Mystery Economic Theater 2010

[ewmayer]

Originally Posted by ewmayer

Medical waivers would of course also be a possibility - so long as one ensures that exception doesn't get abused.

For an example of abuse of disability-related medical waivers, look no further than this fellow from Wisconsin (hat tip Mish Shedlock):

Dave Orlowski can swim 2.4 miles. He can bike 112 miles. He can run 26.2 miles.

In fact, the 54-year-old athlete can do all of these one right after the other - several times a year. He completed six Ironman triathlons last year, has done three so far this year and hopes to compete in yet another one in Klagenfurt, Austria, on July 4.

Orlowski can also play a round of golf, as he did recently at a fund-raiser for the Make-A-Wish Foundation of Wisconsin.

But this is something the guy won't do:

He won't work for the Milwaukee Police Department.

That's because the former homicide detective has been declared "permanently and totally incapacitated for duty."

As an injured ex-cop, Orlowski has been paid nearly $500,000 in tax-free pension checks by the city since 1999. He is currently receiving $53,063 a year from the city Employees' Retirement System, plus full health benefits.

My Comment: It's the mental trauma, post-traumatic something-or-other disorder ... you see, he *has* to compete in those grueling triathlons just to keep the mental demons at bay. I was so traumatized reading the above article, I may apply for disability leave myself.

[ewmayer]

Sales of U.S. New Houses Plunge to Lowest Level on Record: Purchases of U.S. new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Purchases of U.S. new homes fell in May to the lowest level on record after a tax credit expired, showing the market remains dependent on government support.

Sales collapsed an unprecedented 33 percent from April to an annual pace of 300,000, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

Sales were projected to drop 19 percent to a 410,000 annual pace, according to the median estimate of 76 economists surveyed. Forecasts ranged from 300,000 to 530,000. The government revised April’s purchase rate down to 446,000 from a previously reported 504,000.

My Comment: That is one heckuva fat downward revision ... how much do you want to bet the original (now rendered laughable) number was greeted with great cheers of "better than expected!!!" ? But leave it to the sell-side shills to figure out a way to put a positive spin on the latest figures;

Housing’s role has shrunk so much that a renewed slump will do less damage to the world’s largest economy, said Jay Feldman, an economist at Credit Suisse in New York. Residential construction accounts for a record-low 2.4 percent of gross domestic product, down from 6.3 percent when the boom peaked in 2005, he said.

My Comment: ...completely ignoring the damage that another leg down in housing will do to underwater-on-their-mortgage folks who are only hanging on because prices seem to have stabilized.

Britain Unveils Emergency Budget:

Britain Unveils Emergency Budget: Setting the scene for years of potential strife with the powerful public-sector unions and their allies in the Labour Party, Britain’s new coalition government on Tuesday unveiled the most severe package of spending cuts and tax increases since the early days of Margaret Thatcher’s era.

The cuts and tax increases, including average budget reductions of 25 percent for almost all government departments over the next five years, will make Britain a leader among European countries, including Ireland, Greece and Spain, competing to show they can slash spending and appease investors worried about surging debt. But the sharp reductions defy conventional economic wisdom, which holds that governments should increase spending to stimulate growth when the private sector is weak.

The steps outlined to the House of Commons by George Osborne, the chancellor of the Exchequer, would cut the annual government deficit by nearly $180 billion over the next five years, shrinking Britain’s public sector and instituting tough reductions in public housing benefits, disability allowances and other previously sacrosanct aspects of the country’s $285 billion welfare budget.

Only health and international aid spending would be protected from the 25 percent cuts for government departments by 2015,
...
Over the longer term, the main significance of the budget may be judged to be the signal it gave that the Cameron government is prepared to wage a political war to reduce the size of the public sector in Britain, which expanded rapidly under Labour. During that time, more than one million jobs were added to the public payroll, and the public sector accounted for roughly half of the economy.

My Comment: Let`s re-examine that "conventional Keynesian wisdom," shall we?

Cameron Betting on Prosperity From Austerity; Obama Delays: World leaders from the U.K.’s David Cameron to Naoto Kan of Japan are betting they can deliver fiscal austerity without derailing economic prosperity. History suggests they may be right.

