She Said It Best...

"What the honorable member is saying is that he would rather the poor were poorer provided the rich were less rich."

Margaret Thatcher, 1990

Laugh Out Loud, Paul Krugman Edition

Paul Krugman thinks Ben Bernanke can solve the nation's economic problems by having the Fed perform some or all of the following:

• Purchase long-term government debt to push down interest rates and thus borrowing costs
• "[Announce] that short-term interest rates would stay near zero for an extended period, to further reduce long-term rates"
• "[Announce] that the bank was seeking moderate inflation, 'setting a target in the 3-4% range for inflation, to be maintained for a number of years,' which would encourage borrowing and discourage people from hoarding cash" (emphasis mine)
• Depreciate the dollar

I'm no economist, and I never gave economic advice to Enron, but even I can see the holes in these proposals. First, the Fed's been buying government debt for two years in order to lower interest rates, but private borrowing hasn't increased. Second, as Krugman notes, the Fed has all but announced that short-term rates would stay zero through mid-2013. Call me stupid, but how is a bleak economic forecast for 2012 supposed to increase businesses' and consumers' confidence? Third (I'm taking this out of order), the dollar has already been depreciated against world currencies. In fact it's been depreciating for years. And yet imports continue to rise and exports continue to fall. How does that help the economy?

But here's what really got me laughing: years worth of increased inflation to "discourage people from hoarding cash." Who is he talking about? Who in the world is hoarding cash right now?! Who even has cash to hoard?! Is he talking about large corporations like Apple, Google, and GE, who according to their 2011 Q2 filings had cash reserves of $12, $10 and $91 billion respectively? That's a lot of cash, to be sure. But why would increased inflation motivate these companies to spend more? What would they spend it on? In any case Krugman doesn't say "companies from hoarding cash," he says "discourage people." What does he think "people" will do with all this cash he thinks they've hoarded? Buy more Chinese imports? Buy real estate in Detroit? Invest in precious metals? Trade in their SUV's for sleek new EV's?

Laugh Out Loud, Robert Reich Edition

Reich's a smart guy. I usually learn something when I read his stuff. But not today.

He's attacking the President for not having a good jobs plan. Fair enough, the President deserves such attacks. Reich writes:

This job recession shows no sign of ending. It can no longer be blamed on supply-side disruptions from Japan, Europe's debt crisis, high oil prices, or bad weather.

We're in a vicious cycle where consumers won't buy more because they're scared of losing their jobs and their pay is dropping. And businesses won't hire because they don't have enough customers.

Hard to argue with that. But as part of his solution, he suggests (emphasis mine):

Second, we'll recreate the WPA and Civilian Conservation Corps -- two of the most successful job innovations of the New Deal -- and put people back to work directly. The long-term unemployed will help rebuild our roads and bridges, ports and levees, and provide needed services in our schools and hospitals. Young people who can't find jobs will reclaim and improve our national parklands, restore urban parks and public spaces, recycle products and materials, and insulate public buildings and homes.

Holy green gravy. He's done it! He's solved the nation's problems! We'll just take all those chronically unemployed middle-managers, salesmen, lawyers and put them to work building stuff. What a great idea!

And all those urban and suburban youth who can't get jobs in fast food? We'll send them out into the wilderness, where they will also build stuff. Well, except for the ones sorting stinky milk cartons and tuna fish cans down at the recycling center. Or those installing insulation in buildings that are already R33.

Yeah, that'll happen. I laughed out loud when I read that.

Housing Starts Fall Again

Martin Crutsinger of AP reports:

A modest rebound in single-family home construction in April raised hopes Tuesday that the three-year slide in housing could be bottoming. But with the supply of unsold homes bulging, foreclosures rising and prices falling, no broad recovery is expected until next spring at the earliest.

You know, it's funny: we saw articles yesterday (Bloomberg) reporting that Q1 housing starts would rise, and this would provide further evidence the recession has bottomed out. But today's crop of articles make little mention of recession.

Nor should they. This little episode shows two areas where reporters need to do a better job:
1. Stop giving so much emphasis to predictions, especially in a volatile climate like the current financial crisis and recession.
2. Separate fact (housing starts gained/fell) from analysis (the economy has therefore recovered/bottomed out/worsened).

UPDATE: Lucia Mutikani of Reuters reports (emphasis mine):

New U.S. housing starts and permits dropped to record lows in April, while retail sales fell last week, according to reports on Tuesday that tempered optimism the nation's recession was drawing to a close.

Here's how she led yesterday's article, predicting good housing start news:

U.S. homebuilder sentiment jumped to its highest level in eight months in May, a private survey showed on Monday, supporting views that the three-year housing slump might be close to an end.

