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

Trade-Offs and Revealed Preferences, Republican Leadership edition

Even more than Digby on CalPERS, the one piece everyone should read today is Charlie Stross on International Travel. Since this is an economics blog, let’s pull a key section:

Here’s the rub: security is a state of mind, not a procedure. Procedures can’t cope with attackers, because they’re inflexible. If you search passengers for guns, someone will carry a knife. If you search for knives, someone will sew themselves a set of underwear full of PETN. And so on. To deal with a threat — say, someone who wants to attack your air travel infrastructure — you must look for the attacker, not their tools, because they can change their tools at will to exploit weaknesses in your procedure for identifying tools.

JFK is wide open to terrorists intent on causing mass casualties….

Schiphol — Amsterdam airport — gets the security screening right, or at least less wrong than JFK and most other airports. Rather than having a hideous bottleneck between check-in and the departure area, security screening is carried out at each depature gate, with a separate metal detector and X-ray belt; no huge crowds form in unsecured areas. On US-bound flights, someone who clearly isn’t a minimum-wage drone checks ID documents and asks a couple of questions that seem to me to the aimed at flushing out anyone who is disturbed or tense — a crude form of profiling.[italics his; boldfacing mine]

South Carolina Senator Jim DeMint preferred to let the TSA remain leaderless for the past year in fear of unionization of the workers. As he explained to CNN:

Or, as quoted by Mark “neither Ernest nor earnest” Hemingway the Washington Examiner, in a piece oh-so-sensibly entitled Napolitano wants to unionize TSA employees despite safety concerns:

The administration is intent in on unionizing and submitting our airport security to union bosses [and] collective bargaining, and this is at a time, as Senator Lieberman says, we’ve got to use our imagination we’ve got to be constantly flexible. We have to out think the terrorists. When we formed the airport security system we realize we could not use collective bargaining and unionization because of that need to be flexible. Yet that appears to be the top priority of the administration.

But DeMint was much clearer on the Senate floor, and speaking to Fox:

It makes absolutely no sense to submit the security of our airports and the passengers here in this country to collective bargaining with unions.

Which, of course, is why police and fire departments are all non-union as well.

The people you attract to any job—by your deliberate practices, not “unintended consequence”—are those who cannot get a job that they know to be more stable, pays better, has better benefits, or provide a more friendly work atmosphere. By your policies and procedures, you reveal the type of worker you prefer. This is as true of the TSA as it is of Goldman Sachs.

In the case of the TSA, though, the combination produces the natural hire as the people who couldn’t get a job at Applebee’s, The Olive Garden, or Ruby Tuesday’s.

As Paul Kedrosky recently noted, it’s more “security theater” than security. So when DeMint compares the TSA to the FBI, he’s neglecting that the average staring salary at the FBI eight years ago was over $43,000—with an increase of at least $10,000 upon completion of training. This is $20,000-$30,000 a year more than the $12/hour my neighbor made when he started with the TSA. (He quit quickly, finding restaurant work more profitable.)

If you want security, you pay for people who know how to do security. If you want theater, you depend on Jim DeMint to ensure that the TSA remains leaderless, and then have no right to be surprised when a British novelist points out that your security isn’t secure. Even when he says:

Suppose I wanted to attack the US air travel infrastructure….I can kill lots of passengers! All I need to do is to buy a maximum-size carry on bag (US dimensions: 7″ x 13″ x 20″) and build the biggest, heaviest bomb into it that I can wheel behind me….

All I would have to do then is buy a ticket…and go queue. Then, when I get to the middle of the crowd, detonate the device. (For added horrors: have an accomplice with a similar device hang back, to detonate their bomb amidst the fleeing survivors.)

[S]ecurity checkpoints are a target, too, because they slow down travellers and cause crowds to form, and another term for “crowd” is “convenient target”. And because the attacker has not been separated from their weapon at the point when they reach such a target, it’s the logical weak point for causing maximum damage.

