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


by Mike Kimel

There seems to be something inherent in human nature that leads to frequent predictions of the end of the world. Usually, those predictions turn out to be wrong and then require some form of backpedaling. As an example, folks who use(d) a statistical package called Shazam might remember the two quotes that appear at the start of the chapter on Probit and Logit estimation in the user’s manual:

“The deliverance of the saints must take place some time before 1914.”
Charles Taze Russel
American religious leader, 1910

“The deliverance of the saints must take place some time after 1914.”
Charles Taze Russel
American religious leader, 1923

Charles Taze Russel, incidentally, founded the Bible Student Movement, which would birth, among other things, the Jehovah’s Witnesses.

But more, er, secular predictions are not uncommon – there’s always someone predicting that a given policy is going to bring gloom and doom. Those predictions are also usually wrong, but here there’s an important caveat – sometimes the doo-doo really does hit the fan. The Great Depression happened, and more recently, so did the Great Recession. Even systems collapse – the past few decades alone have seen the end of the military dictatorships in South America, of the USSR, and of Apartheid in South Africa, which goes to show that the end comes to the bad as well as the good.

Which raises a point – how can you tell whether a big, quasi-end-of-the-world story has any credibility? I think it comes down to a few things. One is whether the source has been pretty good in its predictions in the past. On the economic front, clearly, anyone who talked about the Great Moderation, and the benefits that financial deregulation would bring is immediately suspect, and more so if they predicted, say, disaster in the 1990s. Another is whether the story makes any sense, and whether there’s any data to back it up.

Now, the point of this post is that I’m going to break a rule I’ve been following since I started blogging in in 2006. See, I have a long-run prediction, one I made in early 2001 – people who know me personally have heard it ad nauseum but I haven’t put it on paper because I really don’t like sounding as if I’m one of those crazy prophets of doom. However, a) I think my calls so far while blogging, though limited, have been pretty good, and b) what I’m seeing is conforming more and more to what I was expecting, so maybe its time to put things on paper in the hope in some small butterfly-flapping-its-wings way it helps change things. (I started toying with the idea of writing down this prediction when I wrote this post a few weeks ago, noting my correct calls about the start and the end of the Great Recession.)

My conclusion, back in 2001, was that when someone got around to writing The Decline and Fall of the American Empire – not the Gore Vidal version, but rather the Edward Gibbon version – they would start it on January 20, 2001. The nutshell version: during the Reagan administration, the Republican Party began buying into magical thinking (a.k.a., supply side economics). The result was a massive increase in the national debt. While these days that isn’t considered a big deal, its important to remember, other than Ford, who only served two years at a very difficult time, Reagan was the president since World War 2 to run up rather than pay down debt. Now, that could have been a one-off, as a single administration changing direction does not necessarily make a trend, but marketing beats product, and the story line, to this day, is that growth in the Reagan era was particularly impressive, never mind reality.

His successor followed in his footsteps – despite the backpedaling on “read my lips” tax burdens fell under Bush Sr. too, which is to say, the magical thinking continued. Under Clinton, things changed (as noted in my book, tax revenues began rising and spending began falling in Clinton’s first year in office, thus predating Newt’s influence by two years) and we had a break in the insanity. It wasn’t a complete break – this was the era of “black helicopters” and “UN military bases on US soil” and “Clinton shot some fellow drug dealers at the Mena airport while he was governor of Arkansas” but on the fiscal front, at least, the country was more or less united; paying down the debt was viewed as a positive. And it certainly is, because there are times when the government has to spend money (think World War 2, or a monster recession), and if the debt is high enough, its freedom of operation is very, very limited.

