demandside

We’re baaaack, with Joseph Stiglitz, Brad DeLong, Idiot of the Week, and more

The Story:  Demand Side, the podcast, fell victim to the logistics of life over the past two weeks.  Lost in the shifting dimensions of job, home, and love lie two podcasts which we will attempt to recover over the next weeks, even as we continue forward.

One early recovery is the Idiot of the Week segment for the first week of april, the period that included the G-20 meeting in London.  We will present that today.

The History Note this week is staffed by the eminent Berkeley economist and historian Brad DeLong.

Joseph Stiglitz provides a most concise and useful characterization of the Geithner plan to deal with toxic assets.

In view of the continued inability to face economic reality with regard to the financial sector, we are revising our forecast, though not significantly.  We extend the horizon for unemployment recovery a bit.

And in all we take our typical potshots at the economics that has failed our society so well.   The well-heeled spnsors Supply Side and Market Fundamentalism now prefer Corporate Welfare-ism.  They gouged the society on both ends, with inefficiency when times were good and bailouts when their get-rich schemes collapsed.

More concerning to us are the academic hacks who practice intellectual dishonesty by pretending this experience does not disprove their failed notions.  The proofs of market efficiency become ever more fanciful, and require ever more absurd leaps of logic and faith.  All this to salvage a year or two on academic careers built on sand, and all to the detriment of clear navigation of the economy for the rest of us.

WE ALSO ADMIT OUR NEW AND IMPROVED DEMAND SIDE BLOG AT DEMANDSIDEBLOG DOT BLOGSPOT DOT COM HAS SUFFERED NEGLECT OVER THE FIRST PART OF THE MONTH.  WE EXPECT THIS AND THE THE FORTHCOMING BOOK A PUNDIT’S GUIDE TO DEMAND SIDE ECONOMICS TO BE BACK ON TRACK BY THE FIRST OF MAY.

First, the news.

This flash from Ben Bernanke last week:

“Something went wrong”

by way of Bloomberg and Mark Thoma’s Economist’s View Blog:

Federal Reserve Chairman Ben S. Bernanke said the collapse of U.S. lending will probably cause “long-lasting” damage to home prices, household wealth and borrowers’ credit scores.

“One would be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be,” the Fed chairman said… “The damage from this turn in the credit cycle — in terms of lost wealth, lost homes, and blemished credit histories — is likely to be long-lasting.” …

“Something went wrong,” Bernanke said. “We have come almost full circle with credit availability increasingly restricted for low- and moderate-income borrowers.” …

Bernanke ought to have been content, but wasn’t, and continued

“Regulation should not prevent innovation, rather it should ensure that innovations are sufficiently transparent and understandable to allow consumer choice to drive good market outcomes,” … “We should be wary of complexity whose principal effect is to make the product or service more difficult to understand by its intended audience.”

Innovation in financial instruments is proven to be inefficient and dangerous.  The products and services of the real economy is where innovation ought to be concentrated.  Bernanke is so far behind the curve he is still heading north while the economy is heading south.

Joseph Stiglitz, like Ulysses, Nouriel Roubini, Dean Baker, and others has apparently been named “Nobody.”  As in Nobody saw the collapse coming.  “Nobody” predicted what is happening now. And so on.  Perhaps even, “Nobody” has the answer.  In any event, this capsule of the Geithner plan from Bloomberg is from one of the lost episodes.  It is clear, concise and accurate.

STIGLITZ

Joseph Stiglitz.  This is elementary.  Attempts to finesse and end-run the reality are doomed to die in the Siberia of policy error.  Only when we face facts will we get the financial sector fixed.

Let’s append here a note from Salon Dot Com’s Andrew Leonard published last week.

As if credit default swaps needed any more bad press! The Financial Times’ Henny Sender reports today that credit default swaps may have left two big-name companies with no other option than to declare bankruptcy this week, instead of concluding out-of-court restructuring deals with their debt holders.

Here’s how it works: A lender buys the bonds of a company — let’s say General Growth, the huge mall operator that declared bankruptcy this week. But then, hoping to hedge against the risk that General Growth might default on its bond obligations, the lender purchases a credit default swap protecting against that event from another party, in effect buying insurance against the chance that those bonds will go bust.

But the kicker is that owning a credit default swap on General Growth bonds turns out to make the lender less willing to cut a deal that would allow General Growth to avoid bankruptcy, because the lender can get paid in full in the event of that bankruptcy by collecting on the insurance policy. So it’s better for the lender to force the company to its knees rather than come to a less disastrous arrangement.