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Breaking The Healthcare Cost Curve

by run75441
Breaking The Healthcare Cost Curve

Quite a bit of the commentary has been written on the question of how-to-rein-in rising healthcare costs and to slow costs to less than the rate of inflation. Massachusetts has been able to provide healthcare to its citizens but still struggles with keeping healthcare insurance costs low and affordable. Healthcare costs continue to rise at 8% annually and will double by 2020 unless Massachusetts can find a methodology to control the rising cost of healthcare.
One answer might be Maryland’s solution, a regulatory commission of seven governor-appointed-commissioners serving 4 year terms and having the responsibility of setting appropriate rates for hospital inpatient, outpatient, and emergency department care to manage its rising healthcare costs by limiting payment to the minimum amount necessary to cover hospital operating expenses, and requiring all payers (both private insurers and Medicare) to adhere to the rates set. This regulatory commission is nothing new for Maryland and has been in place for years. At one time, 30 other states regulated hospital rates only to have them fall by the wayside in the late seventies and earlier eighties with the deregulatory movement.

When Maryland’s Commission determines what can be charged by each hospital, it takes into consideration a hospital’s wages, charity cases, and the severity of illnesses. If not satisfied with the commission’s decision, hospitals can appeal to the commission or go to court for a variance in prices. So what has been the success of Maryland in its attempts to tamp down healthcare costs? Separately, the net savings for Maryland was determined to be an ~$40 billion since 1976 (Health Affairs, “Setting Hospital Rates to Control Costs and Boost Quality,” 2009) and additionally:

“Had a similar system for all states been in place, a savings of $1.8 trillion dollars would have been achieved for the nation’s healthcare system.”

Emory University’s Elena Conis adds:

“The savings and financial stability engendered by the system also receive credit for granting the state (Maryland) the lowest health insurance premiums (as a fraction of income) in the country (‘Impact of a State-Level All-Payer System’).”

In her article “How Maryland Broke the Curve; A Solution for Massachusetts” Maggie Mahar (Health Beat) continues doing the yeoman’s work with additional research on whether hospitals had shifted medical procedure or device functions offsite to avoid regulation. Maggie’s research didn’t find evidence of a shifting of either offsite when compared to other states.

  • In 2004, Maryland was spending slightly more than the US average of $5283 at $5590 and was lower than 16 other states, Massachusetts included.  
  • The growth of its healthcare costs as compared to inflation was at the national average of 6.7% and less than 32 other states. 
  • In measuring against the state’s GDP, Maryland was at the national average or 13.3% for medical bills.

Maryland has managed to maintain the same markup over costs since the Commission’s beginnings as compared to the rest of the US (see chart “Keeping Costs Down”).

So what’s in it for Maryland hospitals? Hospitals are reimbursed at a higher rate for treating those who are uninsured and result in being charity cases; Medicaid and Medicare accept the Commission’s pricing and pays Maryland hospitals at the same rate as private insurance. The standardization of pricing goes a long way towards eliminating operations in the red; offers greater financial stability for hospitals as variation caused by the economy is minimized; prevents leveraging by insurance or hospitals and creates comfortable operating margins; lowers hospital administration costs with standardized pricing by eliminating insurance payout variation; and creates transparency for hospitals and patients on pricing.
What Maggie on Health Beat suggests for those waiting for a federal solution for rising healthcare costs may look to states to play a more active role in the control of cost. While the Federal Government may play a more efficient role in mandating healthcare insurance for people, states may actually hold the key to controlling healthcare costs. States are more knowledgeable regarding local conditions impacting hospital costs and pricing.
But what of Massachusetts? Realizing it could not maintain the same healthcare insurance prices against rising healthcare costs, The Massachusetts Division of Healthcare and Policy contracted Rand Corporation to strategize and help it develop a plan to contain healthcare costs. Besides the bundling of hospital and doctor fees, Rand recommended a similar approach to what Maryland has in place in addition to 10 other strategies and options, Controlling Healthcare Costs in Massachusetts,”
Estimated Massachusetts Cumulative Savings from Selected Policy Options, 2010–2020
As shown in Rand’s chart, the recommended actions and the resulting savings.
It appears to be a direction well worth taking and relieving the Federal Government of much of the responsibility of healthcare cost containment. Hat tip to Maggie Mahar at Health Beat, “How Maryland Broke the Curve; A Solution for Massachusetts”

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The CPI report was encouraging. The total CPI rose 0.2% and the year over year increase is only 2.6%. Although real averge hourly earnings fell, real weekly earnings were unchanged.