But just as Reagan’s change in direction wasn’t inevitably permanent, neither was Clinton’s. The country’s policies stood in balance – we could have gone either way, and we went the profligate route. And now, it will be that much harder to change direction again. Obama isn’t man to do it – as I’ve noted before, where it counts, this administration resembles nothing more than GW’s third term. (Back in 2001 I didn’t expect GW’s eventual successor to turn things around, largely for the reason that a) Republicans following the Reagan myth and GW’s more recent approach would have little incentive to break that mold, and b) any Democrat would realize that he’d be tarred and feathered as a big spender – see JFK, LBJ, Carter and Clinton for an example.) Granted, a few of the details – like Obama was going to shovel money at the folks who brought down the world’s financial system – were unknowable in 2001, but they aren’t exactly warm-fuzzies inducing. If anything, they make the story worse, and move the time line up.

So there it is… we are going to spend ourselves, for no reason, into a position where we have no freedom of operation whatsoever. That leads to a million and one otherwise un-necessary cuts in the sort of spending that otherwise boost growth, and not a time of our own choosing either. And then the big need arrives – some event that requires the spending of money- and the resources aren’t there. Rome pulled back little by little, and so will we. The decay in Rome was gradual, and not noticeable, and for much of the decline, but the lives of the have-nots were much poorer than before, and even the haves lost their ability to control wider events.

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Exasperation with tax cut slogans

Mark Thoma expresses his exasperation with the tax cut slogans of lawyers and journalists:

The disappointing part is that the press still lets them get away with this. At best, the press generally says something like “some economists claim this isn’t true,” implying there’s a debate about this issue — that some credible economists think the tax cuts will, in fact, pay for themselves — when there is no debate and the answer is clear. Tax cuts don’t pay for themselves.

If the press won’t call them on this obvious falsehood, how can we trust them on anything? Instead of reflecting poorly on the press, this ought to bring the general credibility of the people making these claims into question. The press ought to ask something like, “Are you this ignorant about economics, in which case why should anyone vote for you, or are you deliberately misleading people? I’ll assume you aren’t ignorant, so here’s the question. If you are willing to make false claims about the revenue generated from tax cuts in order to promote them for the wealthy, what other falsehoods will you be willing to promote in order to serve political ends? If voters can’t trust you to tell the truth about tax cuts, how can they trust you on anything?”

But then, there is more to the story.

Over at Mankiw’s blog is the ‘cover’ these journalists see. A Harvard economics prof ‘deconstructing’ Goolsbee’s white board lectures. (h/t beezer)

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Health Care thoughts: Reinhardt thinks about (health) accounting

by Tom aka Rusty Rustbelt

Health Care: Reinhardt thinks about (health) accounting

Uwe Reinhardt (Princeton) is one of the world’s preeminent health care economists. In a NYT piece he makes an interesting attempt to define a new “health care accounting.” ( and see his earlier pieces mentioned in the article)

Reinhardt explains and critiques the evolution of financial accounting, and then draws parallels about how we might use some of the same tools and techniques to develop a new “health care accounting.”

Prof. Reinhardt oversimplifies and mischaracterizes financial accounting (space limitations the probable culprit) and some of the parallel fit and some do not (and health care accounting does not 100 years to evolve). Financial accounting is not without its problems.

I imagine Reinhardt knows something about the current efforts in benchmarking and cost analysis, so he is not completely in the realm of theory..

I would propose a slightly different parallel – not all accounting is financial accounting, managerial accounting has a much more diverse tool kit and may well offer a better framework for some aspects of a new health care accounting. Less public, more practical. This is actually the sort of analysis Reinhardt is promoting.

As I explained to students for many years, financial accounting is rule drive whereas managerial accounting is need driven, drawing from a big toolkit and utilizing both historical and prospective data and analysis, even economics. Cost accounting, a subcategory of managerial, is widely used already (e.g., provider cost reports) in health care.

Having read hundreds of pieces (journalism, opinion and scholarly) on health care in the past year, this piece is one of the most interesting. Economics marries managerial accounting and clinical benchmarking? Some potential here.

Reinhardt NYT

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Bear Blowing Own Horn

Robert Waldmann

Paul Krugman October 23

This isn’t original, although I don’t know who deserves the credit.

So, here it is: in effect, QE2 amounts to a decision by the US government to shorten the maturity of its outstanding debt, paying off long-term bonds while borrowing short-term.


It’s just as if Treasury sold 3-month T-bills and used the proceeds to buy back 10-year bonds.

