Relevant and even prescient commentary on news, politics and the economy.

Lawrence Summer says:


Big Think has a video clip on Lawrence Summers and the current crisis. Note that home loans becomes the center of the storm. Of course, understanding value by the “market” is a key in my opinion, and gets to be harder the further from “cash” we go.

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Guantanamo release


An op-ed by Marjorie Cohn, Jurist in Forum details the further developments with Guantanamo detainees.

Finally, on November 20, in a stunning development, U.S. District Court Judge Richard J. Leon ordered the government to release five Guantánamo Bay detainees “forthwith.” Finding that the government failed to prove the men were “enemy combatants,” the judge, in a rare comment, urged senior government leaders not to appeal his ruling. “Seven years of waiting for a legal system to give them an answer . . . in my judgment is more than enough,” he said.

The five detainees the judge ordered released are Lakhdar Boumediene, Mustafa Ait Idir, Hadj Boudella, Saber Lahmar and Mohammed Nechla. Judge Leon did, however, find that a sixth detainee, Belkacem Bensayah, was properly classified an enemy combatant.

It was the Supreme Court’s June 12, 2008 decision in Boumediene v. Bush (see Supreme Court Checks and Balances in Boumediene, JURIST Forum, June 16, 2008) that allowed Judge Leon to review the enemy combatant classifications. The high court upheld the Guantánamo detainees’ constitutional right to habeas corpus and made clear they were “entitled to a prompt habeas corpus hearing.” Judge Leon adopted the definition of “enemy combatant” used by the Combatant Status Review Tribunals, which is “an individual who was part of or supporting Taliban or al Qaeda forces, or associated forces that are engaged in hostilities against the United States or its coalition partners. This includes any person who has committed a belligerent act or has directly supported hostilities in aid of enemy armed forces.”

The six detainees in this case are native Algerians who were residing in Bosnia and Herzegovina, over a thousand miles from the battlefield in Afghanistan. All six held Bosnian citizenship or lawful permanent residence as well as native Algerian citizenship. Arrested by Bosnian authorities in October 2001 for alleged involvement in a plot to bomb the U.S. Embassy in Sarajevo, they were ordered released from prison on January 17, 2002 and then turned over to U.S. personnel who transported them to Guantánamo on January 20, 2002. They have been there ever since.

President Bush had withdrawn the alleged bomb plot as a basis for their detention. He argued instead that the men planned to travel to Afghanistan in late 2001 and take up arms against the United States and allied forces. Judge Leon found the government had failed to prove these allegations by a preponderance of evidence in the cases of all but Bensayah.

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Kevin Drum asks the Romers some questions

Robert Waldmann

Tries to answer.

Drum summarizes better than Waldmann

Last year Christina and David Romer wrote a paper that attempted to quantify the effect of tax changes on economic growth. I read it at the time and didn’t understand it. I read it again a few minutes ago and I still don’t understand it. So my question is: Can you please explain your paper titled “The Macroeconomic Effects of Tax Changes: Estimates Based on a New Measure of Fiscal Shocks”?

Here’s my understanding of what the paper says. Basically, the Romers looked at every tax measure enacted since 1945 and classified them into two groups. The first group they call endogenous. These are tax changes made in response to current or future economic conditions, including responses to spending changes or recessions. Since the effect of these tax changes is difficult to separate from the effects of the events being responded to, they are discarded.

The second group they call exogenous. These are tax changes designed either to reduce a deficit or to raise long-term growth. Since they aren’t motivated by current or future economic conditions, their effect on the economy is untainted by external factors.

The Romers use this second group to calculate the effect of tax changes on economic growth without confounding factors, and their conclusion is that a tax increase of 1% of GDP reduces output three years later by nearly 3%.

Then he says he doesn’t trust any methodology based on interpreting what people say — too subjective.

He also asks

Fifth, can it really be true that a 1% tax increase produces a 3% GDP reduction over the long term? European countries tend to have total tax rates that are upwards of 15% higher than ours, which should mean their GDPs are 45% lower. For the most part, however, GDP per hour worked in Europe is only modestly lower than ours.

Hmmm slipped in that “per hour worked” didn’t he. Obviously the Romers are looking for effects via aggregate demand not productivity. However, a broader analysis would make the point much more strongly. The tax burden is a higher share of GNP in rich countries than in poor countries and is not significantly correlated with slower growth (I’m always going back to Easterly and Rebello 1993 which is getting a bit long in the tooth).