The core CPI actually fell for the first time since 1982, bring the year over year change in the core CPI to 1.6%. The 6 month SAAR for the core CPI is 0.8%. Despite all the worries about inflation the normal pattern is for the best cyclical reading on the core CPI to occur in the first year or two after a recession. If the economy follows the normal pattern, the core CPI should continue to moderate for another year or two.

The most severe source of higher prices was medical care where medical commodities increased 0.7% and medical services jumped 0.5%. Meanwhile we have our political system voting to ignore the severe problem of soaring health care cost.

Interestingly, one of the largest increases was used car prices that rose 1.5% in January and is now 11.5% above their year ago level. But real used car prices are one of the most reliable leading -concurrent indicators of auto sales. This is logical since the supply of used cars is trade ins for new cars and if new car sales are too low this creates a shortage of used cars.

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Torture–It’s the Economy, Stupid….

by Linda Beale

Torture–It’s the Economy, Stupid…..

Naked Capitalism ran a “guest post” by “George Washington” yesterday on Cheney’s role in furthering the Bush Administration’s torture agenda: Cheney Admits to Being a War Criminal, Naked Capitalism (Feb. 16, 2010).

Washington notes that the mainstream media’s approach to Cheney–letting him argue for torture without ever challenging him with tough questions–is “no different than interviewing Charles Manson and letting him argue–without challenge–that murder is a great thing.” And we are all guilty. “By failing to demand that torture stop and those who ordered it–like Cheney–be held to account, Americans are complicit in war crimes, just like the Germans who failed to stand up to Hitler were complicit in crimes against humanity.”

The preface argues that “torture is bad for the economy”, with a link to Washington’s own blog post on January 9 noting that “The Military-Industrial Complex is Ruining the Economy.”

The impact of militarization is huge, and the long-term wars we are engaged in currently, and their high costs, surely impact our economy. Surely the military-industrial complex and its demands on the tax system (and its potential threats to our democratic institutions) are viable topics at ataxingmatter, as part of the discussion of tax policy and institutional sustainability. The military-industrial complex gobbles up huge portions of the tax revenues that our system brings in. At the same time, our income tax provisions are extraordinarily vulnerable to the intensive lobbying of members of the military-industrial complex–from provision of multiple tax breaks to soldiers in the military front line to enormous subsidies for the natural resources extractive industries that feed barrels of oil into the pipeline of energy inefficient ships, planes, drones, trucks, and other energy gobblers in the military supply network. Taxing and spending go hand in hand–even when their relationship has been warped by the kinds of tax cuts passed in the Bush Administration that built in huge shortfalls of revenues in order to benefit the owner/manager class while at the same time treating war expenditures (and the future expenditures for replacement equipment and care of wounded necessitated by today’s war) as after-thoughts that could be added as supplemental budget items that are slipped through the legislative process without the kind of in-depth discussion and understanding that is required. As a result, we have followed a “make war now, figure out how to pay later” mentality. Put together with the huge, multiple Bush tax cuts–especially those for big corporations and their owners/managers–and the enormous financial commitment that was required to bailout the financial system because of its one-way-casino mentality (gamble the house’s money and if you lose, the house makes it up to you; if you win, you eat it all yourself and leave no crumbs for the house), we are left with an economic system that requires deep and thoughtful intervention to right itself–tax reforms to undo at least a portion of the disastrous Bush policies, financial institution reforms to break up the Big Banks and return them to quasi-public utility status where the public interest counters their private greed in the types of decisions they can make, and military reforms that include long-term thinking about the relationship between military decisions and the sustainability of democracy are at the very top of the list .

So how does torture–and the question of holding Bush administration officials accountable for using torture and advocating its use as a cornerstone of their approach to terrorism–relate to the economic/tax issues connected with the military-industrial complex? The following offers a sketch of considerations that support considering torture a tool of war that has particularly bad connotations in connection with the over-militarization of the economy.

First, torture was, under Bush, a key factor of war policy. It was openly advocated for by Cheney, and lawyers like Yoo in the administration pushed the boundaries (I would argue even “went beyond” the boundaries) of ethical requirements and competent representation to create some semblance of a legal foundation supporting the policy (and protecting the state actors who were embarking on it). Torture was thus demonstrably a key factor in the way the Bush Adminsitration fought its wars.