Angry Bear October 10

But why the Fed ? The Treasury is a huge player in the bond market. They are still selling long term bonds. Why ? What if the Treasury decided to finance the deficit with 1 and 3 month T-bills alone ?

No success link begging so far 🙁

update: Oh nooooo. Now Paul Krugman has found a link, but it isn’t to here on October 10 it is to EconoBrowser on October 3rd. “Missed it by that much” is a very week argument.

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I dare to disagree with Nate Silver

Robert Waldmann

Nate Silver, like essentially all election handycappers, ignores internal polls — polls financed by one of the candidates or by the party of one of the candidates. Unusally, he explained why noting that even if the polls are unbiased there is extreme publication bias as campaigns release the polls if and only if they like the results. I think that, if this is the explanation of the known bias in published internal polls, then internal polls should be included in averages of polls.

update: This post is basically a critique of a post by Nate Silver to which I didn’t link. The assumptions I use below are based on things he conceded for the sake of argument. He presents a simple formula which I critigue. All quotes from the post are updates.

I’m not sure why people take polls released by campaigns at face value. This does not mean that campaigns don’t have very good pollsters working for them. But the subset of polls which they release to the general public is another matter, and are almost always designed to drive media narrative.

So the polls are OK when conducted, but the choice to release the polls is strategic and therefore the polls should not be taken “at face value.”

What we’ve found is that is that polls commissioned by campaigns and released to the public show, on average, a result that is about 6 points points more favorable to their candidate’s standing than nonpartisan polls released at the same time. (Other analysts have found similar results.) So, just as a first cut, you might take a Democratic internal poll that shows a tied race and “translate” it into nonpartisan terms by adding 6 points to the Republican’s margin.

I note the weasel phrase “as a first cut” and argue below that a better first cut is to just include internal polls unadjusted if, as Silver semi asserts in the first quoted passage, the problem is just publication bias. The rough 6% correction is definitely not the best first cut. I say 0% is best but 6% is definitely too much because of a universally accepted argument discussed below.

end update

All campaigns appear to believe that reporting a poll which would be good for the candidate if accurate is definitely good for the candidate (they believe in a bandwaggon effect. So the publication bias hypothesis makes sense. I am going to make absolutely key unsupported assumptions in order to write down a model. Then I will pretend the model is reality.

There are two candidates A and B.
Assume that there is an unbiased agreed upon average of consensus based on public polls — A ahead by dpublic. Assume each campaign conducts one unbiased poll and that these polls are of equal quality (same sample size etc). Assume A releases A’s poll if it shows A ahead by more than dpublic and B releases B’s poll if it shows A ahead by less than dpublic.

Claim 1: Then the average including internal polls is an unbiased estimate of the expected value of the actual vote.

Proof: everything is symmetric around A ahead by dpublic so the A’s expected lead including the internal polls is dpublic which is assumed to be unbiased.

Claim 2: the variance of the average including the internal polls will be lower.

Non proof: This is obvious it is an average with an equal or larger denominator.

So what are the key assumptions ? First I don’t really need to assume one internal poll each, but I do need to assume equal numbers of internal polls run by both campaigns. Second I need more for symmetry. I need that the internal polls are all unbiased and that they have equal variance. Also I need that the rule for publishing them is the same for both campaigns.

Silver seems inclined to assume, for the sake of argument, that internal polls are generally reputable polls with bias due to publication bias. It seems to me that the key issue is the assumption that each side actually performs the same number (really approximately the same number).

This is clearly not true if a well financed campaign competes with a poorly financed campaign. This means that results including internal polls will depend partly on current public opinion and partly on which campaign has more money. The same is true of election outcomes. I’d consider that a feature not a bug.

My reasoning is used in informal discussions. The fact that a campaign hasn’t released an internal is interpreted as bad news for that campaign. It is assumed that they ran polls and didn’t like the results. Consider what Steve Singiser just typed.