So Monday she thinks the recession will end soon, based on a prediction of increased housing starts. The next day, the prediction turns out (somewhat) inaccurate, and...she tempers her optimism.

Check out this graf from today's article, near the middle:

Analysts said that while the decline in starts suggests the recession has yet to run its course, it should help the housing market work through a huge stock of unsold existing homes and lay the foundation for a recovery from a three-year slump.

"This is essentially a good thing. It means supply will eventually come back in line with demand. Home builders have adopted an appropriate risk aversion stance," said Joseph Brusuelas, an economist at Moody's Economy.com in West Chester, Pennsylvania.

Why didn't she report this yesterday? As long as there's a "huge stock of unsold existing homes", who in their right mind thinks housing starts are going to significantly improve?

Also missing from today's or yesterday's article is any acknowledgment of the impending wave of foreclosures due to hit the market this month or next.

AIG and the Financial Bounce

The DJI bounced up again today, almost to 7400. Financial stocks, including Citigroup and Bank of America, continue to do well.

As far as I know, Citi and BoA haven't accounted for their success. For all I know they could in fact be following a high-risk path to profitability.

But I just thought of another explanation. We know AIG made billion dollar payments to domestic and foreign banks. Neither Citi nor BoA have been mentioned as counterparties, but this BusinessWeek article does list Merrill Lynch, which is now part of BoA. The article goes on to point out that much of these payments will likely be passed on to other domestic banks.

Adam Lerrick, a fellow at the American Enterprise Institute, argues that viewing AIG's counterparties as the final beneficiaries of the government bailout is overly simplistic and probably not correct. It would not be unusual for the banks named in the report to have turned around, Lerrick says, and written a second round of contracts with yet other banks, quite possibly different U.S. players such as Merrill Lynch. In today's financial system, Lerrick argues, it would be impossible to be certain that the taxpayer bailout didn't eventually come largely back to supporting other U.S. firms.

If that's true (and I have no reason to doubt it), then I wonder how much of the financial sector's recent profitability derives from these AIG payments, which come from taxpayer-funded bailouts? And if these payments are driving Citi's, BoA's, and others success, can that really be called a profit? Or is it just "give a bank a bailout, and they'll profit for a quarter"?

AIG Outrage

Jim VandeHei covers the uproar at AIG's management bonuses. He thinks White House and Congressional outrage rings hollow, considering how long the bonus plan has been publicly announced (more than one year). He doesn't mention the billions of dollars AIG has paid to foreign banks, nor the billions paid to troubled domestic banks like Goldman Sachs (h/t Instapundit).

This spontaneous outrage reminds me of a Johnny Miller story I heard. Miller was playing in a local pro-am. An amateur golfer in his group was struggling, and every time he made a bad shot, he'd explode with obscenities. This went on for a while, and eventually Miller stopped the outraged amateur mid-rant, and told him, "Look, you're just not a good enough golfer to be that angry."

Are the President, Treasury Secretary, and Congress good enough to be this angry? I don't think so.

Update: Eliot Spitzer points out Goldman's and other banks' double bailout, and then asks some very good questions.

Safety, Danger, and Attention Span

Glenn Reynolds has a good review of Tom Vanderbilt's latest book, Traffic: Why We Drive the Way We Do (and What It Says About Us). The main point is that added safety features can make us behave more dangerously. He follows a tangent and raises a very interesting point:

This approach could be taken beyond the world of personal transportation. We’re in the current financial mess in part because things that were actually dangerous—from subprime mortgages to risky financial instruments that no one fully understood—felt safe and ordinary. Modern financial markets, with computers, regulations, deposit insurance and bond ratings, felt as routine and as smooth as that four-lane highway in Spain, causing a lot of people who should have been paying attention to doze off. Investors might have been more careful if it had felt like they were driving down a twisty mountain road with no guardrails, especially since we really were engaged in the financial equivalent of high-speed mountain driving, only without the discipline of fear.

I wonder if there isn't some way to make government and the economy feel more dangerous without actually making it more dangerous? Or would this just be like someone setting their clock ahead 10 minutes to avoid being chronically late?

Citigroup's Bounce

Citigroup has apparently turned a profit [WaPo] in the first two months of the current year. Binyamin Applebaum of the Washington Post has an interesting follow-up article detailing Citigroup's long history of risk-taking.

Question: The market reacted positively to Citigroup's profit news, but how does anyone outside Citigroup know that those profits are sustainable? Prior to last year, Citi profited while engaging in what is now known to be excessively risky transactions. How do we know they're not engaging in even more risky transactions, trying to gamble their way of their current crisis? Even if their January and February profits were legitimate, what risks are they willing to accept to push their stock price even higher? Is anyone at the Fed, SEC, or Treasury Dept. watching this?