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WSJ Oped Blames Easy Money for Weak Housing Market

You can’t make this stuff up – the latest from the economic know nothings at the WSJ Editorial Page:

As for the Fed, we’d feel better if current Chairman Ben Bernanke had been running a tighter monetary policy for the last year; it might have left him with more policy room if the economy does turn sour. As it is, any easing now runs the risk of a dollar rout, which could lead to an even larger loss of confidence and selloff. The current problems in the housing credit markets owe a great deal already to the Fed’s mistake in keeping monetary policy too easy for too long during the late Greenspan era. We now have to ride them out, and Mr. Bernanke shouldn’t make them worse with a panicky, premature easing.

Because interest rates did not rise even higher, the FED has no room to lower them now? Do these fools realize that the reason the Greenspan FED kept interest rates low was to reverse the business investment slump? Or do they think there are different financial markets for business versus residential investment? I’m glad Chairman Ben is running the show and not these clowns.

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Blood for Oil

With a hat tip to Barkley, let’s check out what Pepe Escobar writes about those Iraqi production sharing agreements:

On Monday, Prime Minister Nuri al-Maliki’s cabinet in Baghdad approved the draft of the new Iraqi oil law. The government regards it as “a major national project”. The key point of the law is that Iraq’s immense oil wealth (115 billion barrels of proven reserves, third in the world after Saudi Arabia and Iran) will be under the iron rule of a fuzzy “Federal Oil and Gas Council” boasting “a panel of oil experts from inside and outside Iraq”. That is, nothing less than predominantly US Big Oil executives. The law represents no less than institutionalized raping and pillaging of Iraq’s oil wealth. It represents the death knell of nationalized (from 1972 to 1975) Iraqi resources, now replaced by production sharing agreements (PSAs) – which translate into savage privatization and monster profit rates of up to 75% for (basically US) Big Oil. Sixty-five of Iraq’s roughly 80 oilfields already known will be offered for Big Oil to exploit … Nobody wants to colonial-style PSAs forced down their throat anymore. According to the International Energy Agency, PSAs apply to only 12% of global oil reserves, in cases where costs are very high and nobody knows what will be found (certainly not the Iraqi case). No big Middle Eastern oil producer works with PSAs. Russia and Venezuela are renegotiating all of them. Bolivia nationalized its gas. Algeria and Indonesia have new rules for future contracts. But Iraq, of course, is not a sovereign country. Big Oil is obviously ecstatic – not only ExxonMobil, but also ConocoPhillips, Chevron, BP and Shell (which have collected invaluable info on two of Iraq’s biggest oilfields), TotalFinaElf, Lukoil from Russia and the Chinese majors. Iraq has as many as 70 undeveloped fields – “small” ones hold a minimum of a billion barrels. As desert western Iraq has not even been exploited, reserves may reach 300 billion barrels – way more than Saudi Arabia. Gargantuan profits under the PSA arrangement are in a class by themselves. Iraqi oil costs only US$1 a barrel to extract. With a barrel worth $60 and up, happy days are here again.

Barkley challenges the claim that extraction costs are only $1 a barrel:

I note that Escobar’s article has some errors in it, including the ridiculous claim that it only costs $1 per barrel to pump oil in Iraq. It is up to $3 per barrel in Saudi Arabia, so, while there are still huge profits at $60 per barrel for crude, $1 per barrel is an understatement, raising some questions about Escobar’s general credibility.

Having no idea as to Mr. Escobar’s accuracy or credibility on this topic, his entire discussion should be fact checked. But Barkley’s general point about the lack of coverage of this story by the media is valid. I guess covering Anna Nicole Smith’s departure is more important to folks like John Gibson.

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A Weak Fourth Quarter

The Bureau of Economic Analysis released its Preliminary Report for the Fourth Quarter of 2006:

Real gross domestic product – the output of goods and services produced by labor and property located in the United States – increased at an annual rate of 2.2 percent in the fourth quarter of 2006, according to preliminary estimates released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.0 percent. The GDP estimates released today are based on more complete source data than were available for the advance estimates issued last month. In the advance estimates, the increase in real GDP was 3.5 percent … The increase in real GDP in the fourth quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, state and local government spending, and federal government spending that were partly offset by negative contributions from private inventory investment and residential fixed investment. Imports, which are a subtraction in the calculation of GDP, decreased.

The annualized growth rate for investment demand was negative 15.6% with the decline in residential investment leading the way. Consumption growth was reported at 4.2% and the growth rate for government purchases was reported at 3.3%. So with consumption and government purchases growing faster than real GDP, classical economists can talk about reduced national savings – while Keynesians might note that this reduced national savings kept things from getting worse.