Governments have proven they can spur expansion by focusing their belt-tightening on spending cuts rather than tax increases, according to studies by Harvard University professor Alberto Alesina and Goldman Sachs Group Inc. economists Kevin Daly and Ben Broadbent.

“There have been mountains of evidence in which cutting government spending has been associated with increases in growth, but people still don’t quite get it,” Alesina said in an interview. He made a presentation to European finance chiefs on the topic during their April meeting in Madrid.
...
The key is an emphasis on cutting spending rather than raising taxes, said Goldman Sachs economists Broadbent and Daly in London. Lower spending means consumers and companies don’t fear higher taxes, so demand accelerates. A smaller public sector also helps reduce borrowing costs and makes economies more competitive as fewer government workers lighten labor expenses.

In a study of 44 large fiscal adjustments in 24 advanced economies since 1975, Broadbent and Daly discovered that reducing expenditures by 1 percentage point a year boosted average annual growth by 0.6 percentage point. Raising the ratio of taxes to GDP by the same margin cut growth by an average 0.9 percentage point.

The equity markets of the countries that sliced spending beat those of other advanced nations by 64 percent during a three-year period, and their bond yields fell by more than if budget adjustments had been driven by tax hikes, according to the report....

The U.K., home to the G-20’s biggest budget shortfall, may be a test case. Cameron’s government today introduced an emergency budget aimed at tackling a deficit that reached 11 percent of GDP in the last fiscal year. Spending reductions accounted for 77 percent of the cutbacks proposed by Chancellor George Osborne, who said it was a “false choice” to say policy makers must pick between dealing with debt and going for growth.

“If the U.K. budget is well received by investors and voters, that will have a profound effect on the debate elsewhere,” said Tim Adams, a former U.S. Treasury undersecretary and now managing director of the Lindsey Group, a Fairfax, Virginia-based investment consulting company. “If the U.S. is smart, it will be paying close attention to what happens.”

[garo]

There is some cherry-picking in Broadbent and Daly's data. Why do they start from 1975? Why not earlier? There is also the issue of correlation and causation. But I refer back to Steve Waldmann's post that it is not the amount of cuts or expenditures that matter but what they are!

An article that is somewhat loosely related to the theme of this thread but required reading:

Are We Going Down like the Soviets?

Looking back, the most distinctive feature of the last years of the Soviet Union may have been the way it continued to pour money into its military -- and its military adventure in Afghanistan -- when it was already going bankrupt and the society it had built was beginning to collapse around it. In the end, its aging leaders made a devastating miscalculation. They mistook military power for power on this planet. Armed to the teeth and possessing a nuclear force capable of destroying the Earth many times over, the Soviets nonetheless remained the vastly poorer, weaker, and (except when it came to the arms race) far less technologically innovative of the two superpowers.

In the fall of 2008, the abyss opened under the U.S. economy, which the Bush administration had been blissfully ignoring, and millions of people fell into it. Giant institutions wobbled or crashed; extended unemployment wouldn’t go away; foreclosures happened on a mind-boggling scale; infrastructure began to buckle; state budgets were caught in a death grip; teachers’ jobs, another kind of infrastructure, went down the tubes in startling numbers; and the federal deficit soared.
Of course, a new president also entered the Oval Office, someone (many voters believed) intent on winding up (or at least down) Bush’s wars and the delusions of military omnipotence and technological omniscience that went with them. If George W. Bush had pushed this country to the edge of disaster, at least his military policies, as many of his critics saw it, were as extreme and anomalous as the cult of executive power his top officials fostered.
But here was the strange thing. In the midst of the Great Recession, under a new president with assumedly far fewer illusions about American omnipotence and power, war policy continued to expand in just about every way. The Pentagon budget rose by Bushian increments in fiscal year 2010; and while the Iraq War reached a kind of dismal stasis, the new president doubled down in Afghanistan on entering office -- and then doubled down again before the end of 2009. There, he “surged” in multiple ways. At best, the U.S. was only drawing down one war, in Iraq, to feed the flames of another.
As in the Soviet Union before its collapse, the exaltation and feeding of the military at the expense of the rest of society and the economy had by now become the new normal; so much so that hardly a serious word could be said -- lest you not “support our troops” -- when it came to ending the American way of war or downsizing the global mission or ponying up the funds demanded of Congress to pursue war preparations and war-making.