Meanwhile, Louisiana looks competitive for the first time in months, at least according to a Dem poll. As of this afternoon, we haven’t seen the retaliatory GOP internal poll, suggesting that the Dem poll might at least be in the wheelhouse.

No one seems to doubt that this argument is valid, yet it is excluded from Silver’s model and from the more primitive polling averages presented by others.

update 2: Silver’s proposed 6% correction ignores this factor. Now ignoring all internal polls will not introduce bias, but including internal polls with the 6% correction will introduce bias in my example in the case in which only one internal poll is reported.

end update 2.

I think my alleged proof is rigorous, but it is very brief and I will tell stories to explain.

There are four possibilities
1. Both internals give better results for A than the consensus based on independent polls
2. Both internals give better results for B
3. The poll conducted by A gives better results for A and the poll conducted by B gives better results for B
4.The poll conducted by A gives better results for B and the poll conducted by B gives better results for A

In case 4, no internal polls are released so the average including (hypothetical reported internals) is just the average based on independent polls.
In case 3 each internal poll is published. Each is biased (by selection) each is equally biased in opposite directions. The final average is unbiased and based on a larger sample (with a larger denominator) so it has lower variance than the average independent poll.

The interesting cases are 1 and 2. I will explain case 1, since they are symmetric. In case 1 one poll is included in the average. It’s distribution is biased by selection. However, the fact that the Poll run by campaign B gave an lead for A greater than dpublic is not included at all in calculating the average. The two biases exactly cancel. It is sufficient but not necessary to note that the distributions of (internal poll minus average of independent polls) are symmetric around 0. It is necessary that the two internal polls have the same distribution (the bit about equal quality).

update 3: I haven’t shown you the proof of this new claim. It actually adds something to the obvious claim based on symmetry. It means that not only is there no unconditional bias, but also there is no bias conditional on being in case 1 and similarly there is no bias in case 2. This means that Silver’s proposed “first cut” is not the correct formula given Silver’s data. The fact that one campaign is not releasing internal poll results means something and the 6% correction is based on the assumption that it means exactly nothing. I’d say a better first cut is 0%, but I am absolutely sure that a 5% correction is better than a 6% correction (I’m willing to bet a modest amount of money on it using exactly the same data Silver used to calculate the 6%)

end update 3.

Now someone at DailyKos noted (I think it was Steve Slingiser to whom I linked above) that averages including internals performed better than averages of independent polls in past cycles. I claim that I have an explanation of that fact which is perfectly consistent with the very significant bias in publicly reported internals.

Second, my argument for including internals will cease to hold if it is adopted. If it is known that internal polls are believed, the incentive to deliberately bias them increases until the effect of including them becomes a bias in favor of the less honest campaign. No campaign is very honest, but they do differ, so, if indeed they are not cooking the internal polls now, it would be better if people ignored the internal polls at the cost of not knowing so well how elections will turn out.

Not being Kant, I will include internal polls in my averages.

update 4: I haven’t proven any of my mathematical claims after the first (at most) but I will add one more for the patient reader. Even if internal polls are biased (not just reported internal polls but also the numbers which might or might not be biased) they should be included if both campaigns have the same bias and the same symmetric distribution around that biased mean, both know the bias and both report the poll if it is better for their candidate than they expected given the bias.

as in the non proof of the cliams of no bias in cases 1 and 2 works just as well.

A simpler way to put the new claim is that if half of internal polls are reported, and those are the half which are better for the campaign which financed the polling, then the best approach is to include internal polls in the average just as if they were independent. This is true even if internal polls are biased (and it’s not just that published internal polls are biased due to publication bias).

If more than half of internal polls are reported on average, then the simple average UNDERestimates the expected vote share of the campaign which reports the internal poll. The fact that the other campaign didn’t report it’s poll contains lots and lots of information if campaigns usually report their internal polls. More generally for many internal polls run but equal numbers by each campaign this means that my 0% correction for internal polls is too high if most internal polls are reported.

This is always assuming a lot of symmetry, importantly symmetry in the number of internal polls run and symmetric bias (indeed mirror image distributions) and symmetric rules for what to publish.