Jeannine Aversa writes:

The economy grew at a sluggish 2.2 percent pace in the final quarter of last year, much slower than initially estimated, the government reported Wednesday in the sort of unusually large revision that has happened only seven times in the last 30 years. The latest reading on the gross domestic product released by by the Commerce Department came a day after stocks on Wall Street and around the globe took a nosedive and showed the economy in a considerably weaker state than the government first estimated. It had initially reported the expansion in the last three months of 2006 to be at a 3.5 percent pace. The principal reason for the new, significantly lower estimate: Businesses tightened their belts amid fallout from the troubled housing and automative sectors.

Jeannine found one optimistic economist:

Ken Mayland, president of ClearView Economics likened the fourth-quarter’s showing as part of a “mid-course breather” reflecting a period of temporary listlessness, not a slide toward recession. “I think it is unfolding as a slowdown, not a turndown – meaning recession,” he said.

Let’s hope Ken Mayland is correct but just in case – I’m jumping on the bandwagon calling for the Federal Reserve to lower interest rates.

Update: James Pethokoukis has lately been emailing his pieces to economist bloggers. I usually just ignore them, but today’s is timely if not misguided

Does Wall Street’s swoon mean there’s a recession on the way? I think JPMorgan economist Jim Glassman summed up the current situation pretty well to me late yesterday: “The question is, does a recession seem a plausible scenario in the current circumstances … with inflation near post-World War II lows, corporate profit margins at record highs, an unprecedented global awakening underway, financial signals [credit spreads] still at good-time lows? Please!”

Why Pethokoukis would turn to James “DOW 36000” Glassman is beyond me – but he does acknowledge the news from the BEA. Pethokoukis goes onto to say:

The GDP report wasn’t all bad. Although everyone has been worried about the consumer–because of the housing slowdown and the subprime mortgage market meltdown–the GDP report showed personal consumption expenditures contributing 2.9 percentage points to the GDP growth rate. Overall, consumer spending–taking into account rising prices–increased 4.2 percent in the fourth quarter

Everyone has been worried that consumption demand would turn weak? I guess Pethokoukis doesn’t read our blog very much! Pethokoukis also goes onto to talk about the allegedly strong job market (don’t get me started as I have more to say on Friday), the allegedly exploding tax revenues, and strong corporate profits. Alas, the news from BEA today was that investment demand had declined – in spite of all those profits. At one point, Pethokoukis noted:

Yet one would have to be Dr. Pangloss to not somewhat fretfully wonder what the future holds given the stock market’s big plunge

Fine, I have neither Pangloss’s baseless optimism nor a single focus on the stock market. But maybe Pethokoukis should change his first name from James to Pollyanna.

Update II: Thanks to the AB reader for letting me know that I made a big mistake. James E. Glassman is managing director and senior policy strategist with J.P. Morgan Securities Inc. and is not the same person as James K. Glassman.

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Kerry Takes on the Swift Boat Nominee for Ambassador to Belgium

Bob Geiger calls this – Scumbags Become Ambassadors:

It should be an interesting afternoon in the Senate Foreign Relations Committee as hearings begin to consider Sam Fox as George W. Bush’s nominee to be the new U.S. Ambassador to Belgium. While the White House lauds Fox’s qualifications for the role, it’s obvious from a tiny bit of searching that Fox’s primary qualification is that he is a big rainmaker for the Republican party with a healthy portfolio of donations over the years – this is a guy who has donated hundreds of thousands of dollars to Bush, Dick Cheney, the Republican National Committee and every GOP candidate you can shake a stick at. But what’s especially interesting is that if you really look under the hood of where this guy’s political heart is at, you find that in late 2004 he gave $50,000 to no less solid citizens than the Swift Boat Liars who made it their mission to discredit a highly-decorated Vietnam Veteran in John Kerry. Now if that won’t buy you an ambassador’s post from George W. Bush, nothing will.

AP informs us that Senator Kerry got to question Sam Fox:

Sen. John Kerry, D-Massachusetts, grilled nominee Sam Fox about why he donated $50,000 to the Swift Boat Veterans for Truth during the 2004 presidential race. The group of Vietnam veterans made unsubstantiated allegations against Kerry – then the Democratic presidential nominee – and charged that Kerry did not deserve the medals he won in the Vietnam War. “Might I ask you what your opinion is with respect to the state of American politics as regards the politics of personal destruction?” Kerry asked near the end of the hearing before the Senate Foreign Relations Committee. Fox, one of the nation’s most generous contributors to Republican candidates and causes, said he shared Kerry’s concerns that politics “has become mean and destructive.” Fox said he didn’t recall who asked him to give to the group and blamed partisans on both sides for contributing to so-called 527 groups that are not subject to conventional campaign finance rules. “So is that your judgment that you would bring to the ambassadorship, that two wrongs make a right?” Kerry asked. “I did it because politically it’s necessary if the other side’s doing it,” Fox said.