However, that’s not what the Romers are talking about at all. Basically 3 years is not long run.

I am an economist and immediately perceive the paper to be a vindication of Keynes not of Laffer. I think your key question is the Europe question. The effect appears to be at a Laffable level. However, what they are really discussing is the medium term effect of budget deficits.

Europe has high taxes, but doesn’t have high budget deficits.

Now the Romer’s would not propose huge tax cuts. That is because, they assume that the long run effect of budget deficits on GNP is zero (increased demand just ends up as increased inflation) or negative (if deficits crowd out investment).

Roughly 3 years is not at all the long run.

In fact, the long run effects of deficits on growth appear to be negative (and large). This is based on comparing growth in different countries.

Now as to the methodology, the Romers are highly respected, but no one really trusts anyone to make subjective decisions in a way that doesn’t lead to bias. I think that this paper, like a similar paper on monetary policy, is likely to convince no one.

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by reader coberly


for Aaron

In a recent thread reader Aaron asserts in his confident way that “if Trump, Soros, and Redstone get Social Security “then in can’t be an insurance policy for poverty in old age. These three are not poor yet they qualify for social security.”

To see where Aaron has gone wrong, we need to return through time to the golden days of yore when Bill Gates was still a very young man.

Young Bill was not yet rich, but he was sure he would be. Still, being a nerdy kind of guy, Bill liked to think things through. Certainly it was very likely he would be rich, but not absolutely certain. He could have an accident, or get sick, or Apple could drive him out of business. So, yes, unlikely, but he COULD end up poor. And Bill was not the kind of guy who would enjoy living under bridges and eating out of the dumpster behind the Safeway, so he needed a fallback plan… just in case.

He could do like Coberly’s gramma said: put 10% of everything he made in the bank so he’d have something to retire on. But he’d have to hope that 10% wouldn’t be eaten up by inflation… so, maybe, but still not as sure a thing as he’d like. He looked at the stock market and thought, yeah, I could probably stay ahead of inflation there, but if my luck went bad, the Stock Market turned down the day I decided to retire, or if i got sick or had that accident early in life, I wouldn’t have enough to put into the stock market. It’s hard to find a lot of investment money when you are making just barely enough to buy groceries and shoes for the kids..

So, Insurance!, I’ll buy an insurance policy. He goes to Providential Insurance company and asks, “how much will the premiums be to guarantee me an income of a thousand a month after I turn 65?” The Providential man tells him. But Bill is a smart guy, remember, so he asks… “is that thousand going to be adjusted for inflation?” Well, no, says the agent. “How much to buy a policy adjusted for inflation?” The man either says he can’t insure for inflation, because he as no idea how much inflation could be in the next forty years, or he quotes a figure like 2000 a month. Bill says, “so I give you two thousand a month for forty years and you guarantee me a thousand a month for a life expectancy of less than 20 years after age 65?” Something like that.

“Oh, by the way, how do I know Providential will still be in business in 40 years?” Oh, ahem, we’re a very solid company. Nothing ever goes wrong like that.

Bill is not convinced, and he is not happy. He has another idea:

“How much if you pay off only if I am poor when I reach 65?” No can do, says the man. “Why not?” Because we would have no way to check to be sure whether you were really poor or just hiding your assets. Anyway, the probability of you being poor… not you, of course, but the general population… is much higher than you would suppose. More than 50%, so you wouldn’t really save that much.

So Bill says, I’ll think about it.

On the way home, he meets a Tall Man in a striped suit with a tall hat, and, oddly, a cigarette holder cocked jauntily in his teeth. The Tall Man says, I hear you are looking for an Old Age Insurance policy. Have I got a deal for you.

The Tall Man say, I can guarantee you against inflation using something I call pay as you go financing with wage indexing. But it only works if everybody in the country joins the insurance pool. And no, I can’t insure for just the possibility that you are poor. By the time we set up a government proctology bureaucracy that would cost as much as just paying you the money when you reach 65 whether or not you are poor. We would need to collect about 12% of your first hundred thousand a year, and we would pay about 40% of your average monthly pay, up to that hundred thousand, each month when you retire.

“What do you mean “about”?” asks Bill. Well, says the Tall Man. In order to make this work for everyone, we do need to adjust the returns so that the very poorest people get enough to live on, a little more than 40%. And the only place to get the money would be to reduce the return on the richest to about 30%. “So I only get 30%?” asks Bill. Only if you retire rich, says the Tall Man, if your luck goes bad, you could get 50% or more. That’s why it’s insurance.
by reader coberly

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Obama, is he or isn’t he … real?

by: Divorced one like Bush

As we watch the “team” Obama is putting together and the discussions regarding how reflective of progressive ideas they are vs same old, same old, I thought I would add to the hunt for Obama’s true identity. These are comments from his policy positions regarding development of our living environment and the economic relationship. I was keyed to these via a notice I receive from the Smart Growth movement.

Build More Livable and Sustainable Communities: Over the longer term, we know that the amount of fuel we will use is directly related to our land use decisions and development patterns, much of which have been organized around the principle of cheap gasoline. Barack Obama believes that we must move beyond our simple fixation of investing so many of our transportation dollars in serving drivers and that we must make more investments that make it easier for us to walk, bicycle and access transportation alternatives.
Level Employer Incentives for Driving and Public Transit: The federal tax code rewards driving to work by allowing employers to provide parking benefits of $205 per month tax free to their employees. The tax code provides employers with commuting benefits for transit, carpooling or vanpooling capped at $105 per month. This gives drivers a nearly 2:1 advantage over transit users. Obama will reform the tax code to make benefits for driving and public transit or ridesharing equal.

The top 100 metro areas generate two-thirds of our jobs, nearly 80% of patents, and handle 75% of all seaport tonnage. In fact, 42 of our metro areas now rank among the world’s 100 largest economies. “To seize the possibility of this moment, we need to promote strong cities as the backbone of regional growth. And yet, Washington remains trapped in an earlier era, wedded to an outdated ‘urban’ agenda that focuses exclusively on the problems in our cities, and ignores our growing metro areas. Strong cities are the building blocks of strong regions, and strong regions are essential for a strong America….that is the new metropolitan reality and we need a new strategy that reflects it . . .

Obama furthers his argument that type of transportation is important in the overall picture of our living arrangements which relates to the overall quality of our economy.
Responding to Transportation for America’s petition:

We need our next president to lead an initiative to invest in public transit, high-speed trains, places to bike and walk, and green innovation. We need a president with a plan that can put millions to work in jobs that can’t be outsourced, bring down the costs of travel, and create a sustainable infrastructure that will keep America on the cutting edge.

Obama answers:

And I think you’ve identified an important part of the answer as well. Our economy is slowing down, we need to stimulate it. Jobs are disappearing; we need to create new ones. At the same time, our infrastructure is crumbling and we need to rebuild it.
I had already proposed creating a National Infrastructure Reinvestment Bank, funded with $60 billion over 10 years, to expand and enhance, not replace, existing federal transportation investments.
I will invest $150 billion over the next decade in renewable sources of energy to create five million new, green jobs – jobs that pay well and can’t be outsourced; jobs building solar panels and wind turbines and fuel- efficient cars;…
I support Amtrak funding and the development of high-speed freight and passenger rail networks across the country.
As you know, all of these measures will have significant environmental and metropolitan planning advantages and help diversify our nation’s transportation infrastructure. Everyone benefits if we canleave our cars, walk, bicycle and access other transportation alternatives. I agree that we can stop wasteful spending and save Americans money, and as president, I will re- evaluate the transportation funding process to ensure that smart growth considerations are taken into account.

So, he talked the lingo of progressive minded people. Do these statements suggest that the ideology behind his pragmatism is progressive?

If the change we wanted was not to be bull shitted anymore, and the one I’m listening to is talking “change” using lingo, presenting policy plans of what I want, was I wrong to think they were talking no more bull shit? Are those talking like Glen Greenwald correct in that people should not be surprised with Obama’s appointments? Maybe, but then based on the above Obama words, that would mean we (you and I) just plain have to approach our relationship with governing as suspect until proven otherwise. Unfortunately, that means we will always be a day late and a dollar short having never known at the time of the decision if we made the correct one because you can not go by what is said.

Hey, I posted about Goolsbee and even asked if bringing in Jason Furman was a concession to the Clinton/blue dogs, did it mean the DLC kept control of the money issues. Does this mean that the non blog savy voter can not rely on what Obama said? Do you understand what the answer of “yes” means? Are those informing us that we should have known better, also saying that knowing the talk of “change” by Mc Cain et al was bull shit were not real in our understanding of what Obama was saying?

Come-on already! This is like blamming people for the down economy because of their consuming in an economy that is 75% consumption. We’re progressives, for christ sake… We Trust.

Do you know what happens to a person when they can never get a straight, no hidden agenda answer from one they count on? They go nuts.

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Citibank Like S&P assumed house prices can’t go down

Robert Waldmann


Eric Dash and Julie Creswell who argue that Citibank took insane risks holding CDOs on its books, because of a failure of the fixed incomes risk management team, reckless ‘short termism’ and two amazing mistakes. The two alleged mistakes are that they trusted the ratings agencies and that they assumed that the national average house price would certainly not decline. These are actually similar mistakes as at least one rating agency, S&P, making the same insane assumption about house prices.

They write:

when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.

Later that summer, when the credit markets began seizing up and values of various C.D.O.’s began to plummet, Mr. Maheras, Mr. Barker and Mr. Bushnell participated in a meeting to review Citigroup’s exposure.

The slice of mortgage-related securities held by Citigroup was “viewed by the rating agencies to have an extremely low probability of default (less than .01%),” according to Citigroup slides used at the meeting and reviewed by The New York Times.


C.D.O.’s were complex, and even experienced managers like Mr. Maheras and Mr. Barker underestimated the risks they posed, according to people with direct knowledge of Citigroup’s business. Because of that, they put blind faith in the passing grades that major credit-rating agencies bestowed on the debt.

and finally

To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person [who worked in the CDO group] said,

This is amazing. It’s not as if no one with an Op-Ed column in the New York Times was discussing the possibility of a national housing downturn. I can’t believe that this was an honest oversight. The anonymous source doesn’t say either ““I just think senior managers got addicted to the revenues and arrogant about the risks they were running. As long as you could grow revenues, you could keep your bonus growing.”


Brad Delong argues that 43 billion is a small part of Citibanks problems. He is talking about market capitalization not book equity which matters given capital requirements. I mean also not a tiny part, and 43 billion here 43 billion there and soon your talking real money.

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Shiela C. Bair Tries to Save the World–Again

Via Felix, we discover Joe Nocera at the NYT reporting that securitization professionals are not as stupid as they would have had us believe:

What [the FDIC] has discovered, said [Michael H. Krimminger, the F.D.I.C.’s special adviser to the chairman for policy], is that the contracts are rarely as constricting as investors and servicers have been portraying them. They do not allow principal reduction, for sure, but they almost never disallow interest rate reduction — or delaying principal payments for a short time. What’s more, Mr. Krimminger said, the servicer agreement simply says that the servicer’s job is to maximize the investment — which often means avoiding foreclosure.

Buyers of a security want the best return they can get. Foreclosure stops that cash flow, and bankruptcy procedures—at their best—impede those flows.

This is the rational position. So what had Nocera written that caused Bair and Krimminger to call him?:

I have quoted a number of experts and people in the securitization business who have told me repeatedly that it is nearly impossible to modify mortgages that are trapped in toxic mortgage-backed securities. The contracts, they say, don’t really have provisions for preventing foreclosures. And the servicers face terrible conflicts if they try to modify mortgages, because inevitable some of the bond investors will do better than others — depending on where they stand along the risk continuum — and under those same contracts, servicers are obliged to treat all investors alike. Finally, I’ve heard, servicers have been unwilling to lift a finger for homeowners because they have no financial incentive to do so — and they face the prospect of being sued by one of their investors if they do.

Servicers have been unwilling to lift a finger, and as such are not following the fiduciary responsibility of ensuring investors an appropriate return.

And it takes the bloody Chair of the FDIC—not the Treasury Secretary, whose former firm made piles of money for him with such securitization procedures—to understand the situation and tell the truth.

Apparently, we have to wait for some large investor and/or hedge funds whose bonds have gone into the default to sue their servicer before someone outside of the FDIC understands that investors prefer receiving some money to none.

Update: I see, via Mark Thoma, that John Hempton is being stupid. Is this a unique situation, or is he selling something? It appears to be the latter.

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WTO and the auto industry bailout

Bloomberg has an article on the international implications to remind us competitors are watching and acting as many of us look inward very intensely. This article reminds us that even though the Doha rounds are done, the WTO structure is in place.

A U.S.-triggered spate of global carmaker-bailout proposals may spark trade disputes over whether the Americans are unfairly trying to subsidize their industry or just making up for state aid that foreign rivals already enjoy.

As the U.S. considers a lifeline for its auto companies, officials in Europe, Canada and Asia are considering their own aid packages — even as the European Union threatens to lodge a complaint against any U.S. bailout to protect manufacturers from Renault SA in France to Fiat SpA in Italy.

China also may complain, though the government is considering helping SAIC Motor Corp. and Guangzhou Automobile Group Co.

Any World Trade Organization complaints may open a Pandora’s Box, bringing to a head a long-simmering dispute over policies that U.S.-based General Motors Corp., Ford Motor Co. and Chrysler LLC say unfairly aid rivals, including state-financed health-care and retirement benefits, and currency policies.

“Frankly, it’s stones and glass houses,” said Garel Rhys, professor of automotive economics at Cardiff Business School in Wales. “Everybody has been at this game for their own interests; nobody is pure.”

Neelie Kroes, the European Union’s antitrust chief, weighed in on the debate yesterday, urging the bloc’s 27 nations to avoid the “costly trap of a subsidy race” that would give some countries unfair advantages.

Greater ‘Temptation’

“The temptation may be greater now for member states to give subsidies that can result in their economic problems being exported to their neighbors but that would only worsen the economic difficulties,” Kroes said at a conference in Brussels.

“The European economy and European taxpayers will be better off if politicians choose another, more effective, route,” Kroes added. She pointed to EU rules allowing limited aid that doesn’t distort competition, including grants for entrepreneurs, research, education and environmental projects.

The U.S. kicked off the bailout war. Congress is trying to reach a compromise on giving automakers $25 billion the companies say they need to survive the next year, either by speeding up the use of funds already approved to develop more fuel-saving technologies and models or by providing a new source of funds. President-elect Barack Obama, who complained during the campaign that South Korea created disadvantages for American carmakers, supports helping the industry.

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David Sirota has it right….


David Sirota at Salon has reflected my take on media and says it much better than I. And here in addition to the first link.

If you’re having trouble remembering what the recent election was all about, rest easy: You’re probably not going senile — you’re likely experiencing the momentary effects of brainwashing.

For weeks, your television, newspaper and radio have been telling you that America is a “center-right nation” that elected Barack Obama to crush his fellow “socialist” hippies, discard the agenda he campaigned on, and meet the policy demands of electorally humiliated Republicans.

This is the usual post-election nonsense from the Braindead Megaphone, as author George Saunders famously calls our political and media noise machine. When George W. Bush wins by 3 million votes, the megaphone blares announcements about a conservative mandate that Democrats must respect. When Obama wins by twice as much, the same megaphone roars about Democrats having no mandate to do anything other than appease conservatives.

It’s confusing, isn’t it? We hazily recall backing Obama and his progressive platform. Yet, the megaphone’s re-educative shock treatment aims to wipe away that memory and conjure eternal conservatism from our spotless minds.

Luckily, we have polling to maintain our sanity.

Public opinion surveys show that most Obama voters knew the Illinois senator was a progressive when they cast their ballots — and that those votes for him weren’t just anti-Bush protests; they were ideological. According to a post-election poll by my colleagues at the Campaign for America’s Future, 70 percent of Americans say they want conservatives to help this progressive president enact his decidedly progressive agenda.

But we have a possible 1 trillion dollar federal budget deficit:


“A trillion-dollar deficit is not only something you wouldn’t have seen in an economic textbook, it is something that even a science fiction writer would not dare mention,” said Stan Collender, one of the nation’s most respected budget analysts, who was a budget staffer for both the House and Senate and now works for a Washington corporate communications company.

A serious problem with Medicare expenditures and a growing burden of using increasing % of income for health care, shrinking state and local government revenue for services, a trade imbalance that makes recovery seriously difficult for most Americans, and some economically oriented ideologies that can only claim purity and offers ‘if only’, ‘other factors all being equal’ (slipping past the need for an answer), and platitudes about ‘the force’ taking care of things come what may, externalities not being important.

Spinners are pretty much bankrupt walking that talk…(then the flip side accusation is communism and 100% government. That kind of argument has nothing to do with thinking, but simple personality structure…nuanced being not understood). So the blathering is part of needing to publish something every day instead of saying ‘I don’t know’, ‘I need some time to think on it’, ‘Watch carefully to match intent and behavior’. ‘oops.’ Can voters handle nuance. Not many I know. Quite a quandary, yes?

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