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Democrats touting tax cuts

by Linda Beale

Democrats touting tax cuts
crossposted with Ataxingmatter

The New York Times ran a story this week about the Obama tax cuts–the point? while the Tea Partiers rage against the Obama administration because they want more tax cuts, they have missed the fact of substantial tax cuts under the Obama administration. See Michael Cooper, From Obama, the Tax Cut Nobody Heard of, NY Times, Oct. 18, 2010 (noting that a reporter’s query at a Republican gathering ifound most commenters saying that their taxes had gone up under Obama and a NY Times, CBS News POll that showed that fewer than 1 in 10 Americans knew that Obama had cut taxes for most Americans, with a third mistakenly thinking their taxes had increased under Obama).

The reason for the failure to notice. It might be partly the vast expenditure of funds to support misleading propaganda that claims that the Obama administration’s policies are terrible for ordinary Americans. But it is at least in part because of the design of the economic stimulus tax cuts–intended to let the tax relief arrive in paycheck after paycheck (about $65 a month for typical families) so that it would be spent and thus help the economy, rather than arriving in a lump sum that might more likely be used as savings/debt reduction that would have less of an effect on the economy, coupled with the fact that the recession was cutting into spending money as businesses cut back, construction workers worked less, state services declined and, in at least 30 states, state taxes rose (see CBPP, States Continue to Feel Recession’s Impact, Oct. 7, 2010), and deductions for the ever-spiralling health insurance bills increased.

[Of course, this will all be much worse for many if the Tea Party candidates dominate in the elections. The ranking Republican on the House Budget Committee, for example, “calls for a radical redistribution of resources from the broad majority of Americans to the nation’s wealthiest individuals” including a plan that “provides the largest tax cuts in history for the wealthy,raises taxes on the middle class, ends guaranteed Medicare benefits, erodes health care coverage, partial privatizes Social Security, and makes deep cuts in guaranteed Social Security benefits.” Ryan Plan Makes Deep Cuts in Social Security, CBPP, Oct. 20, 2010. See Ryan Roadmap (introduced as H.R. 4529).]

The Democrats didn’t miss a beat in putting out a “fact sheet” to help people understand the range of tax cuts included in the stimulus bill and other legislation passed under Obama. See “Democrats Cut Taxes by $509 Billion, Putting Taxes at Lowest Level Since 1950“, Democratic Policy Committee, Oct. 20, 2010. The release includes the following list of major tax cuts enacted in the 111th Congress.

American Recovery and Reinvestment Act of 2009 (P.L. 111-5; JCX-19-09)

  • Tax relief for individuals and families (e.g., Making Work Pay Credit, American Opportunity Tax Credit, first-time homebuyer credit, and AMT relief)

$232,426 million

  • Clean energy incentives

$19,963 million

  • Tax cuts for businesses

$6,150 million

  • Manufacturing recovery provisions

$1,850 million

  • Economic recovery tools (e.g., recovery zone bonds, new markets tax credit)

$6,501 million

  • Infrastructure financing tools (e.g., school construction bonds, Build America Bonds)

$19,638 million

  • Low-income housing and energy property provisions

$74 million

  • $250 refundable tax credit for federal and state pensioners not eligible for Social Security

$218 million

  • Health Coverage Tax Credit provisions

$457 million

  • Low-income housing tax credit provisions

$143 million

  • Assistance for COBRA health coverage premiums

$24,677 million

TOTAL (over 2009-2019)

$312,097 million

Patient Protection and Affordable Care Act (P.L. 111-148; JCX-17-10 and CBO, Table 2)

  • Tax credit to help small businesses afford health coverage

$37,000 million

  • Tax credit to help individuals afford health coverage (Exchange Premium Credits)

$106,000 million

  • Therapeutic Discovery Tax Credit (for small businesses to produce innovative medical therapies)

$900 million

  • Adoption tax credit

$1,200 million

  • Health professional state loan repayment tax relief

$100 million

TOTAL (over 2010-2019)

$145,200 million

Worker, Homeownership, and Business Assistance Act of 2009 (P.L. 111-92; JCX-45-09)