The Swift Boat ads were not just the politics of personal destruction. They were dishonest. I’m sure the government of Belgium appreciates the gesture that our next ambassador fosters such dishonesty – unless the Senate rejects Mr. Fox.

Update: Some of the comments to this post are such stupid. They are asking me to point out where the Swifties lied. Fellows, learn to use Google. Even the clueless wonders at FactCheck were onto this back in August 2004. I guess the next request will be for me to point out where Dick Cheney has lied. Oh yea – did you know that Saddam really did have an active nuclear program? Pathetic!

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Hagiography by Party

Regular readers know I’ve been writing posts putting up numbers looking at the difference between Republican and Democratic Party performance when it comes to growth. The posts come irregularly – its a slow process because I have a day job and other committments and running the numbers takes time.

But it has gotten me to thinking about Democrats and Republicans in general. I had a post the other day noting that Reagan did not live up to his billing – he was a cut and runner when it came to terrorism, he sold weapons to the sponsors of the very terrorism from which he cut and run, his contribution to the war effort as a young man was to work less and brag about it, his economic performance (once you account for the debt) was sub-par, etc. And yet, he’s treated as a saint.

I noted yesterday that not long ago, writers respected by right wingers looked at GW as someone who was potentially Mount Rushmore material. Many still look at him as someone who is generally correct, and would be succeeding if only the rest of us would believe.

I was thinking… are Democrats as likely to sanctify Democratic presidents as Republican presidents? There is JFK, but I’m not sure he ever reached sainthood. I would imagine even Democrats that are fondest of JFK would admit the Bay of Pigs was a horrible mistake horribly executed. Roosevelt? I don’t think he’s been sanctified either.

And if Democrats are not as likely to elevate their presidents to superhuman status as Republicans, why is that?

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A Day in the Life, Fancy Statistical Tools, Help!!!

I’m not really sure where I’m going with this post. Maybe its “a day in the life of an economist” combined with “anyone have any suggestions?” In any case, it gives me an opportunity to put some thoughts on paper, and hopefully you’ll find it interesting.

My day job is as a consultant. I do some strategy work for companies (not as much as I’d like – I have not been that great at marketing myself at these jobs, but if anyone is looking for an economist, drop me a line!), some forecasting (mostly for phone companies), and I build statistical models and/or statistical software (mostly for the military or NASA or the like). The latter projects come via a firm for which I am a freelance employee. I tend to get the oddball projects, and its really a lot of fun, because basically it means that every time, I have to literally invent something from scratch.

The problem is that every so often something comes along that kind of stumps me. Here’s an example… we have a project to estimate the costs of developing satellites that will not be ready for launch for at least 15 years. In other words, satellites for which some of the technology at least doesn’t exist and won’t exist for a while. I have descriptions of a couple of hundred (mostly US) satellites, and an analyst converted these descriptions into some basic information. This includes some things like mass, size, year of launch, design life, etc., but also some measures that are more specialized toward satellites, such as autonomy, method of spin control, size of solar array, etc.

Originally, we built a tool that was almost or just barely (depending on how you looked at it) artificially intelligent to rummage through the data and reach a conclusion. It took us about six months. Sadly, it didn’t do any better than at forecasting 15 years out than I was able to do with some simple regressions. As I’m getting older and the jobs are getting more complicated, I’m finding that the complex methods really don’t always buy you all that much, at least when it comes to forecasting. (As an aside… this is one of the reasons I’ve always been suspicious of the unemployment figures. One of the components of those figures comes from an ARIMA model. ARIMAs are not particularly complex, but if you pick the right parameters, you can literally get any answer you want, from unemployment = -5 trillion to unemployment = + 5 trillion. Throw on an administration that trusts political hacks more than professionals in any field, and who knows what they’re spitting out.)

And its not like we’re using the tools poorly. I’m well aware of GIGO. But we’re not blindly shoving variables into the maw of some piece of software. We’re building the software, we know how it works, and we are using them in the, um, appropriate way. But… at some point, intuition matters more. There’s more mileage from creating the right variables than from using the best tools.

Here’s an example… with a satellite, as a general rule, mass is highly correlated with cost. (The way in which it is correlated changes over time. The costs of getting a box into the sky have not only changed, the way the costs have changed, and the rate of change of those changes has itself changed a lot over time.) To some extent, so is the power consumption of the thing. But, some satellites are much more (or less) costly than their mass would indicate. Communications satellites, for instance, are large. But there are sometimes reason why other satellites might be very big or very small. Similarly, the power consumption may be higher (or lower) than one would expect given the cost of the satellite. But while the mass may be misleading, or the power consumption may be misleading, I’ve noticed that rarely are both misleading at the same time. A well-constructed model will take advantage of that fact. Instead of simply being related to mass, it will be related to mass subject to some information about power.

