demandside

Business school, Larry Summers is on board, commodity speculation, Robert Lucas and other non-sequiters

Confetti

Our object here at demand side is to assault the conventional wisdom that is not very wise, dispute the accepted facts that are simply not true, and lampoon the insightful analysis that is just fuzzy thinking.  All from the Demand Side.  Needless to say it is a work program far too ambitions, so in honor of 2008 and to be able to start fresh for 2009, we have conceived here at demand side of the following in-box cleaning exercise.

I have placed in a pile the ideas and issues I would have liked to visit or re-visit during the year.  I have listed them on a spreadsheet.  Now with the help of a random sequence generator, I will order them and get to as many as I can in fifteen minutes.

I originally tried to do this extemporaneously, but that bogged down quickly.  Sitting in a room talking to the wall is not very conducive to anything except I suppose ruminations on the tragedy of one’s childhood.  So I have taken each in order and will make a few notes and come back and read them.

First:

37 Commodities Speculation

For the first six months of this year the issue on the news and in the coffee houses was the price of oil.  The accepted fact was that demand was outstripping supply.  No less than T. Boone Pickens came up with the idea that supply was constrained at 185 million barrels and demand wanted 187 million barrels.  The new cars of China and India would take whatever they could get.  Subsidies from other governments was keeping demand unrealistically high.  Never mind the subsidy in the U.S. implicit in low gas taxes on a substance which is burning up the planet.

In any event, talk that speculation might be driving prices higher was not considered appropriate for polite company.  Anybody could see that peak oil and the rest was finally coming home to roost.  Might the tripling of the price in a year be a bit too much to lay to supply and demand?  Particularly considering that the economy was slowing down?  No, no, no.  Well a few brave voices did object.  At a Senate hearing, which we podcast nearly in its entirety here on Demand Side, chaired by Maria Cantwell of Washington, Michael Greenberger, a representative of an oil retailers association, and George Soros made noises.  Greenberger, in particular, pointed out the Enron loophole had — with the aid of a compliant Commodities Futures Trading Commission — survived Congressional action and was providing speculators with a dark market.  We also noted that Goldman Sachs had classified trading floors and the largest holdings of real heating oil in New England.  Goldman Sachs was also the author of the call that oil would reach $200 per barrel in the near term.

Ms. Cantwell promised some direct messages to the CFTC.

Less than two weeks later, the commodities bubble began to fall.  We should note it was not simply the Goldman Sachs style trading in commodities futures, but the advent of the Exchange Traded Fund, ETF, which allowed investors from individuals to pension funds to play the commodities markets and actually own the commodity.

It’s unfortunate this was number one on our list, because we spent too much time on it.

3 Toyota is King, Long Live the Dead

Let’s make short work of this.  A month ago the Big Three auto makers came hat in hand to the Congress and had their hat handed to them.  It was the incompetence of the management or the greediness of the workers that had brought them to this pass.  Well, it was the oil bubble and the credit crisis.  Not to say I approve of the products of the Big Three, but even I was feeling sympathy.

No more proof is needed than the demise of Toyota, the king.  35 percent off on sales in November and looking at the first losing quarter in several decades.  They had made money on their hybrids when gasoline spiked.  But Mr. Senator, now nobody wants to buy their products either.

It is possible the history of this event will be written as a grand pratfall by the Big Three, but it won’t be too long before the exchange rate and the credit freeze will make Toyota and the others get in the same line.

6 Larry Summers

Last winter, in late 2007, Larry Summers came down from Harvard to Brookings and to Stanford and made dark noises about the economy.  It was sobering.  Not as dark as Nouriel Roubini or Joseph Stiglitz or Demand Side, but Summers was welcome in polite circles.

His targeted, timely and temporary mantra carried the day for the first fiscal stimulus.  Defeating calls for productive, permanent and paid for, I might add.  That targeted, timely and temporary turned out to be timid and tepid.  That its best-known cheerleader was George W. Bush should give us some pause.  In any event, there is still a debate whether it did anything at all, as people were thankful, but paid down debt and saved, as rationality might suggest, rather than spend.

Now Summers is back.  He is incoming head of the White House National Economic Council, a parallel to the National Security Council.  We suspect he would have been named Treasury Secretary but for the prospect of embarrassing confirmation hearings.  But he is on board with the Obama camp.  He is now ….  Here I have a clip.

From a press conference last week with Joe Biden and the new administration’s economic team.

16 Business School

In the 1990s all the bright young people went to computer school and spent their family’s money becoming computer scientists.  Now they are manning help desks at the local industrial site or governmental agency.  After that all the bright young people went to business school.  It was worse.  People cheated and bribed their way in, because a degree from Wharton or Booth could make your millions.

Somebody’s senior thesis made its way into innovation and derivatives and now the economy has collapsed.  The fancy mathematics should have been left to thermodynamics.  Not only has the economy collapsed, but it collapsed on top of these bright young people with their tens of thousands in student loans.

And all those students are now turning back to their professors and saying, “Who is this John Maynard Keenes guy?  You never told us about him.”  Well.  It’s Keynes (KANES), and I’m sorry, you were being taught pre-Depression pap.  Is there a law that could get these kids their money back?

Probably not.  Greed is its own reward.

45 Robert Lucas

Here’s another Chicago School Nobelist.  Champion of Rational Expectations, a kind of Friedmanesque fantasy that people have perfect foresight and will alter their behavior, for example, when the government borrows money, because they realize that social security is no longer viable.  This was the example I heard most of.  So Lucas later changed his mind.  And his is still changing his mind.  Kept the Nobel prize money, though.

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