  • First-time homebuyer tax credit provisions

$10,823 million

  • Business tax cut (increase carryback period for net operating losses)

$10,407 million

  • Military BRAC fringe provisions

$243 million

TOTAL (over 2010-2019)

$21,473 million

Hiring Incentives to Restore Employment Act (P.L. 111-147; JCX-6-10)

  • Payroll tax forgiveness for hiring unemployed workers

$7,616 million

  • Business tax credit for retaining newly hired workers

$5,422 million

  • Business tax cut (increase in expensing of certain depreciable assets)

$35 million

  • Qualified Tax Credit Bonds provisions

$4,561 million

TOTAL (over 2010-2020)

$17,634 million

Small Business Jobs and Credit Act of 2010 (P.L. 111-240; JCX-48-10)

  • Small business tax cut (modification to exclusion for gain from certain small business stock)

$518 million

  • Small business tax cut (5 year carryback of general business credit of eligible small business)

$107 million

  • Small business tax cut (general business credits of eligible small business not subject to AMT)

$977 million

  • Small business tax cut (reduction in recognition period for built-in gains tax)

$70 million

  • Small business tax cut (enhancements to section 179 property provisions)

$2,177 million

  • One-year extension of bonus depreciation

$5,454 million

  • Increase deduction for start-up business expenditures

$230 million

  • Limitation on penalty for failure to disclose reportable transactions based on resulting tax benefits

$176 million

  • Deduction for health insurance costs in computing self-employment taxes

$1,919 million

  • Cell phones and telecommunications equipment provisions

$410 million

TOTAL (over 2011-2020)

$12,038 million

Homebuyer Assistance and Improvement Act (P.L. 111-198; JCX-34-10)

  • Extend eligibility for the first-time homebuyer credit

$140 million

TOTAL (over 2010-2020)

$140 million

Charitable Donations for Haiti Earthquake Relief (P.L. 111-126; CBO)

  • Tax benefit for charitable cash contributions toward Haiti earthquake relief

$2 million

TOTAL (over 2010-2020)

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A proxy for nominal aggregate demand and payroll growth: Treasury receipts are recovering…

I present an update on aggregate demand using the highest frequency of economic data available, US Treasury tax receipts. Tax receipts serve as a proxy for nominal aggregate demand via a nominal indicator of private payroll growth.

US daily Treasury tax receipts are improving. (This chart has been modified since its original posting to enable reader to click to enlarge).

The chart illustrates the federal deposits of income and employment taxes that are recorded on a daily basis and presented here as the annual pace of the 30-day rolling sum. The red line illustrates the average annual growth rate spanning the period 2005-current.

Since roughly April of 2010, the annual pace of income and employment tax receipts has been above the average, 2.8%. In the third quarter, the annual pace of income and employment tax receipts remained around 4%, consistent with the second quarter pace. Hours and employment are improving, supporting wage gains and higher tax receipts. But more importantly, the pace of tax receipt growth has not faltered, demonstrating ongoing recovery in the labor market and consumer demand.

But it’s not enough. The gains in tax receipts are likely a function of firms adding back hours instead of pumping up the work force. (see my previous post with links on the “hourless recovery“).

The chart above illustrates the cyclical loss from recession and gains during the recovery of private net-jobs (payroll) and aggregate weekly hours (you can see the summary data from the September payroll report here).

Both series found a trough in the third quarter of 2009, which is consistent with the bottom in tax receipt growth (chart above). However, the hours index has recovered quicker than has its payroll counterpart (of course it fell farther, too). To date, both private hours and payroll are 7% short of their values at the peak of the economic cycle.

Receipts are growing, but not vigorously enough to indicate any shift in the current trajectory of payroll growth. Therefore, nominal aggregate demand remains weak. Furthermore, the still-nascent household deleveraging cycle is very likely moving at snail-speed (see this article for a discussion of the link between consumption growth, income growth, and deleveraging for today’s commentary).