“We have seen CDS becoming a significant factor” when negotiations on out-of-court restructurings fail, said Alan Kornberg, the partner in charge of the bankruptcy practice at Paul, Weiss, Rifkind, Wharton & Rice, speaking generally. “We used to talk about the practice theoretically but now we see cases where it is hard to get lenders to agree to tender or to compromise and then you find out that these holdouts had significant CDS protection.”

Warren Buffet was never so right as when he called derivatives “weapons of mass destruction.” No matter which direction you point them, someone gets blown up.

That’s Andrew Leonard in Salon dot Com from Friday, April 17.

And on the Tax Tea Parties a week ago.  As Republican Bruce Bartlett says, tax protesters “are not entitled to be taken seriously”

Such belly-aching about taxes entitles these people to a one-way ticket to Somalia.  AS IF taxes were the cause of any of the economic problems today.  A clear breakdown in the Market First ideology of these nuts is at the root of the greatest crisis in the last seventy years.  Yet they blame taxes.

Government may have contributed, but it was the incompetent and corrupt government of George W. Bush and his non-oversight of everything environmental and economic that have put us in the place we are today.

To take the Tea Partiers on their own, if immaterial point, Bartlet says:

Last week, I presented data comparing taxation in the United States to other major countries and concluded that Americans are not especially overtaxed. … But what if we compare U.S. taxes today to those in the past? Are Americans more heavily taxed than those in earlier years, and do polls show greater dissatisfaction with taxes today? … [I]t is hard to find evidence that taxes are rising or unusually high. …

In response to these facts, some critics say that it is not today’s taxes that concern them, but those that will have to be paid in coming years as a result of the large spending and deficits being projected. …

I have problems with this argument as a justification for the sudden appearance of tea parties to protest taxes. First, many protesters implicitly assume that that the deficit has increased solely as a result of Barack Obama’s policies. But in fact, the Congressional Budget Office was projecting a deficit of more than $1 trillion this year back in January…

It’s true that projected deficits have gotten larger since January. But much of this resulted from deteriorating economic conditions that would have occurred even if John McCain were president.

…

I strongly suspect that many of those that loudly denounced the Obama stimulus package for its impact on the deficit would have cheered the McCain stimulus package even though it would have increased the deficit by about the same amount.

Proof of this proposition is that there were no tea parties during the years when George W. Bush was turning the surpluses of the Clinton years into massive deficits. … Those protesting this week were only protesting because it is a Democrat who has increased the deficit. When a Republican did worse, it’s like Emily Litella used to say, “Never mind.”

…

People should remember that while they have the right to their opinion, they are not entitled to be taken seriously. That only comes from having credibility gained by the correct presentation of facts and analysis and a willingness to be even-handed–criticizing one’s own side when it is wrong and not only speaking up when the other party does the same thing.

Robert Reich is also tired of hearing complaints about taxes:

In his “A Short Citizen’s Guide to Kooks, Demagogues, and Right-Wingers On Tax Day,” Reich says No one likes to pay taxes, so tax day typically attracts a range of right-wing Republicans, kooks, and demagogues,

…

1. “Americans pay too much in taxes.” Wrong: The United States has the lowest taxes of all developed nations.

2. “The rich pay too much! The top ten percent of income earners pay over 72 percent of all income taxes!” Misleading: The main reason the rich pay such a large percent is they’ve become so much richer … in recent years. If you look at what they pay as individuals … you’ll see a steady decline over the years. …

3. “The bottom 60 percent pay only 3.3 percent of the taxes!” Misleading again. Most Americans are paying more in sales taxes than they ever have. Property taxes have also been rising at a steady clip. And Social Security taxes have also risen

Diverging from Reich here, you can find the tax burden if it were to include all taxes would be relatively flat.  I have the chart and will put it up on the blog when we find it.  When tax-o-phobics get to cherry pick the data, of course, they select the federal income tax and ignore everything else.

Taxes are the means of financing public goods.  Nothing more.  If you want roads, you pay taxes.  If you want schools, you pay taxes.  You cannot buy public goods with a credit card.  Public goods are the best deal going.

Back to Reich’s guide.

4. “Obama is raising your taxes!” Wrong. Obama is cutting taxes for 95 percent of Americans, by about $400 per person a year… Only the top 2 percent will have a tax increase, but even this tax increase is modest. Basically, they go back to the rates they were paying under Bill Clinton… And they won’t start paying this until 2011 anyway.

