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August 2007

Andrew Samwick on Karl Rove

Andrew writes:

Vox Baby: Rove and Mythology: That said, there is quite a bit of myth in Rove's interview. Gigot's editorial comments around the quotes from Rove are right on the money:

Mr. Rove... [is] less persuasive on Medicare, where he insists that market reforms and health savings accounts are building a "critical mass" of popular support that will make them unrepealable. Yet Democrats are even now trying to kill Medicare Advantage, blocked only by the promise of a veto. If Mrs. Clinton wins in 2008, the Medicare drug expansion may prove to have been all spending and no reform.

He also insists that Social Security reform was worth the failed effort, and that Mr. Bush's ideas will be adopted inevitably by some future president. I ask if, given Mr. Bush's falling approval ratings in 2005 due to Iraq, he shouldn't have pushed for something less ambitious. Not a chance. "You cannot advance on the fronts you want to advance if you're playing mini-ball," he says, once again sounding like Mr. Bush.

Medicare Part D was a betrayal of conservatism. Conservatives are supposed to see fiscal responsibility as their friend, precisely because the need to pay for what the government does should constrain the overall size of that government. This Administration let go of fiscal responsibility early in its first term and has been undermined by its absence ever since.... The President's attempt at Social Security reform was the first casualty.... The President lost all credibility... when he decided that the short-term non-entitlement budget imbalances "don't matter" and when he passed a Medicare expansion whose unfunded obligations were larger than those in Social Security. That was contradiction number one....

Contradiction number two came from the President's statements that he wanted to "strengthen" the system. It is reasonable to believe that strengthening an entitlement program means putting more resources into it. There was no plan put forward by the Administration, even in the form of a trial balloon, that tried to strengthen the system with new resources. That doesn't mean the proposals were bad ideas, but it does mean that the honest description of what his plans due is to pare back projected future spending so that it is balanced by projected future revenues. The President's intentions here were both conservative and (to use Rove's word) ambitious. They just weren't presented coherently, and so they got nowhere.

This notion that the President's legacy on matters of fiscal policy--which will be written by historians (and bloggers!) that Rove can't spin--will be anything but a severe and harsh critique is what I consider the Myth of Rove.


Rick Bookstaber: What’s Going On with the Quant Hedge Funds?

Rick Bookstaber:

Rick Bookstaber: What’s Going On with the Quant Hedge Funds?: There are a host of very large and well-managed quantitative equity funds that are up against the ropes, all seeing big losses at the same time. And these are market neutral funds that spend a lot of time and resources monitoring risk and systematic exposure.... Yet they are all getting hammered. Why is this happening?

If I were to venture a guess.... [Q]uantitative funds are highly levered... they have strategies in common... share a common lineage: Goldman’s Global Alpha Fund and AQR; Tyke and DE Shaw. The bread and butter strategies for many of these larger quant funds are momentum and stock valuation, with some factor-based allocation strategies sprinkled in. There aren’t a whole lot of different ways to measure momentum.... The same is true with stock valuation and factor strategies.... [A]t the end of the day each of these funds will be long and short similar sorts of stocks.... Finally, in aggregate... the money employed by these strategies might be more than the market can absorb.... They have not been doing very well [recently], which suggest there might be too much money chasing the opportunities.... The quant fund crisis is as close as it gets to a pure example of the point in my book that it is liquidity and market dynamics, not economics, that spawns market crises. These are funds that invest substantially in talent and systems, and focus on keeping clear of anything systematic. Yet they are embroiled in a liquidity crisis. If it can happen to them, it can happen to anyone.

To me, it looks as though two things have happened:

  • Credit spreads have returned to normal levels, and those who bet that they would stay low have lost big.
  • The market has overreacted. Quant funds that are undercapitalized or lily-livered and sell will have lost big, and will close down. Quant funds that are well-enough capitalized to maintain their positions will do well enough in the end. Those who are liquid enough to buy what the undercapitalized quant funds are selling will be acclaimed as geniuses.

Dick Armey Doesn't Like Karl Rove

Josh Green in the Atlantic Monthly:

The Atlantic Online | September 2007 | The Rove Presidency | Joshua Green: Dick Armey, the House Republican majority leader when Bush took office (and no more a shrinking violet than DeLay), told me a story that captures the exquisite pettiness of most members of Congress and the arrogance that made Bush and Rove so inept at handling them.

“For all the years he was president,” Armey told me, “Bill Clinton and I had a little thing we’d do where every time I went to the White House, I would take the little name tag they give you and pass it to the president, who, without saying a word, would sign and date it. Bill Clinton and I didn’t like each other. He said I was his least-favorite member of Congress. But he knew that when I left his office, the first schoolkid I came across would be given that card, and some kid who had come to Washington with his mama would go home with the president’s autograph. I think Clinton thought it was a nice thing to do for some kid, and he was happy to do it.”

