Mystery Economic Theater 2010

[cheesehead]

Okay, I'm convinced now. I withdraw my objections.

From these quotes, I get the impression that Krugman seems to think that interest-rate adjustments could prevent control bubbles as long as the adjustments were swift-enough and substantial-enough.

I sympathize with that wish, but it occurs to me that the Fed's interest-rate adjustments are one-dimensional (okay, maybe sorta two- or three-, since there's more than one type of rate they can adjust), whereas the economy's response is multidimensional. Housing sales might not move in phase with business capital investments, which might not move in phase with GDP, which ...

[Fusion_power]

Following the context of this thread re blowing bubbles but letting the economy down easy, it appears that the only way so far to ease down one bubble is to blow another. Said another way, you can either take your recession now or you can push it down the road a ways and take it later. The problem with this is easily summed up with the old adage 'if you ignore a problem long enough, it will get worse, much worse'.

Which leads to the thought that perhaps the best course is never to blow bubbles in the first place.

That's interesting ... your "last 30 years" reminded me of Arthur Schlesinger's theory of U.S. history, which I mentioned in early 2008.

There does seem to be a pattern with roughly a 60 year cycle in the economy. Whether it fits your quote or not, I do not know.

DarJones

[ewmayer]

Phrase of the Day

This is only tangentially related to the thread topic in that it is about America`s long-standing (and still not dampened enough) consumer fetish ... today`s "how to turn a phrase" award goes to expert phrase-turner Matt Taibbi, who writes in his Rolling Stone blog:

A few weeks [ago] I tried on a friend’s recommendation to get into Entourage and gave up after it struck me that it was the same show as Sex and the City – a drama about a foursome of impulsive yuppies with lots of disposable income who spend half of each show buying brand-name consumer products to make them feel better about having no brains/soul. And the plot of pretty much every reality show is the same: ordinary middle American Joes with poor taste meet silver-tongued, fake-boobed Hollywood/New York shopping expert, who tells them what a shitty house they’ve been living in and what ugly shoes they’re wearing, and hands them a bunch of cash so that they can shop themselves back to superficial respectability. The public seems to have a limitless appetite for this awful stuff, which makes me wonder if it’s possible to clinically diagnose an entire country with depression.

How Debt Can Destroy a Budding Relationship

How Debt Can Destroy a Budding Relationship. Nobody likes unpleasant surprises, but when Allison Brooke Eastman’s fiancé found out four months ago just how high her student loan debt was, he had a particularly strong reaction: he broke off the engagement within three days.

Ms. Eastman said she had told him early on in their relationship that she had over $100,000 of debt. But, she said, even she didn’t know what the true balance was; like a car buyer who focuses on only the monthly payment, she wrote 12 checks a year for about $1,100 each, the minimum possible. She didn’t focus on the bottom line, she said, because it was so profoundly depressing.

But as the couple got closer to their wedding day, she took out all the paperwork and it became clear that her total debt was actually about $170,000. “He accused me of lying,” said Ms. Eastman, 31, a San Francisco X-ray technician and part-time photographer who had run up much of the balance studying for a bachelor’s degree in photography. “But if I was lying, I was lying to myself, not to him. I didn’t really want to know the full amount.”

At a time when even people with no graduate degrees, like Ms. Eastman, often end up six figures in the hole and people getting married for the second time have loads of debt from their earlier lives, it should come as no surprise that debt can bust up engagements. Even when couples disclose their debt in detail, it poses a series of challenges.

When, exactly, are you supposed to reveal a debt of this size during the courtship? Earlier than you’d disclose, say, a chronic illness?

Even if disclosure doesn’t render you unmarriageable, tricky questions linger. If one person brings a huge debt to a relationship, who is ultimately responsible for making good on the obligation? And if it’s $170,000, isn’t the more solvent partner going to resent that debt over time no matter how early the disclosure comes? After all, it will profoundly affect every financial decision, from buying a home to how many children to have.

These were the questions that weighed on Kerrie Tidwell. A third-year student at the Medical College of Georgia and an aspiring emergency room doctor, she doesn’t worry so much about her ability to pay back her loans.

Ms. Tidwell, 26, is involved in a serious relationship with Stefan Kogler, an architect who is a native of Austria and living in Vienna. To Europeans, who often pay little or nothing toward their university studies, the idea of going deeply into debt to get educated is, well, foreign.