[ewmayer]

Originally Posted by ewmayer

U.S. Identifies Vast Riches of Minerals in Afghanistan: The United States has discovered nearly $1 trillion in untapped mineral deposits in Afghanistan, far beyond any previously known reserves and enough to fundamentally alter the Afghan economy and perhaps the Afghan war itself, according to senior American government officials.

Here is what George`s favorite "colorful" Florida congressman - Alan Grayson - has to say about the "revelation of huge mineral wealth":

In the New York Times for June 13th, the Pentagon proclaimed that Afghanistan holds almost one trillion lira - no, sorry, that's one trillion dollars - in hitherto-unknown mineral wealth.

Allow me to offer these revelations:

(1) Paris Hilton actually is Albert Einstein, with a wig. Think about it - you've never seen them together, have you?

(2) The Moon is made of green cheese. Specifically, a lovely Camembert, slightly fruity, that goes very well with cabernet.

(3) While you were at work today, someone broke into your house, stole everything, and replaced it with an exact duplicate (apologies to Steven Wright).

$1 trillion dollars in mineral wealth in Afghanistan. What a lame excuse for a lame excuse.

But the interesting thing is that the Pentagon felt it necessary to serve up this fevered imagining. Why? Because they say that they need another $33 billion for the war by July 4th, or, or, or, I don't know - they just say that they need it. And for once, Congress isn't falling all over itself to give the generals whatever they want. So get ready to hear about lithium in Afghanistan, oil in Iraq, and diamonds in your bathtub.

With 14 million Americans out of work, support for endless war is crumbling. People want an America that is #1 in health, #1 in education, #1 in quality of life, not #1 in number of foreign countries occupied.

My Comment: In other news, Obama has accepted Gen. McChrystal`s resignation over the "bad-mouthing the pols" flap and replaced him with Ge. David Petraeus of Iraqi-surge fame ... the McChrystal episode was bizarre, I can`t imagine someone as famously self-disciplined as McChrystal would say things like that to a reporter [i.e. *knowing* it was on the record] unless he in some way *wanted* to vent, and perhaps force longstanding frustrations with the the Afghan strategy to a head.

Or maybe he`s just fundamentally one of those lifetime-military top dogs who deep-down can`t accept [or chafe under] the constitutionally-mandated civilian control [president as commander-in-chief] of the U.S. military - Douglas MacArthur was like that.


More Revelations About the Role of HFT in the May 6th Flash Crash:

ZeroHedge features the disturbing [but not entirely surprising] findings of stock-price "quote stuffing" by one or more HFT algos during the May 6th Flash Crash:

How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any Moment

While analyzing HFT (High Frequency Trading) quote counts, we were shocked to find cases where one exchange was sending an extremely high number of quotes for one stock in a single second: as high as 5,000 quotes in 1 second! During May 6, there were hundreds of times that a single stock had over 1,000 quotes from one exchange in a single second. Even more disturbing, there doesn`t seem to be any economic justification for this. In many of the cases, the bid/offer is well outside the National Best Bid/Offer (NBBO). We decided to analyze a handful of these cases in detail and graphed the sequential bid/offers to better understand them. What we discovered was a manipulative device with destabilizing effect.

What benefit could there be to whomever is generating these extremely high quote rates? After thoughtful analysis, we can only think of one. Competition between HFT systems today has reached the point where microseconds matter. Any edge one has to process information faster than a competitor makes all the difference in this game. If you could generate a large number of quotes that your competitors have to process, but you can ignore since you generated them, you gain valuable processing time. This is an extremely disturbing development, because as more HFT systems start doing this, it is only a matter of time before quote-stuffing shuts down the entire market from congestion.

My Comment: Essentially an HFT algo executing a DDOS attack on its computerized rivals ... and this is what passes for a "market" these days.