Second, torture as a practice weakens democratic institutions, since it can only be furthered through methods that run counter to our constitutional protections for due process–it demands that the executive powers be permitted to treat harshly those that are considered “other” without ordinary processes for first determining guilt before meting out punishment. In the Bush case, there was an affirmative decision to torture stemming from the undemocratic (and unsupported in our constitutional history) notion of a president with unilateral powers to do anything domestically or internationally, even actions contrary to domestic law and international treaties, under the presidential powers to conduct wars that Congress has declared–the absurdly undemocratic, fascist, militaristic, and anti-constitutional concept of a “unitary executive” pushed by the neo-cons to support the accretion of incredible powers to Bush because of his role as “commander in chief” of the armed forces.

Third, the use of torture invites a cycle of non-diplomatic and non-democratic responses. In a world context where even Democrats and Republicans have lost the art of reasonable compromise in pursuit of the greater good, it is not surprising that cultures that are as deeply opposed in values as (a) open democracies that strive for equal rights for women and men and freedom from religion as well as freedom of religion and (b) male-dominated theocracies where religion is imposed will find it hard to find avenues for working together for the common good. Add bias and assumptions about violence to the mix, add torture of those who perhaps are most prone to violent jihad to the mix, and the mixture becomes explose. As noted, torture represents a decision to deal brutally with those who are considered “other” than the governed people but for whom there have been no public processes to determine guilt or innocence. That lack of due process and lack of transparency breeds contempt for the government that embraces it–especially by those who bear the brunt of it. The widely disseminated photos of torture in the Abu Ghrab prison firmly fixed the image of “America as a torturing state” for those who were already prone to view the nation as biased against Islam and as a brutal state pursuing capitalism at any expense. Just as news of the Nazi concentration camps spread from one group of potential targets to another, the news of American use of torture and the intentionally anti-Islamic techniques (menstruating women, dogs, nakedness) must clearly have spread from one fervent Islamic group to another, reinforcing any hate and buttressing militant responses. Torture, in other words, breeds contempt, and contempt breeds war in a vicious cycle of brutal torture-hate-brutal response.

Thus, when torture and war crimes are furthered by top officials, the military economy is benefited and both democratic institutions and ordinary Americans are the losers. As one commentator on the Naked Capitalism post noted:

The only people who are intelligent, informed, AND support torture are the ones who WANT the US to have a lot of enemies, because they are in the pay of the military industrial complex. …They want a forever war. …[I]n the end, the neocons and the jihadis need each other for [their] own self-interests. Unfortunately, it’s the rest of us that end up paying. –Comment by “Skepticus Maximus”

So adding to the human rights and international treaty and domestic law arguments about holding the Bush Administration accountable is this economic/democratic institution argument . People like Cheney who advocated torture and legal advocates like John Yoo who facilitated it ought to be be held responsible not only because their actions violated the Geneva Convention and human rights agreements (we hanged Japanese prisoners for waterboarding) but because the advocacy and use of torture continue to threaten the foundations of the democratic institutions that we hold dear by underpinning an “above the law” military-industrial complex that is extraordinarily powerful and able to garner spending and tax provisions to its favor with apparent ease, with long-term deteriorative impact on the economy.
crossposted with ataxingmatter by Linda Beale

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Foreign holdings of U.S. Treasuries: was it really that bad? No.

by Rebecca Wilder

(Rdan…published two day ago at Newsneconomics)

Foreign holdings of U.S. Treasuries: was it really that bad? No.

I can’t believe that the Financial Times can get away with this. From the FT, titled Foreign demand falls for Treasuries:

Foreign demand for US Treasury securities fell by a record amount in December as China purged some of its holdings of government debt, the US Treasury department said on Tuesday.

China sold $34.2bn in US Treasury securities during the month, the US Treasury said on Tuesday, leaving Japan as the biggest holder of US government debt with $768.8bn. China overtook Japan as the largest holder in September 2008.

I don’t know what foreign demand is (these are net flows, so it could likewise be a product of domestic supply and/or demand), but foreign holdings of US Treasuries grew! In December, foreign holdings for US Treasury securities – official and private holdings of US Treasury bonds/notes + US Treasury bills – increased by $17 bn over the month (you can see the major holders by country here, or the total on the press release, lines 5+10+23).