Ms. Tidwell feels no guilt about the $250,000 in debt she will probably run up, including some from a master’s degree program she completed in London, where she and Mr. Kogler met. “I didn’t acquire it because I go out and shop a lot,” she said. “It’s because I’m doing something that I’ll love for the rest of my life.”

Still, if she and Mr. Kogler are going to move in together and get engaged, she wants their financial arrangements to be clear and fair. But how do you define fair when you’re bringing a quarter of a million dollars in debt to a relationship?

My Comment: In my opinion, there is a strikingly similar - just on a different time scale - dynamic in U.S. higher-education as there was recently in real estate, which could well be dubbed the "college cost bubble". Just as during the housing bubble a seemingly endless supply of easy credit helped fuel a wild asset price runup, the ever-increasing availability of college-financing credit schemes (with the direct encouragement and sponsorship of the federal government) over the past 3-4 decades has inflated a huge “college cost bubble”, by allowing college tuition and related costs to increase at a rate significantly higher than inflation, year after year, for decades. College administrators have had no market-based incentives to rein in costs while the credit spigot has been open and the supply pressure ever-increasing. Compared to housing the bubble in college costs has been a “slow speed” one, but it has been no less spectacular in terms of magnitude.

And the rationale behind making credit as widely available as possible is also exactly analogous: With housing we had the misguided notions that “homeownership is a basic right” and that “the more people own a home, the better off the economy and country will be” … with college we have “higher education is a basic right”, and “the more people have a college degree, the better off the economy and country will be”. 100% pure unadulterated codswallop, especially when the cost of the college degree in question (including the opportunity cost of attending school versus entering the workforce sooner) is as disproportionate to the expected increase in earnings power - if any - it brings. $170,000 for a degree in "photography"? Getthefuckouttahere...

[ewmayer]

By the way, in his next blog posting after the one linked in my previous post, Taibbi has a pro-union (or perhaps more accurately, anti-faceless-corporatist) rant ... I would qualify this only with "many thousands of overpaid union workers can bankrupt their employer (or city, or state) just as surely as a few greedy executives can" ... the problem is that we seem to have lost a reasonable middle ground in these things:

On ESPN and "Replaceable" People

Almost everyone who has a job is economically "replaceable," but shit, outside an Ayn Rand novel, there's more to it than that. Does it make economic sense to fire the auto worker who mangles his hand in the factory machinery and bring in a younger guy with all his fingers? How about the secretary who refuses to fuck the boss, isn't she replaceable? Couldn't we put her ungrateful ass out on the street and bring in another, hotter girl to do the same job at the same price? How about a teacher who refuses to pass his failing students on to the next class? How about the worker on the oil rig who complains about his company's safety procedures? The aforementioned steelworker who gets a little too old and becomes too much of a liability to the company health plan? The government civil servant who turns whistleblower?

Yes, Colin [Cowherd, host of an ESPN afternoon sports show], you spoiled little fuckhead, we can replace all of these people. After all, you're right, none of them are truly valuable, at least not like Simon Cowell or Rush Limbaugh, anyway.

But we don't always replace them, because some people in our past spent generations fighting to push us up above the level of savages. Unions aren't perfect, and they don't always pick the right causes to fight for, but they have to exist precisely because the vast majority of workers are replaceable, which is to say not special, which is to say vulnerable. Not that Cowherd would have any reason to know this, but that's what a "job" is, as opposed to what he and I both have, careers -- a job always involves shelving your own personal creativity and ambition to at least some degree, in order to push someone else's idea along for a while.

Measuring people by how much numerical wealth they produce is a kind of psychopathy -- it's that kind of thinking that led to Larry Summers^* famously saying that African countries are "underpolluted," because poisoning people in low-GDP African states makes less sense than poisoning the relatively more economically productive citizens of Western countries in Europe and America.

That kind of thinking is spreading, because our pop culture priests have succeeded in filling the population with shame and nervous self-loathing to the point where they think of anyone who isn't an employer as a parasite, and anyone who isn't rich and famous, or trying to be, as a loser. People even think of themselves this way, which is why there are so many down-and-out people voting to give tax breaks to the same bankers who've been robbing them for years, and booing when the mere concept of unions shows up for a few seconds in a football game. It's sad, and a lot of it's the fault of mean little assholes like Cowherd. Shame on him.

^*[Obama top economic advisor, former Harvard president, a.k.a. "the man who single-handedly set back Harvard's endowment by a decade" and all-around candidate for "biggest douchebag in the history of the known universe"]

[garo]

http://www.eurointelligence.com/inde...=581&tx_ttnews[tt_news]=2895&tx_ttnews[backPid]=901&cHash=50b405da12

The entire article is worth reading. I quote a couple of extracts below.