[cheesehead]

Originally Posted by ewmayer

My Comment: Let`s re-examine that "conventional Keynesian wisdom," shall we?

You mean

"conventional" Keynesian "wisdom"

don't you, since the article doesn't contain the words "Keynesian" or even "Keynes"?

- -

When Obama first proposed his stimulus program, I pointed out that this represented an opportunity to gather data about effects of the stimulus in order to test the Keynes theory. (Distinguishing signal from noise is a problem, of course, but that's true in many cases.) Has any group announced their intention to do such in a scientific way?

[cheesehead]

Originally Posted by ewmayer

More Revelations About the Role of HFT in the May 6th Flash Crash:

ZeroHedge features the disturbing [but not entirely surprising] findings of stock-price "quote stuffing" by one or more HFT algos during the May 6th Flash Crash:

How HFT Quote Stuffing Caused The Market Crash Of May 6, And Threatens To Destroy The Entire Market At Any Moment

My Comment: Essentially an HFT algo executing a DDOS attack on its computerized rivals ... and this is what passes for a "market" these days.

Skynet approacheth.

[ewmayer]

Originally Posted by cheesehead

You mean

"conventional" Keynesian "wisdom"

don't you, since the article doesn't contain the words "Keynesian" or even "Keynes"?

The "conventional wisdom" was obviously a la Keynes ... leave it to an uncritical accepter of Keynesian theory to omit mentioning the originator by name - as if there were no plausible alternatives.

But I should have been more careful and used the more precise term "neo-Keynesianism" ... the article below explains the difference quite well:

The best stimulus? Spend less, borrow less

FORTUNE -- Of all the highlights of Allan Meltzer's half-century as a distinguished monetarist -- advising Presidents Kennedy and Reagan, producing celebrated books on John Maynard Keynes and the history of the Federal Reserve -- none proved more memorable than a crisis session at 10 Downing Street in mid-1980.

A group of 346 noted economists had just written a scathing open letter to Prime Minister Margaret Thatcher, predicting that her tough fiscal policies would "deepen the depression, erode the industrial base, and threaten social stability." Thatcher wanted to make absolutely certain her unpopular attack on huge deficits and rampant spending, in the face of high unemployment and a weak economy, was the right one.

So Thatcher summoned Meltzer, along with a group of trusted advisors, to explain why the experts were wrong. Even leaders of her own party advised Thatcher to make what they called a 'U-Turn,' and enact a big spending program to pull Britain out of recession. "Our job was to explain why lower deficits and spending discipline were the key to recovery," recalls Meltzer.

Thatcher was regally unamused by arcane jargon. "Being right on the economics wasn't enough," intones Meltzer. "She made it clear that our job was to explain it so she could understand it. If we didn't, she made it clear we were wasting her time. She'd say, 'You're not telling me what I need to know.'"

Thatcher stuck with draconian policies, invoking the battle chant "The Lady's Not for Turning." She launched Britain years of balanced budgets, modest spending increases, falling joblessness, and extraordinary economic growth.

[EWM: Whether Thatcher deserves such unabashed praise is a separate discussion ... I'm interested in the Keynes angle here.]

Misunderstanding Keynes

For Meltzer, the courageous, damn-the-sages stance that Thatcher took three decades ago should guide President Obama today. "If Obama announced a strategy to deal with the long-term debt and stopped doing things to increase the uncertainty that businesses face, it would do a great deal to stimulate the economy," declares the 82-year old Meltzer.

Meltzer is right, and most of the "experts" -- from Paul Krugman to Ben Bernanke -- are wrong. The best stimulus is a solid, credible plan to radically reduce government spending, starting right now.

To be sure, President Obama frequently advocates shrinking deficits in future years. The problem is that he wants to keep spending heavily today, in what's supposedly a classic Keynesian formula for charging a weak recovery and lowering unemployment.

But that formula isn't what Keynes recommended. "Keynes championed temporary deficits to stimulate consumption during recessions," says Steve Hanke, an economist at Johns Hopkins. "But he also insisted that deficits disappear during recoveries, so that budgets would be balanced or in surplus during most of the business cycle."