And lookie here, China dropped its overall holdings , yes, but the article fails to mention the shift in holdings by other key countries that offset completely China’s sell-off. In December, the UK and Japan jointly increased their holdings by more than China dropped its holdings, + $US 36.4 bn vs. -$US 34.2 bn.

And finally, China’s current portfolio is really not that difference from recent history. China’s December share of US Treasury holdings, 20.9% (as a % of total foreign holdings), is barely off its 2007-2009 average, 21.4%. But Japan’s holdings are way off, and could revert towards the average, 23.7%.

The FT’s coverage of the TIC report does not do justice to the undertones of this massive release (especially the China piece, in my view). More TIC analysis to come tomorrow…

crossposted with NewsnecomicsRebecca Wilder

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Financial Reforms: no dearth of suggestions, but a lack of action

by Linda Beale

Financial Reforms: no dearth of suggestions, but a lack of action

As economists track the signs of a possibly receding recession, investors test the waters for investing, and Congress is pushed to focus more on deficit reduction than on economic stimulus (probably wrongly), the financial institution imbalance that started it all goes on unabated. We still have huge financial institutions risking not just their money but ours, under the implicit federal guarantee that lets them borrow for less and earn more than similarly situated banks that don’t enjoy that federal guarantee. We still have endless variations of derivative instruments available for custom delivery, instruments that were ill-understood by the market participants before the crisis burst andthat remain problematic from tax and regulatory perspectives. Swaps, CDOs and other securitization instruments continue to be traded between counterparties without the widespread knowledge of important market information to inform the trades. Banks continue to hold onto loan portfolios, unwilling to acknowledge–either in their “mark” for financial and tax accounting purposes or in their relationships with borrowers–the appropriate decline in the principal amount of the loans.

What are the solutions, if any, that will be imposed. Two figures from prior administrations have suggestions about what they should be. Not surprisingly, the focus, and corollary impacts, are profoundly different.

Robert Reich, labor secretary under Bill Clinton, looks at the bank bailouts and the banks’ failures to modify principal amounts on mortgage loans and sees what many other commentators have seen–socialization of bank (i.e., manager and shareholder) losses, privatization of gains. Welfare for Wall Street, Free markets for the rest of us. Salon, Feb. 12, 2010. Reich reminds the President that there is not that much differnce between the “lower” bonuses paid to Goldman CEO compared to other big investment bankers ($9 million versus $17 million)–those are both stratospheric pay amounts, entitling their recipients to live in the exclusive realm of the top percent of all households in this country–kings in their privileged domain, and both paid for by taxpayer largesse, which bailed the companies out of inevitable huge losses and possible insolvency (if counterparties hadn’t paid on their debts, if AIG had defaulted on all of its guarantees, if the government hadn’t made credit available on very easy terms, etc.). Meanwhile, they contrast sharply with the economic situation of ordinary Americans–millions with lost jobs, millions more with “furloughs” and other forms of pay cuts, millions with real fear of imminent job loss, and almost all with homes whose values have tanked and retirement accounts whose funds are now much less than adequate for the years ahead. Wall Street is making hay, but Main Street is suffering. And the banks that securitized those mortgage loans–and pushed homeowners to take out new loans, to get equity out of their homes, to refinance so that banks would have more product to sell in securitizations to earn more fees–are not doing the one thing that could make the biggest difference in ending the struggles of this recession for many people–modifying the principal amount of mortgages by writing them down to reflect the true value of the homes on which they were granted. Here is Reich’s argument in his own words.

Bankruptcy has been part of the “free market system” for hundreds of years, but its details are determined through politics — the same politics that arranged the $700 billion bailout of Wall Street. In fact, you might say that during 2009, Wall Street went through its own kind of bankruptcy restructuring, with the generous aid of American taxpayers. JP Morgan Chase, Goldman Sachs, Morgan Stanley, Bank of America, Citigroup and Wells Fargo, along with their top executives, traders, and major investors, have benefited handsomely.

Now, a quarter of American homeowners need help restructuring their loans, but Wall Street is blocking the way.