To someone who had lived through the 1930s, this would not have seemed at all strange. The 1920s had seen a gradual reconstruction of the international economy, and with it signs that Germany was being successfully reintegrated into the international community: the signing of the Locarno Treaties in 1925, Germany's admission to the League of Nations in 1926, the agreement of the Young Plan in August 1929. Moderates had reasons to be optimistic. The Nazis obtained just 2.6% of the vote in 1928.
Then, in late 1929, the Great Depression hit and everything fell apart. Thanks to Brüning’s deflationary policies, Germany’s national income fell by more than a quarter, and official unemployment rose to almost a third of the labour force. Optimism was replaced by a profound sense of insecurity. Inevitably, the extremist parties benefitted. In 1930 the Nazis increased their share of the vote to 18.3%, while in July 1932 they scored 37.8%. By this stage Brüning was gone, his successor adopted some modestly stimulative policies, and there were signs of a partial recovery. Not coincidentally, in November 1932 the Nazi share dipped to 33.1%; but by then it was too late, and the Weimar Republic was doomed.

To quote Tony Judt: “why have we been in such a hurry to tear down the dikes laboriously set in place by our predecessors? Are we so sure that there are no floods to come?”

[garo]

http://www.ritholtz.com/blog/2010/09...these-7-ideas/

If you were going to give me a trillion dollars to stimulate the economy so that the next expansion could proceed, here’s what I would do:

1) One Year Payroll Tax Holiday: Want to increase job creation and reduce unemployment? Tax it less. A 12 month employer FICA holiday will encourage job creation.
How to pay for it: Raising both the retirement age and the cap on FICA contributions.
2) Capital Investment 1 year 100% Deduction: The administration has already proposed a variation on this. It was an effective tax credit when done in 2004-05, but the drawback was it encouraged CapEx over new hiring. The idea of the payroll tax holiday is that it prevents that drawback.
How to pay for it: Via gains from the Corporate Tax-Free Repatriation (#3)
3) Corporate Tax-Free Repatriation: US corporations are sitting on trillions of dollars of cash in their overseas divisions. A one year tax holiday to bring that back to the US. It can be structured in tiers (0%, 5%, 10%). The goal should be to bring to the US a trillion plus in overseas profits.
How to pay for it: Its free; These are overseas revenues that are untaxed by the US.
4) Pure Science R&D Program for Alternative Energy: Gains in the basic science of solar energy conversion, battery storage, alternative biofuels, etc has been incremental. The private sector does not patience for multi-year or basic science R&D.
How to pay for it: Via a Pigouvian tax on gasoline, phased in over 5 or 10 years.
5) Mortgage Principal Write Down Plan: Buyers paid too much, banks lent too much against residences at the top of the RE cycle. To get the sector healthy again requires prices to normalize, which is now occurring thru Foreclosure. An alternative is a voluntary principal write-down, where both the borrower and lender split the losses. An underwater home is refinanced at its 2011 appraisal value, with the mortgage shortfall rolled into a 10 year interest free balloon payment. Banks cut the balloon loan in half in year 10, rolling it into the existing mortgage (assuming the owner stays current on mortgage).
How to pay for it: There is no costs, but Congress would need to make the 10 year zero interest free tax free, and permission the banks to defer reserving for eventual balloon defaults for the same 10 year period.
6) Electrical Grid Refurbishment: This is both an economic and national security issue: The electrical grid is an unreliable mishmash of public and private ownership, vulnerable to both blackouts and cyber-attacks. It needs to be upgraded yesterday.
How to pay for it: A one cent per kilowatt hour grid tax.
7) Airports, Ports, Roads, Bridges, Tunnels: The US was one of the first nations to build out a massive interstate highway system. We love big construction projects, but we seem to dislike the maintenance. Most of the transportation grid in the US is falling apart, in need of a massive repair. Many US airports look like they are from 3rd world countries.
How to pay for it: Usage tolls on roads, ports, bridges, landing slots.

[ewmayer]

Two related pieces from the Irish Independent describe the dire straits facing Ireland and banks:

Irish Labour Party Leader: Defaulting on Anglo debts now on agenda

These are desperate economic times. So desperate that the subject of Ireland defaulting on its bank and sovereign debts is now routine conversation among academics, bankers and economists.