Today, the administration is pursuing a totally different policy. It's sharply raising expenditures when the U.S. already faces gigantic, chronic deficits that barely shrink even in a recovery, and burgeoning debt. "Keynes specifically warned against structural deficits when both U.S. and British economists were pushing for them at the end of World War II," says Meltzer. "He never said that more spending on top of chronic deficits was a stimulus. Just the opposite, in fact."

My Comment: As I`ve said before, my main beef with Keynes is his shocking naïveté with respect to how governments and large bureaucracies, and entitlement-spending programs actually function. Once you make an economy dependent on the government teat - even if merely "temporarily" - it can be very hard to wean it off. That’s why I draw less of a distinction between “classic Keynesianism” and “neo-Keynesianism” than Meltzer et al do – in the real world classic Keynesianism almost never works as it requires far more fiscal discipline than most vote-buying politicians and power-drunk economy-micromanaging central bankers can muster up. As result, once tried – especially if successfully [or perceived as having been so] it almost inevitably morphs into neo-Keynesianism.

[cheesehead]

Originally Posted by ewmayer

The "conventional wisdom" was obviously a la Keynes ... leave it to an uncritical accepter of Keynesian theory to omit mentioning the originator by name - as if there were no plausible alternatives.

All I meant was simply that the article's actual phrase is "conventional economic wisdom", so claiming that that meant Keynesian should have been conveyed by:

"conventional economic wisdom" [where "conventional" = Keynesian]

or

"conventional [Keynesian] economic wisdom"

or something like that, or else not to use quotation marks at all.

[cheesehead]

Originally Posted by ewmayer

I contend that if conservatives had not abandoned their traditional fiscal responsibility at the end of the 1970s, they would today have great persuasive power to convince the public to oppose excessively prolonged deficits.

But because they did make that abandonment, today (and for a long time to come) any effort they make to argue for reducing deficits will be undercut by the plain historical record that GOP administrations ran up $7 trillion of deficit between 1980 and 2010, and that the only balanced budgets during that 30 years were the result of a Democratic administration.

Conservatives talk about "moral hazard", but they themselves created that whopping big moral hazard that now cripples their attempts to pretend to take the fiscal high road.

[Fusion_power]

Cheesehead, deliberate misattribution is not seemly.

Go back over the last 30 years administrations and look how many times we had a democrat president and a republican congress or vice versa. I think you will find that the most prosperous years were all at times when we had opposite parties in control. Bill Clinton was hamstrung by the republican congress. It kept him from implementing any of his major campaign commitments. It also kept the business cycle intact and permitted greenspun to blow huge asset bubbles. The end result was an economy that produced surpluses. That is not a credit to a democrat president. It is a credit to a lack of government interference in the economy.

DarJones

[ewmayer]

Originally Posted by Fusion_power

Go back over the last 30 years administrations and look how many times we had a democrat president and a republican congress or vice versa. I think you will find that the most prosperous years were all at times when we had opposite parties in control. Bill Clinton was hamstrung by the republican congress. It kept him from implementing any of his major campaign commitments. It also kept the business cycle intact and permitted greenspun to blow huge asset bubbles. The end result was an economy that produced surpluses. That is not a credit to a democrat president. It is a credit to a lack of government interference in the economy.

I would argue that the Green Goblin's allegedly "laissez faire" policies were deliberately one-sided in a way which amounted to government [by way of the Federal Reserve] attempting to micromanage the business cycle and "support the markets", with epic-credit-bubble-and-bust disastrous consequences. The laissez-faire was really only with respect to regulation, where nonfeasance was the order of the day. By actively encouraging EZ-credit, speculation and leveraging-up on the one hand and gutting regulation on the other, the Greenspan Fed interfered in the economy to an unprecedented extent. Barry Ritholtz has written extensively on this.

Five presidents [Reagan, who first appointed Greenspan to head the Fed, Bush Sr, Clinton, Bush Jr, Obama] and all the accompanying congresses have swallowed the Greenspanian market-propping and asset-bubble-blowing economic model - the failure of leadership here is both colossal and thoroughly bipartisan. I Include Obama because even though there's tough talk about regulation now, the push to blow bubbles [now a neo-Keynesian sovereign debt bubble in a vain attempt to reflate the consumer-credit and housing-price ones] is as string as ever.