Anyway, I’ve been beating my brains against the wall, but I’m just not producing models I’m happy with for this project. (Out year forecasts with median and average absolute percentage errors of about 50%.) Not bad considering what we have to work with, but I like to do better. I have a few more ideas, but not many. Comments, suggestions, contributions and donations are all welcome.

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Converts at the NRO

Not everyone at the National Review’s Corner is always blind. Lately, Andrew Stuttaford seems to be harping on Afghanistan, namely that the US efforts to eradicate poppies in the country is strengthening the hand of the Taliban. Today, he writes:

Who is losing Afghanistan?

George W. Bush, that’s who. His watch. His administration. His incompetence. His arrogance. His failure to learn from failure.

Now, the fact that one writer at an organization believes something doesn’t mean they all do. Not all Angry Bears agree on everything, and I’ve put up posts by readers with whom I don’t agree at all. But one would think that refering to things the rest of the world has accepted years ago – GW’s incompetence, arrogance, and failure to learn, would be something that would get some comment or notice from some other denizen of the Corner. After all, the idea that GW is incompetent, arrogant, and fails to learn is counter to the view of most of the writings that come out of the National Review – some of them have gone so far as to write that GW is potentially Mount Rushmore material.

And yet, the only comment so far seems to come from Michael Ledeen. Yup, he of the “Ledeen Doctrine.” He provides a bit of a defense of the poppy eradication program (it only goes to show – the administration cleverly got itself into a “damned if you don’t, damned if you do” situation), and concludes with: “Life is rarely so simple as that.”

You’d figure considering how many writers produce how many posts at the Corner on any given day, that a post criticizing GW for being what he is, incompetent, arrogant, and unwilling to learn, would generate something over there. But perhaps the folks over there aren’t as stupid as they often sound. Maybe, at long last, they know they can’t argue that point. But if that’s the case, why do they keep insisting on supporting the President’s policies on Iraq? Is it possible that GW could be incompetent, arrogant, and unwilling to learn when it comes to Afghanistan, and simultaneously competent, humble, and eager to learn when it comes to Iraq?

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Corzine’s Trading Future Tax Revenues for Cash

It would seem that the Governor of New Jersey wants to get into the business of selling off the rights to future toll revenues:

New Jersey Governor Jon Corzine has made privatization of the New Jersey Turnpike the centerpiece of his budgetary strategy for the state – greatly raising the stakes in the debate over its wisdom. In his budget address Feb 22 the former investment banker said: “Potentially, asset monetization (the NJ term for privatization via sale or longterm leasing) could reset the state’s finances by dramatically reducing our debt burden, and consequently reducing debt service. Monetization could free up as much as a billion dollars or more in every year’s budget – long into the future… Asset monetization gives us the potential to reduce our crushing debt burden – and meet New Jersey’s long-term capital needs in a way no other alternative provides.” He listed the Turnpike first among various state assets being considered. Corzine said that borrowing or using the proceeds of privatization for covering operating costs is “a terrible idea” and “not under consideration.” The Governor’s whole speech was structured to present a conclusion that the state has no choice but to privatize major state owned assets because all the alternatives are unacceptable.

In my original post on this issue, I tried to rationalize what the Governor was saying:

Let me play a bit of devil’s advocate for a moment. Is it possible the $3.8 billion received by the state of Indiana covers the present value of the foregone toll revenues? We are talking about the lease versus buy issue, which is analogous to switching from traditional IRAs to Roth IRAs (getting a early big bang of tax revenue but sacrificing taxes in the future).

But I still think Max Sawicky got this right:

When a government takes a lump sum in exchange for permitting a private firm to manage a road and levy tolls, it is not only privatizing. It is borrowing, worsening its fiscal position. Most states are looking at growing budget shortfalls in the future, as Medicaid costs in particular continue to grow more rapidly than their revenues. The Gov could just as easily contract out operations and management, but keep the tolls for itself. The fact that the money is earmarked to new projects – investment – is irrelevant. It’s still borrowing. You could just as easily keep the roads and float a bond – also borrowing – for the new projects. The leasing is not necessary. The political onus against explicit borrowing can warp decisions.

Corzine was an investment banker so he should realize what Max said makes a lot more sense than what he said. And as AB readers know (even certain rightwing trolls who refused to get even this simple point), we had lots of subsequent discussions on the privatization of toll roads issue.

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