5. “The huge debts we’re racking up will cause your taxes to rise!” Wrong again. When it comes to the national debt, as I’ve said before, the relevant statistic is the ratio of debt to the gross domestic product.

…

6. “We have a patriotic duty to stand up against Washington taxes!” Just the opposite. We have a patriotic duty to pay taxes. …

An acquaintance from law school, now a partner in one of Washington’s biggest and wealthiest law firms, explained to me one day over lunch how he and his partners use tax rules to create offsetting taxable gains and losses, and then allocate the gains to the firm’s foreign partners who don’t pay taxes in the United States. That way, they keep the losses here and shelter their income abroad. I noticed he had an American flag lapel pin. “You’re supporting our troops,” I said, referring to his pin. “Yup,” he replied, entirely missing my point.

True patriotism isn’t cheap. It’s about taking on a fair share of the burden of keeping America going.

Robert Reich

Okay, more than enough news

It’s time for

Idiot of the Week

This from the lost podcast of the first week of April.

It is a most curious curiousity that economists want to talk politics and politicians want to talk economics.  But curiouser is that politicians are doing better than economists.

As we’ve noted, a majority of economists think the earth is made of green cheese and the sun rises in the west.  And all agree that politicians have made a hash of the rescue of the economy.  Most all fail to note that the crisis was and is a function of free markets gone feral.

Once New Deal strictures tamed a rogue private banking sector.  Not long after those strictures were relaxed the excesses returned, cybernetically engineered into more complex and global and lethal strains.

Unfortunately this leaves the mainstream of economists — who have risen in promence in proportion to their willingness to adhere to a free market orthodoxy while ignoring the corporate oligarchy around them with nothing to talk about.  Or as in today’s idiot, with less than nothing to talk about.

We lead off with Gordon Brown, describing the nut of the problem.

Doofus Magee, AKA Arvin Subriamanian follows with a weak nonresponse.  The interviewer is Warren Olney of To the Point.

IDIOTS

Protectionism is the least of our worries.  Trade has collapsed with the exporting nations not from any protectionist measures, but because demand has collapsed.  The radical preference for free trade, of course, ignores the environmental impacts of transportation and other elements, but here the point is that the issue is raised to the level of significance when it is not significant.

To say that the Doha Round is an avenue to further trade liberalization is to ignore the evidence for the last round.  A free trade agreement can be written in a dozen pages.  It is the managed trade for the benefit of the powerful that takes the thousands of pages commonly found in the WTO agreeements.

And at the beginning, following Gordon Brown’s address of the problems of hot money, you see the complete inadequacy of these yokels when it comes to dealing with issues for which they have no sponsors in the corporate community.

So.  Arvin Subriamanian and Wolfgang Moonchow.  Idiots of the Week.

Now the History Note with Brad DeLong

Questioned by Tom Keene on Bloomberg on the Economy about whether there has ever been a situtation of plus ten percent unemployment with the overlay of financial crisis, DeLong replies.

DELONG

Brad DeLong.  One of the phony issues of the American Enterprise Right Wing is the supposed failure of the Roosevelt response to the Great Depression.  Because this response is so informative to today’s situation, the Right must mask and distort the history in order to mask and distort the appropriate policy.

One prominent contribution to this effort is Amity Schlaes’ book The Forgotten Man.  This is a book which could not have been written while those who had direct experience of the actual events were still alive.  Serious consideration of the absurd and intellectually dishonest propositions of the book depends on a certain level of ignorance.  The book has been embraced by advocates of market efficiency as a means of bolstering their own failing constructions.

Now and finally, the forecast.  We are pushing out two quarters our projection for the recovery of employment to take account of the ineffectual policy response to the financial sector meltdown.  Harking back to the beginning of today’s podcast and Joseph Stiglitz, until the losses incurred by the financial cowboys are directly addressed and assigned, a vigorous recovery cannot begin.  The current response is another attempt to finesse the problem, and it has to fail.

We were perhaps alone among forecasters to project employment leading the recovery rather than lagging it.  Now we’ve changed that call.  The bad news, we believe, WILL stimulate the correct policy response and that response will precipitate the recovery, just not as soon as we originally believed.  We need to be clear.  It will take further policy action to generate recovery.  It is not baked in.  We remain confident that the Obama administration is equipped to recognize the situation in real time and take those policy actions.