to Jesse Helms to Ted Kennedy — have sought its repeal.

A Treasury Department study in 1991 also thoroughly undermined the justifications for the law. It found that tax compliance for technology professionals was actually among the highest of all self-employed workers and that Section 1706 probably raised no additional tax revenue and perhaps even resulted in losses, because self-employed workers did not enjoy as many tax-free benefits as employees.

Section 1706 is an example of how Congress enacted a discriminatory law that hurt thousands of technology consultants, their staffing firms and customers. And despite strong bipartisan efforts and unbiased studies supporting that law’s repeal, it remains on the books.

Cast No Shadow. pt 2

According to an off-hand comment in today's W$J, Hank Paulson's new book includes the revelation that Russia approached the Chinese in August 2008 with a plan to dump trillions of dollars worth of Fannie Mae & Freddie Mac bonds. Shouldn't the SEC be looking into this? Russia Tried to Force a Bailout of Fannie & Freddie

Russia urged China to dump its Fannie Mae and Freddie Mac bonds in 2008 in a bid to force a bailout of the largest U.S. mortgage-finance companies, former Treasury Secretary Henry Paulson said.

Paulson learned of the "disruptive scheme" while attending the Beijing Summer Olympics, according to his memoir, "On The Brink."

The Russians made a "top-level approach" to the Chinese "that together they might sell big chunks of their GSE holdings to force the U.S. to use its emergency authorities to prop up these companies," Paulson said, referring to the acronym for government sponsored entities. The Chinese declined, he said.

Russia's five-day war with U.S. ally Georgia started on Aug. 8, the same day as the opening ceremonies of the Beijing Games.

Prime Minister Vladimir Putin told U.S. President George W. Bush during those ceremonies that "war has started," according to Dmitry Peskov, Putin's spokesman.

"The report was deeply troubling — heavy selling could create a sudden loss of confidence in the GSEs and shake the capital markets," Paulson wrote. "I waited till I was back home and in a secure environment to inform the president."

Call me crazy, but isn't this the sort of story that's worth a little publicity? There was a UPI story, a story in the Denver Post, and a couple scattered blog posts. But, most of the public discussion has focused on what Paulson "thought" of Sarah Palin (whom he only talked to on the phone). The American public is often accused of being ignorant, but it's always mind blowing to consider the type of information that is often kept out of the public consciousness. In fact, Fannie and Freddie have consistently benefited from this sort of controlled release of information. I'm sure that has nothing to do with their fictional status as "private" companies and their very real status as a conduit for an off-the-books national housing policy by progressives in and out of government.

As might be expected, Zero Hedge provided the most comprehensive coverage and analysis: Russia Urged China To Dump Its Fannie/Freddie Holdings Before GSE Bailout

The implications of this revelation are troubling, as in a newly multi-polar world, in which China is now the second largest economy, and merely needs a block of one other major power, be it Russia or Japan, in order to precipitate a selloff in critical U.S. securities, be they MBS (not so much these days), or, more relevantly, Treasuries.

Curiously, the bailout of the GSE was based on the premise that placating China and other major US security holders (both in the public and private arena) is critical. It explains the lack of impairment of both the Sub debt in the GSEs as well the sub debt in all the bank holding companies. If indeed China had been considering selling its bonds, it means that it had likely approached the proper senior level officials with its concerns, and could have been a material influence in bailout policy in the days surrounding the Lehman collapse. Which makes an even bolder case for the observation that the U.S. is nothing more than a vassal state of its largest creditor: if China can dictate domestic policy, which these days typically amounts to yet another bailout decision, then why do Americans need to pretend their government is at all relevant any longer?

We keep hearing that America is "ungovernable," its politics gridlocked because of partisanship. But, the real problem is that we've spent ourselves into a hole with no way to get out on our own, and the rope held by the likes of Vladimir Putin. The public is in an uproar. There is a growing sense that untrammeled public spending has to come to an end; yet all the present leadership in DC wants to do is convene a blue-ribbon commission, instead of convening the "commission" - that would be Congress - we already have. For decades, Democrats have been nurturing and defending the New Deal/Great Society from all comers. It may yet be that their hand will be forced by the sort of hostile foreign elements that they believe they can engage diplomatically. We can only hope that, after the crash, we understand how we got there and how we can dig our way out.

Capitalist Pigs More Equal Than Commie Rats

The headline says that the Organization for Economic Cooperation and Development has concluded that the gaps in wealth that have arisen in China since it began modernizing have closed, meaning China has become more "equal" after decades of development had caused the dread inequality. Apparently, China really was more equal back in the Maoist, mass murder days. The OECD seems to think the return of equality is a good thing: OECD: Inequality In China Leveling Off

The increase in inequality in China has leveled off in recent years and could be less severe than previously thought, the Organization for Economic Cooperation and Development says, suggesting that Beijing is starting to make progress in tackling one of its biggest social problems.

The OECD, in its economic survey of China published Tuesday, said more welfare spending in rural areas and increased migration to cities helped arrest a widening of the income gap. The Paris-based organization urged China to lower what is still a fairly high level of inequality by further boosting social programs and eliminating discrimination against rural residents.

(snip)

China's breakneck economic growth of the past three decades has pulled hundreds of millions of people out of poverty. But the incomes of people at the top have risen much faster than the rest, creating new divisions in a once-egalitarian society. Tensions between property developers and dispossessed farmers, and between factory bosses and their rural work force, are often a flashpoint for social conflict. That has pushed China's government to narrow the gap, and officials have repeatedly said they will do more to boost incomes of the worst-off.

That's all very nice, but there's a surprise in the OECD's handy chart. Among the nations that are more equal than China, according to the OECD are Japan, the UK, and ... the US????

Jeez, the western Left's world view is dependent on their oft-repeated claims that the US is a den of inequality, with piggy bankers on top and oppressed masses - AKA the middle class - at the bottom. Now, we learn that the three most successful capitalist countries in the world are actually more equal than loudmouthed "progressive" countries like China, South Africa, and Brazil. Of course, simply observing the extreme - not to mention endemic - poverty in those nations will make you realize that their claims to equality are greatly exaggerated. I'll be watching to see if this makes it into Paul Krugman's next column.