Rather than defending the outsized paychecks of Dimon, Blankfein, and the rest of Wall Street as part of the free market system, the President needs to demand that Wall Street help homeowners on Main Street. The Obama White House should have made this a condition of getting the giant bailouts in the first place. The least it can do now is to is to make the free market system work for everyone.

Meanwhile former Treasury Secretary Paulson doesn’t seem to be thinking much about ordinary Americans. He is worried about the financial system, as we all should be. But his solution is the one that seems worrisome for the power it vests in the Fed and the failure to change the “too big to fail” status. He wants a systemic risk regulator and a pre-crisis liquidation process. See How to Watch the Banks, Henry Paulson, Op-Ed, New York Times, Feb. 15, 2010. Moreover, he suggests that decisions about banks’ size can only be made through an international regulator–the Financial Stability Board–which would broker international agreements regulating size and capital requirements.

Yes, we need to be cognizant of systemic risk factors and take action, but is a “systemic risk council” (Congress current idea) or the Fed as a systemic risk regulator the way? A systemic risk regulator is subject to capture–as the Fed arguably was during the Greenspan years of watching the housing bubble grow while mouthing paens to the free market’s ability to self-regulate. The Fed’s actions to deal with the bailout could have been less bank friendly and more ordinary American friendly–more control of salaries and risk taking for the billions pumped in, exaction of an agreement to support legislation on modifying loans in bankruptcy before any money was made available, refusal to “solve” the too big to fail problem by letting corporations consolidate and become even larger, etc.

And yes, plans for dissolution of insolvent banks are important, but they will not work if 1) we don’t have the will to allow them to go bankrupt and 2) we don’t exact from these banks a sufficient fee, as times goes on, for the protection that we provide them in the form of lower credit, liquidity facilities, and other guarantees.

But we have a real problem with financial institutions that are, as my grandmother used to say, “too big for their britches.” Brokering agreements through an international board sounds as fruitless as the endless proposals for commissions to study tax reform. We need Congress to take real action, now. We can’t wait for an international agreement, that would take years to work through and becomes less likely as the crisis recedes and the banks exert lobbying pressure.

So while a systemic risk regulator is probably important, controls on leverage ratios are more important. And while a plan for dissolution of insolvent banks is important, it is even more important to charge the banks an appropriate fee for the support provided by the government. Obama’s suggestion for a fee related to the amount of leverage is possible–it should be permanent, high enough to result in a pull-back in the amount of leverage in order to reduce the rate, and calculated in a way that will not be hard to manipulate (perhaps using a debt to basis ratio rather than a debt to fair market value ratio). And while all of those are important, we need to figure out how to break the big banks up into smaller pieces that are not as capable of wrecking the entire economy.

We probably need both Reich’s suggestions and some of Paulson’s. Modification of loans in bankruptcy seems a no-brainer, though Congress cannot get beyond the lobbyists’ grasp. Attention to systemic risk is required, but that is much more than the Fed as regulator–we need to repeal the Commodities modernization act and regulate all derivatives, requiring transparent terms via trades through exchanges. Somehow we need to find the will to break up the big banks–without that step, they will amass both economic power that can be devastating when misused and move the economy from crisis to bubble to crisis and political power that will insulate them from any remedial action by Congress, especially after the Citizens United case.

(By the way, Paulson goes on to throw out the GOP party line by treating the social welfare programs (Medicare, Medicaid, Social Security) as just as troubling as the bank bailouts in terms of problems that need to be gotten a handle on–he suggests by paring down the entitlements. This is the old bait and switch gimmick. Move the focus from the banks, which have reaped enormous rewards for their joint folly in economic engineering, to the folks who rely on these various safety net programs for a decent standard of living.)
crossposted with ataxingmatter by Linda Beale

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Leninism in the USA

Leninism in the USA
First let me define Leninism. To me the key feature of Leninism is that Lenin declared the party to be the highest good. Thus acts were to be judged as pro-party or anti-party. In fact the very same acts were good or bad depending on whether they were done by the party or some other organization. Claims of fact were judged as pro-party or anti party. People were told not to be selfish and to choose between “your truth and the party’s truth.” Events were evaluated as good for the party or bad for the party hence “The worse it is, the better it is.” Most of all, the party demanded absolute obedience — a Leninist level of discipline.

I don’t think I need to discuss specific episodes to make it clear that I think the Leninist party in the USA calls itself The Republican Party.

The same acts … :
The party’s position is that to send predators to kill people without warning is, now, a law enforcement approach to terrorism. Reading Reid his rights after 5 minutes is fine, but reading Abdulmutalab his rights after 9 hours is unacceptable.
Claims of fact …:
global warming is a hoax, Reagan showed how to cut taxes without adding to the debt, the health care bill is a government takeover. The individual mandate is uncontroversially needed no it’s a violation of the constitution etc.
The view that the worse it is the better it is the only explanation of why Republicans filibustered a bill which they cosponsored.

The American Lenin.


OK the American Lenin is Dick Cheney, but McConnell is, at least, the American Zinoviev.

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TIC tock; TIC tock; TIC tock

No, the US Treasury’s time is not running out. Where’s Brad Setser when you need him – and the media definitely needed him in reference to the December TIC report.

Okay, okay, we know: China dropped its share of Treasury holdings in December by $US 34.2 bn. China now holds just 20.9% of the total foreign-owned stock of Treasuries, second only to Japan (21.3%).

But China’s share is closer to its average, while Japan’s share is way off – there may be a reversion here, i.e., Japan will grow its stock of Treasuries relative to China (Please see my post yesterday). Except for the period of September 2008 through November 2009, Japan held a much larger share of Treasuries than did China for every month since 2000.

Is there a sinister plot developing? Is China selling off S-T T bills to retaliate against the Obama administration’s push on the renminbi? Or is China simply reallocating its portfolio toward risk?

Perhaps there is a (partial) retaliation scheme underway, as suggested by the 3-month accumulation of short-term US assets (mostly T bills agencies with a maturity of less than 1 year).

But isn’t it just slightly more plausible that the Chinese are – official + private – selling off zero-yielding (practically) Treasuries in exchange for longer-duration, higher-yielding, and riskier assets.

The first bit of the story is this: one should take care in not reading too much into the TIC report. It’s just one month’s worth of data; but more importantly, the data miss a critical component of the capital account, foreign direct investment.

The chart above illustrates China’s one-year rolling monthly flows of long-term, high quality asset purchases – Treasuries bonds/notes, agencies, stocks, and corporate bonds. The Chinese are accumulating stocks, primarily through private investors, but through official channels as well (see press release, lines 8 and 13). This suggests an increasing interest in equity, which could signal growing foreign direct investment flows (not shown in TIC).

Furthermore, the entire year’s shift in assets, long-term Treasury purchases, +$US 98.8 bn fully offsets the drop in short-term Treasuries, -$US 98.8. This suggests diversification.

Finally, everybody’s doing it, not just China – diversifying away from T bills, that is!

The chart above illustrates the 3-month rolling sum of all foreign net flows of ST US assets (mostly T bills). If you invest $US 1 million dollars today in a bill expiring in August 2010, you make about 900 bucks. Man, doesn’t that sound like a wonderful investment?

So the next question is: why do the Chinese care about return on their F/X holdings? Because they have a peg! Here is a great article for all of you who wanted to know about the costs of maintaining a peg. Accumulating FX reserves is a costly business, and T bills are unlikely to finance the type of sterilization that is needed by the PBoC.

Rebecca Wilder

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Say It Ain’t So

NBER paper of the day:

We analyze asset-backed commercial paper conduits which played a central role in the early phase of the financial crisis of 2007-09. We document that commercial banks set up conduits to securitize assets while insuring the newly securitized assets using credit guarantees. The credit guarantees were structured to reduce bank capital requirements, while providing recourse to bank balance sheets for outside investors. Consistent with such recourse, we find that banks with more exposure to conduits had lower stock returns at the start of the financial crisis; that during the first year of the crisis, asset-backed commercial paper spreads increased and issuance fell, especially for conduits with weaker credit guarantees and riskier banks; and that losses from conduits mostly remained with banks rather than outside investors. These results suggest that banks used this form of securitization to concentrate, rather than disperse, financial risks in the banking sector while reducing their capital requirements.

UPDATE: If anyone knows of Tom points us to an “ungated” version from three weeks ago, please mention it in comments or e-mail.

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