Rebecca Wilder

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Everything Old is New Again, Part 1934-1937

I have (vainly, I suspect, in both senses of the phrase), tried to start a meme on Twitter, #ifTimGeithnerrantheEmergencyRoom. “The defibrillator would only charge to 30 to prevent scarring; anything more and you’re on your own” probably isn’t winning friends or influencing people, but it does make me feel better.

It also makes me look back at the histories written of the time.  A detailed analysis of Keynes’s discussion of Goldman Sachs’s antics in the late 1920s, which echo their trading in middle 2000s, is left to someone else. (Suffice it to say, one never quite listens to John Denver’s “Take Me Home, Country Roads” the same way again after reading about Blue Ridge and Shenandoah.)

It’s the macro monetary moves that abide, and the lessons of history. Years ago, people failed to notice that money whose multiplier is 1 is not inflationary—most especially when you have one of the so-called “balance sheet recessions” where assets are being carried at a value significantly higher than can be realized even in Edward C. Prescott’s or Thomas M. Hoenig’s most lurid fantasies.  To wit:

Over time, Fed officials became increasingly concerned about substantial increases in bank reserves, especially excess reserves. During 1934 and 1935, gold inflows of some $3 billion contributed to a doubling of member bank total reserves (from $2.76 billion in January 1934 to $5.72 billion in December 1935) and more than a tripling of excess reserves (from $866 million to $2.98 billion; Board of Governors of the Federal Reserve System 1943, 371). The buildup of excess reserves alarmed Fed officials, who feared that these “idle” balances might permit a wave of speculation and inflation.

Using its traditional tools the Fed would have reduced reserves (or slowed their rate of growth) by selling securities and raising the discount rate. But this was not feasible in the mid-1930s. A discount rate increase would have had no effect on reserves since discount-window borrowing already was trivial, even at a discount rate of just 1.5 percent. Similarly, by mid-1935, member bank excess reserves alone equaled the Fed’s total security holdings, leaving the Fed unable to slow significantly the growth of total reserves through open market sales….


And the result, Basel III-like, of ignoring that the accounting Fantasies of Solvency were dwarfing the lending realities:

Alarmed at the sharp increase in excess reserves that had taken place since 1933, and viewing it as potentially inflationary, the Board of Governors increased required reserve ratios in August 1936, and again in March and May 1937. In total, the reserve requirements on time deposits were increased from 3 percent to 6 percent. Requirements on demand deposits were increased from 7, 10, and 13 percent to 14, 20, and 26 percent for country, reserve city, and central reserve city banks, respectively. The increases, according to the Annual Report of the Board of Governors for 1936, were intended to eliminate those excess reserves the board deemed ‘‘superfluous for prospective needs of commerce, industry, and agriculture, and, if permitted to become the basis of a multiple expansion of bank credit, might have resulted in an injurious credit expansion” (14).

If “those who forget the past may be condemned to repeat it,” are those who remember it and still fail to do anything are just condemned to be economists?

All quotes from Charles W. Calmoris and David C. Wheelock, “Was the Great Depression a Watershed for American Monetary Policy,” 1996-1998, as published in Bordo, Goldin, and White eds., The Defining Moment, NBER Press, 1998

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I Told You So

Robert Waldmann is pleased to note that he was right and that Paul Krugman and Joeseph Stiglitz were wrongggg. They claimed that PPIP was a huge giveaway, because purchases of toxic assets would be 85% financed by no-recourse loans from the FDIC. I noted that this financing would only be available if the FDIC (not just Treasury) agreed, and that the FDIC had no intention of being taken to the cleaners.

Now I read that, so far, PPIP has generated a 36% annual return for the Treasury. That’s not the point. The point is that it has generated approximately no profit or loss for the FDIC, because the FDIC refused to be played for suckers. They key sentence is

The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program.

Note that the acronym FDIC doesn’t appear.

*Sorry for the brief uninformative title. I foolishly precommitted to the title:

OK so Masaccio is a great painter but I don’t know if he is right about the final outcome of the legacy loan portion of the Geithner plan. If he is I will write a post entitled “I Told You So.”

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