----------------------------------------

Lawmakers Agree on "Historic" Wall Street Reform: U.S. lawmakers hammered out a historic overhaul of financial regulations as dawn broke over the nation's capital on Friday, handing President Barack Obama a major domestic policy victory on the eve of a global summit devoted to financial reform.

In a marathon session of more than 21 hours, legislators agreed to a rewrite of Wall Street rules that may crimp the industry's profits and subject it to tougher oversight and tighter restrictions.

To secure agreement, lawmakers reached deals in the final hours on the most controversial sections which restrict derivatives dealing by banks and curb their proprietary trading to shield taxpayer-backed deposits from more risky activities.

Banks will be allowed to keep most swaps dealing activity in-house, although the riskiest trading would be pushed out. They will also be permitted small investments in hedge funds and private equity funds.

My Comment: Sounds pretty good on its face ... but as usual,let`s look beyond the headlines. Here is Denninger`s take, qualified with a loud "must wait until we see the final version of the bill gets signed into law" disclaimer:

The ink is not yet dry and there`s no vote yet on exactly what this bill actually is and does. I`ll be doing my usual analysis once I have an actual stable copy.

But what I can tell [so far] this is what we got:

* Banks will have to spin off SOME (but not the important parts) of their derivative operations. The parts they care about (and on which they make the most money) are not credit-default swaps, they`re interest-rate and FX [foreign exchange, i.e. currency] swaps. Those are pretty much left alone, and that stinks.

* Investing in hedge funds is a red herring. Controlling them is another matter, and might in fact be worthwhile reform. We`ll see. Color me skeptical on this one until I can read the ACTUAL text as passed.

* It appears that language that would prevent banks from taking positions opposite to their clients (as opposed to hedging market-making risk) has survived. This would prevent the Goldman-esque game played with various CDO structures. Again, I wait until I can read actual language before I call this good.

* Increasing capital is good. Not forcing that capital to cover all unsecured lending is bad. The attempt to split the baby and keep the "credit leverage" game is clear in the legislation, but so far nothing they`ve tried has made that actually work, nor do I think it can. Thus, the major factors in the instability we experienced remain intact and that`s bad.

* Fannie and Freddie are left out of it. That`s horrible. I know the banks went bananas on the possibility they`d be constrained, but they need to be constrained and the banks need to be forced to pay for their part of interacting with Fan/Fred and causing this mess. Not in this bill it won`t, and that sucks.

Much of the bill also won`t do anything immediately, as it "enables" rather than directs in and of itself. That`s very bad, as the regulatory capture process remains intact. What actual regulations will come out of this remain an open question.

On balance: Better than no bill, and Judd Gregg claiming that the bill is a "disaster" and will "dramatically contract credit" is just pure garbage. What it will do is stop a small amount of unsupportable and unsustainable lending, but nowhere near enough of it. It will not stop excessive risk-taking and risk-layering. The capital requirements aren`t stringent enough, the "Volcker Rule" was watered down to the point of being of little effect and the derivatives regulation was eviscerated.

Oh, and nowhere that I can find - thus far - is there an "or else" for either a bank or a regulation for violations of the law.

On balance, thus far, I call it this:

All bun to (try to) soothe the masses and electoral anger, no beef.

My Comment: And here is a synopsis of Barry Ritholtz`s grading of the bill-as-currently-constituted:

NEW REGULATORY AUTHORITY: Grade: C+
LEVERAGE: Grade: F
FINANCIAL STABILITY COUNCIL: Grade: B-
MORTGAGE UNDERWRITING STANDARDS: Grade A
CREDIT RATING AGENCIES: Grade: F
DERIVATIVES: Grade B+
VOLCKER RULE: Grade A-
CORPORATE PAY: Grade F
FEDERAL PRE-EMPTION OF STATE BANKING RULES: Grade C+
DEPOSIT INSURANCE: Grade B-
CONSUMER AGENCY: Grade D+