However, up until now, such an idea was rarely entertained by senior politicians, but in a surprising move yesterday the leader of the Labour Party, Eamon Gilmore, came very close to suggesting such a course of action when he talked about the Government "negotiating" with bondholders in Anglo Irish Bank.

While Mr Gilmore trenchantly denied such an approach meant defaulting, he certainly came very close to that position. According to the last balance sheet published for Anglo Irish Bank, bondholders have €16.5bn invested in the bank, while other investors have €2.4bn invested in more risky subordinated bonds at Anglo.

While there is almost unanimous agreement now that the subordinated bondholders should be either given nothing or very little by the Irish State, the more pressing issue is whether Ireland, which now owns Anglo, should welch on obligations to the senior debt holders, most of them German, British and French asset and pension funds.

Mr Gilmore said he was not recommending a default on these debts, but instead was suggesting negotiations begin with the holders. This suggestion has a populist ring to it, because as long as the bondholders don't absorb any losses, it means all of the Anglo losses are absorbed by the Irish taxpayer instead.

My Comment: The article goes on to describe the 2 likely scenarios: outright haircut for bondholders or debt-for-equity swap, both of which amount to much the same thing.

And there are definite rumblings pointing to a Greek-style bailout/austerity/restructuring involving the IMF:

Irish Government perilously close to calling in IMF, report warns

TAOISEACH Brian Cowen last night insisted he would fight on -- but his economic woes deepened as a major new report warned the country was perilously close to calling in outside help from the EU or the IMF.

After a disastrous three days, Mr Cowen offered little comfort to disgruntled Fianna Fail backbenchers as he failed to outline what changes he would make to his leadership, communications and lifestyle as a result of his 'Morning Ireland' interview debacle.

But the persistent grumbling over his leadership was overshadowed last night by two new economic blows.

The cost of borrowing for the country moved higher again on international bond markets, after falling back following last week's government decision to split Anglo Irish Bank.

And a report from Barclays, one of Europe's largest banks, said Ireland may yet need financial help from the IMF or the EU if conditions got any worse.
...
While Ireland has raised most of the money it needs for this year, the cost of Anglo and the scale of the deficit meant any further financial shocks could push the country over the edge, the bank warned.

My Comment: Any of our Irish readers care to fill in us non-Gaelic speakers what a "Taoiseach" is?

[i]Update: I see via an online Gaelic dictionary that Taoiseach [pronounced tee-shuckh] means "prime minister".

[garo]

Ah yes! There is an amusing exchange going on in the otherwise excellent irisheconomy.ie thread: http://www.irisheconomy.ie/index.php...presentations/

All the VIs (vested interests) are making all the right noises about this being ridiculous and unhelpful and that Ireland is totally fine. But in the end, I am of the opinion that there will be a bailout or restructuring in the next 5 years.

PS: The Morning Ireland interview debacle is when he showed up for a radio interview and sounded drunk or hung-over.

[cheesehead]

Originally Posted by garo

PS: The Morning Ireland interview debacle is when he showed up for a radio interview and sounded drunk or hung-over.

He wasn't pulling a Joaquin Phoenix?

[garo]

Listen to it yourself. It is the 14th of September:
http://www.rte.ie/radio1/podcast/pod...ingireland.xml
Cowen pledges to be 'more cautious' in his social life
17:32Taoiseach plans to be more careful after radio interview embarrasses Government

[ewmayer]

A bit of irreverent Friday humor to end the week: While we're on the subject of controversial Irish lads...

Anybody see those inane Louis Vuitton handbag ads featuring U2 frontman Boner (that's the U.S. spelling ... we don't do faux-Latin over here, y'all) and Ali (the model, not the boxer) on Safari in Africa? Picture a small plane parked out in the middle of the African savanna ... out steps Boner wearing his wraparound anal-explorer sunshades, preceded by willowy beauty Ali, both looking fabulously stylish and ready for anything the African plains can throw at them ... because they've got their overpriced Louis Vuitton bags, of course. The subtitle for the ad should be "Presenting the 2 people on earth most in need of trampling by an enraged elephant."

The ad mentions that some money is going to charity, or something. I guess that`s supposed to make it "not Boner's latest ego-trip". LOL...Perhaps South Park best captured the essence of the Bonerous one.

Ah, found a link about the ad (if you thought I was being snarky, check out the user comments to that) - It's actually Boner and model-slash-wife Ali, and the photo is by Annie Leibovitz, who is apparently working overtime to raise cash to keep her life's work out of the repo man's clutches: