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

Brad DeLong is Correct

All right, I give up. I’ve reviewed for the Washington Post Book World, I consider some of their work interesting, and can almost forgive them for publishing Ruth Marcus, Charles Krauthammer, Anne Applebaum, and Richard Cohen as if they were sane.

But when your Ombudsman claims that your readers “typically demand coverage that is unfailingly neutral,” and cites as an example of “crossing the line” one of your reporters making a statement of fact:

“We can incur all sorts of federal deficits for wars and what not,” Raju Narisetti wrote on his Twitter feed. “But we have to promise not to increase it by $1 for healthcare reform? Sad.”

There is no purpose for your organization to even claim it publishes news.

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Draining liquidity from the banking system

by Rebecca
(cross posted at Newsneconomics)

Prof. Jim Hamilton at Econbrowser (thanks Mark Thoma for the link) addresses one of the Fed’s standard methods of draining liquidity from the banking system: reverse repurchase agreements. Basically, the Fed will transfer some of its assets to the banking system via short-term loans taken out with its Primary Dealers, presumably offering standard (Treasuries) and less standard (MBS or agency bonds) assets as collateral.

Reverse repurchase agreements simply slosh around the assets (MBS, agencies, and Treasuries) between the Fed and the Primary Dealers, rather than removing the assets from the Fed’s balance sheet permanently. Eventually, though, the Fed must sell the securities outright onto the open market – we are far, far from that!

This is all hot air for now. How can the Fed soak up the expansionary liquidity, let alone unwind $1 trillion in assets, when the banking system is still shedding pounds?

The Fed is considering another route, too: conducting the same repurchase agreements with the money-market mutual fund industry in tandem. An excerpt from the FT:

The Federal Reserve is looking to team up with the money-market mutual fund industry as part of its strategy to ensure that its unconventional policies to stimulate the economy do not produce a bout of post-crisis inflation.

The central bank envisages eventually draining liquidity from the financial system by engaging in trades called “reverse repos” with the deep-pocketed money-market funds. In these, the Fed would pledge mortgage-backed securities and Treasuries acquired during the crisis as collateral for short-term loans from the funds.

The obvious counterparties for reverse repo deals are the Wall Street primary dealers. However, the Fed thinks they would only have balance sheet capacity to refinance about $100bn of assets. By contrast, the money-market funds have $2,500bn in assets, which means they could plausibly refinance as much as $500bn in Fed assets. Officials think there would be appetite on the part of the funds, which are under pressure from regulators and investors to stick to low-risk liquid investments.

The Fed is solely attempting to assuage inflation angst at this time; it’s still very premature to talk about an exit of expansionary policies when credit markets still crimp the stimulus that the Fed so desperately wants to get into the open market (much of the base, roughly $855 billion on September 23, 2009 and up from $2 billion in August 2008, remains on balance with the Fed in the form of “excess reserves). Just look at the crunch in the consumer credit space (chart to left).

As Prof. Hamilton suggests, the mechanisms of the reverse repos should successfully sterilize the base before it starts to become inflationary (with either the Primary Dealers and/or the Mutual Funds industry). However, one of the programs through which the Fed utilized previously to sterilize its liquidity, and to which Prof. Hamilton refers, – the Supplementary Financing Program – is unlikely to be an avenue for removing liquidity.

In fact, it’s quite the opposite. The Treasury already announced its imminent plan to liquidate the bulk of its $200 billion account with the Fed. There’s another $200 billion in excess reserves with which the Fed must contend (see my previous post here).

It’s easy to get the liquidity into the financial system. But getting it out without collapsing the economy or allowing inflation pressures to build? Well, that’s a different story.

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Employment Report

By Spencer

Not only was the employment report disappointing, but previously reported encouraging leading indicators of employment were revised away.

Most importantly, hours worked fell 0.5% from 99.0 to 98.5. We are now looking at a 3.0% drop in hours worked in the third quarter as compared to 7.8%,8.9% and 7.4% in the prior three quarters, respectively. If the consensus expectation of around 3% real GDP growth in the third quarter materialize this means that third quarter productivity growth will be very, very strong.

Previously it had appeared that hours worked were bottoming in the third quarter. Now we are ending the quarter on a weak note that establishes a poor base for fourth quarter growth.

In addition, employment growth in the household survey no longer appears to be bottoming. Usually the household survey leads the payroll survey at bottoms and the latest data does not look encouraging. Even the apparent bottoming in the decline in payroll employment stems more from the point that the employment drop was more severe a years ago, not that the current data is improving.

Finally, average hourly earnings were virtually unchanged as they rose from $18.66 to $18.67.
With the drop in the hours worked this means that nominal weekly wages actually fell and the year over year gain fell to 0.7%. Consequently, the growth in nominal personal income is likely to remain negative. Something that has not happened since the depression.

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Obliviously Offending the World, Teabag Edition

by Noni Mausa

From the Australian :
news service

Tea Party Obama ‘witchdoctor’ slur offends PNG October 01, 2009 02:46pm

PAPUA New Guinea tribesmen have demanded an apology from American political satirists who used their traditional dress in a witchdoctor slur against US President Barack Obama.

In the offending image, a headshot of Mr Obama was superimposed on a photograph of a PNG Highlands region man in full traditional costume, supposedly to portray the black President as an African witchdoctor.

Damien Arabagali, Hela Gimbu Association chairman, said PNG’s Foreign Affairs Minister and Cultural Minister would have to take up their demand.


HGA lawyer Alfred Kaibe, who wore his traditional Hela costume when sitting as a member of Parliament in 2001, said his people did not see the funny side.

“It borders on racism, to us and the US President,” he said. “The connotation is this type of dress is for witchcraft…This is our traditional costume; we are proud of it.”

Another HGA member suggested that if no apology was forthcoming the $16 billion ExxonMobil liquefied natural gas project based in the region could be jeopardised…

Well, maybe not. But maybe.

Good prospects of reopening Bougainville copper mine.
There are ‘positive prospects’ for reopening the Panguna copper mine in Papua New Guinea’s Autonomous Bougainville province, with local landowners planning a major reconciliation. The mine was closed nearly 20 years ago during a secessionist conflict led by the late Francis Ona, which was sparked by landowner issues and environmental damage caused by the mine……The Bougainville conflict that broke out in 1989, when rebels under the leadership of the late secessionist, Francis Ona, attacked the mine workers and installations over environmental pollution they alleged the mine was causing.

The mine was abandoned, and thousands of Bougainvilleans died in the subsequent civil war before a peace accord was reached in 2001.

Words and images have power, and not just in the intended direction . It doesn’t seem likely that the offensive images fostered by the American tea partiers will have force enough to reach around the world and effect the business dealings of ExxonMobil…

But they might.

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The form of health insurance matters

by Linda Beale

Linda Beale writes at ataxingmatter:

Health Care Reform or a boondoggle for private insurers?

The Baucus proposal for health care “reform” doesn’t include a public option. And the Senate Finance Committee voted this afternoon-by 15 to 8–to reject the Rockefeller proposal to add a public option “community choice health plan’. See Hershenson, Senate Panel Rejects Pair of Public Options in Health Plan, NY Times, Sept. 29, 2009.

Kent Conrad, Bill Nelson, Blanche Lincoln, Thomas Carper–those are purported Democrats who voted against Rockefeller’s public option. Conrad and Lincoln voted against both versions put forward today. They need to think about whom they are serving, because it isn’t the ordinary people of this country. Sure, the Republicans are going to claim that any public option is “socialized medicine”. So what? Those naysayers want to preserve the status quo system of high prices and low coverage that allows the health industry to reap “rent” profits no matter what the effect on the vast majority of ordinary citizens. Democrats are supposed to stand for something different–for using government in the service of the people. They should be out on the stump, explaining to people why public provision of education (public schools, public universities), medicine (medicare, medicaid, and a new public option here), and fire and police protection are not issues of “socialism vs capitalism” but of workable regimes that serve the people versus nonworkable regimes that permit a very few, very large corporate players (and their managers and owners) to hold a near-monopoly over services that ought to be available to everyone at a reasonable price: this is so because we are a democratic society that believes in government working for the good of all and not just for the good of the wealthy.

I simply don’t buy the excuses. Republicans and Democrats voted for irresponsible tax cuts under Bush and for irresponsible deregulation of financial institutions under Clinton and Bush. We have the awful result of an economy that serves the wealthy now much better than it serves ordinary Americans, at a cost that will be borne by ordinary Americans in terms of lost job opportunities, lower standard of living, and declines in health care coverage. I am becoming convinced that this Congress is too beholden to private money to make long-term decisions to benefit the public–whether on climate change or health care reform.

So where do we go now? The House needs to stand firm for the public option, and perhaps the Senate itself, not the Finance Committee, will see the light. We cannot simply mandate coverage–providing a huge boon to private insurers in terms of getting a new captive audience of insureds paying premiums–without also providing a public option that will allow us to move someday, if it proves to work better than private insurance, to a medicare-like system for all.

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Health Care Harder Ball: You read it here first

Robert Waldmann

Angry Bear September 04 2009

Tell reluctant senators and representatives that, if they think their constituents don’t want any public insurance except for medicare and medicaid, then they can refuse to have it.

Ezra Klein and Senator Maria Cantwell October 1 2009

EK Can they opt out?

MC States can opt out.

Senator Tom Carper too October 1 2009

Tom Carper’s proposal is more interesting. It’s gone through a couple twists in the past 24 hours (including the addition, and then welcome removal, of a trigger), but in its current form, each state would have the option to:

1) Participate as grantees in the CO-OP program and apply for seed funding.

2) Open up that state’s employee benefits plan.

3) Create a state administered health insurance plan with the option of banding together with other states to create a regional insurance compact.

Each state would, in other words, be allowed to create a public option


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Robert Waldmann

A proposed reform (already shelved) is to require banks to offer “plain vanilla” products. I am very confused about this proposal, so this is a semi bleg. I can’t see any possible benefit from the regulation (probably because I haven’t read the fine print of the draft bill).

My thoughts after the jump.

Bottom line — a vanilla option must include the rule that at least x% of a bank’s business must be vanilla or they pay a fine to work.

Also, I propose calling non vanilla products “fudge swirl” products unless anyone has ever scene “fudge twist” or “fudge spin” ice cream.

update: Jump corrected so most of my post is after it.
Also see Waldman vs Waldmann after the jump.

I will criticize a proposal which might exist only in my imagination. A very silly vanilla rule that just says banks must offer a plain vanilla product — say a 30 year fixed rate mortgage. [Here is an] explanation by [Steve Waldman at] Interfluidity via rortybomb:

Vanilla products would turn basic financial services into a commodity business, and force providers to compete on price…. Since vanilla financial products would be commodities, banks would have to universally collude to offer them at inflated prices in order to bilk consumers. Competing vanilla project offerings would (at least they should) vary only on a single dimension (e.g. an interest rate). Points, fees, penalties, etc. would be homogeneous or uniformly pegged to the core price.

This argument does not apply to a simple requirement that banks offer vanilla products. Forcing them to offer the product does not force them to compete to sell the product.

Consider the case in which all banks offer fixed interest 30 year mortgages at 100% interest per year. Technically they have fulfilled the silly vanilla requirement. There is no improvement in anything as offering a fixed rate mortgage at 100% is just like not offering a fixed rate mortgage.

So, in the absense of collusion, is this alleged equilibrium vulnerable to deviation by a firm which offers a reasonably priced fixed rate mortgage ? It might or might not be. If it isn’t then the silly vanilla rule will not be effective. If it is, then the silly vanilla rule is not needed and will make no difference.

Since offering fixed rate mortgages at 100% is just like not offering them, the equilibrium profits and profits to deviators are just the same as in the case in which there are no vanilla products and one bank can deviate by introducing one.

If compliance with the regulation implies no real change at all, then a bad equilibrium with technical compliance will be identical to a bad equilibrium with no regulation, one is a Nash equilibrium if and only if the other is and payoffs to all agents are just the same.

So “forced to compete” only makes sense if the vanilla rule is not the silly vanilla rule. It makes sense if there is a requirement that say at least 10% of a bank’s mortgage lending must be fixed rate 30 year. Then banks will compete to issue fixed rate mortgages even if they are not as profitable as option ARMs etc , because by loaning a dollar at a fixed rate for 30 years they win the valuable right to loan 9 dollars as option arms.

I have no idea if the proposed now shelved rule was the silly vanilla rule (hence the bleg)

Steve Waldman to me
show details 5:23 AM (15 hours ago)


I tried to add this as a comment to your Angry Bear post, but alas, I am too logorrheic. The post was rejected, and I am too lazy to edit.

So I offer it to you, fwiw…


Robert — I hesitate to disagree with you, because you have that extra ‘n’ that gives you superpowers of which I can only dream.

But you are wrong, right here:

“Since offering fixed rate mortgages at 100% is just like not offering them, the equilibrium profits and profits to deviators are just the same as in the case in which there are no vanilla products and one bank can deviate by introducing one.”

This would be true if consumers had perfect information and could distinguish safe from unsafe products, vanilla from fudge swirl. But in a world where all financial products that banks offer are opaque to most consumers, and where therefore consumers attach an uncertainty cost based primarily on offering institution, no bank has an incentive to deviate with a less profitable vanilla product. Suppose a 30-year “fudge swirl” mortgage creates higher revenues in expectation (and higher costs to consumers) than a 30-year vanilla. But consumers cannot distinguish fudge swirl from vanilla. Then offering only fudge swirl is the dominant strategy for banks. Offering vanilla involves fixed costs of product development, and consumers that choose vanilla are just an opportunity cost viz fudge swirl.

Now suppose a trusted external party, call it “the government” certifies some products as vanilla. (There is no other party that could credible on this given the incentives to game certifications, and even the government might be too compromised.) Now consumers can distinguish between vanilla and fudge swirl, and deviating involves benefits as well as costs. Offering a non-100% 30 yr vanilla will capture some extra consumers, who know it is that good clean flavor they like, leading to extra revenues, while it will also cannibalize some existing, more profitable nonvanilla prospects. Under this circumstance, there should be deviation, as the sole provider of vanilla (under reasonable assumptions) would gain much more by taking other firms’ prospects than they’d lose downselling their own client base.

This argument suggests that there’s no reason to require any bank to offer vanilla, just a requirement to have the government certify some products as vanilla. And I think that’s mostly right, although I support a requirement for the sake of timing, because it can take a while for existing well-policed cartels to collapse despite a favorable Nash equilibrium. That is, if CFPA simply defined a schedule of vanilla financial products and offered to certify compliant offerings, the larger banks would “as a matter of principle” refuse to participate, and many smaller banks as well by virtue of industry/ABA pressure. The industry would also lobby for very elaborate certification requirements for vanilla products, and that banks should pay their own certification costs, to create a barriers that would help to discourage smaller deviators. Still, if the certification barriers aren’t too outlandish, some small and midsize banks would deviate. Since financial product markets are segmented (there are many customers who for arguably misguidedly perceive larger providers as safer or more reliable), big banks wouldn’t be under very much pressure to follow suit and compete. Eventually, again if certifiation costs aren’t outlandish, the cartel would break, and fundamentally, mere credible certification of vanillahood would be sufficient over the long run. But over the long run we’re dead. I support vanilla as a requirement because I want to see informationally-protected financial services rents collapse quickly, not “at equilibrium”.

Note that the market that would be least affected by vanilla products is mortgages, because a de-facto vanilla standard already exists — GSE requirements for prime mortgages. Here we can see that…

1) vanilla is not a panacea — there has long existed a widely known vanilla product, yet banks often persuaded prime-eligible consumers to accept products with much higher expected costs by offering attractive features like teaser rates and negative amortizations. People can still choose belly-ache when vanilla is on offer, and they will.

2) vanilla is not useless. Many homebuyers, understanding that mortgages are a complex game they are ill-equipped to play, forgo lower down- and monthly payments to stick with “traditional prime” mortgages. Vanilla has worked exactly as it is supposed to for this population: homebuyers can shop around for a prime mortgage based on fees, perceived service, convenience, etc, and the market is competitive. Not all providers are the same, of course, but people are rarely screwed by surprising characteristics of the product. Lots of primes are defaulting of course, but they are doing so for reasons they would have understood well ex ante: they can’t make the monthly payment, even though it is the same payment they signed up to and paid their first month. They are not being screwed by prepayment penalties, resets, recasts, interest-rate spikes, etc. That primes are suffering in the quantity that they are is arguably a function of the popularity of nonprime products, which permitted higher effective leverage and therefore helped inflate a housing market primes had to compete in. (If all homebuyers had to put 20% down per supervanilla prime, there would have been no housing bubble.)

Anyway, my understand is that the vanilla rule would have been what you are calling the “silly vanilla rule”. But you are wrong to do so. Such a rule would not be silly at all.

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PEW Trust summary report on regulatory models


The PEW economic policy department task force report suggests we take a better look at other models of regulation, perhaps to Australia.

In this short paper we look at the structure of international financial regulation in teh context of their response to the crisis in order to see what lessons there may be for the US. This is a summary not a detailed research effort, but we believe that even a summary effort could be helpful in order to dispel the idea that the experience of other countries makes it a waste of time to attempt substantial consolidation of regulatory agencies in the US.

The most important factor in determining the response of the different systems to the crisis is whether or not regulators were actively involved in making sure that their institutions, especially large institutions, were not taking excessive risks and speculating in risky assets. The particular designs of the regulatory systems do not show a clear enough pattern to make a definitive case for one specific approach. However, all of the countries described here undertook programs of regulatory consolidation in recent years in response to the changing nature of their financial sectors. Having a fragmented regulatory system did not strike any country as a particularly good idea…

As the G-20 makes announcements and the WTO actually makes rules with teeth, we shall see how this plays out on the global front as well, where the big action also takes place.

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