Armey said that when he went to his first meeting in the White House with President Bush, he explained the tradition with Clinton and asked the president if he would care to continue it. “Bush refused to sign the card. Rove, who was sitting across the table, said, ‘It would probably wind up on eBay,’”

Armey continued. “Do I give a damn? No. But can you imagine refusing a simple request like that with an insult? It’s stupid. From the point of view of your own self-interest, it’s stupid. I was from Texas, and I was the majority leader. If my expectations of civility and collegiality were disappointed, what do you think it was like for the rest of the congressmen they dealt with? The Bush White House was tone-deaf to the normal courtesies of the office.”

One of the most insightful commenters I know told me once that Bush's management strategy is that of Doug Niedermeyer, chair of the fraternity council in "Animal House": needle people in ways they cannot quite call you on in order to unbalance them and put them down. The remarkable thing is that this works: note how Armey has to protest that it didn't work on him, but it did.


25-Standard Deviation Moves, Several Days in a Row

From Peter Thal Larsen of the FT:

FT.com / Capital markets - Goldman pays the price of being big: For years, Goldman Sachs’s asset management business has been the envy of Wall Street. While other investment banks have struggled to establish a hedge fund arm, Goldman has raced ahead. At the end of May, it had $151bn of alternative assets, making it one of the world’s largest hedge fund managers.

In the past week, however, Goldman learned that being a big hedge fund manager can be a mixed blessing.... Its Global Equity Opportunities fund suffered such heavy losses that Goldman on Monday took the unprecedented step of putting $2bn of its own capital in the fund. Goldman is the most high-profile victim of the recent upset in quantitative strategies....

For reasons that are still unclear, shares began to move in ways that were the opposite of those predicted by computer models. These moves triggered selling by the funds... [to] meet margin calls from banks. This in turn exacerbated the share price movements.... [T]he GEO fund... [b]y Friday... had lost more than 30 per cent of its value. Goldman’s flagship Global Alpha fund, which uses quantitative strategies across a range of asset classes, has lost 27 per cent of its value this year.

“We were seeing things that were 25-standard deviation moves, several days in a row,” said David Viniar, Goldman’s chief financial officer. “There have been issues in some of the other quantitative spaces. But nothing like what we saw last week.” Faced with this situation, Goldman had to make a decision. If the bank did nothing, the GEO fund would probably be hit with large-scale redemptions in the next few weeks as investors pulled out.... But Goldman came up with an alternative: it would commit $2bn of its own capital in an effort to shore up confidence and to allow the GEO fund to ride through the downturn. It also asked some clients to join in. A handful of investors with strong links to Goldman, including C.V. Starr, the investment vehicle run by former AIG chairman and chief executive Hank Greenberg; Perry Capital, the hedge fund managed by a former Goldman Sachs trader; and Eli Broad, the real estate and insurance entrepreneur, chipped in another $1bn. Goldman yesterday denied that the move was a bail-out, arguing that it decided the GEO fund’s portfolio represented a good investment.

“We do not want to leave the impression that we have some moral or other obligation to shore up a fund. People who invest in a fund know what they’re investing in,” Mr Viniar said....

The bank also attempted to play down concerns that it might be facing similar losses on its own balance sheet as a result of proprietary trading bets. Mr Viniar said that, while Goldman does use its own balance sheet to pursue quantitative strategies, its exposure was “quite small”.

A broader question, however, is what damage the events of the past week mean for quantitative strategies. Mr Viniar said.... “What we have to look at more closely is the phenomenon of the crowded trade overwhelming market fundamentals,” he said. “It makes you reassess how big the extreme moves can be.”

The line that Goldman Sachs is pushing for public consumption is that its quants identify trades with good fundamentals, and thus that a temporary market move that loses it money is actually a good thing for the strategy--an opportunity to load up, take bigger positions, and profit much more as prices come back to normal, if prices do come back to "normal." Goldman has put $2 billion of its money where its mouth is, and it looks like about ten of its biggest clients have each put up about $100 million. This is either a sign that they have confidence that GS is right--ten clients put in a billion!--or not--even by twisting arms they could only get ten clients? and only $100 million each?--depending on your neurochemistry.

Renaissance is also pushing the "we are well capitalized, and this is an opportunity" line.


John Berry of Bloomberg Relays the Word from the Eccles Building

John Berry of Bloomberg says what's what about the Federal Reserve:

The amount of cash the Federal Reserve injected into the U.S. banking system on Aug. 9 and 10, and its importance, have been widely misunderstood. Each day banks are open, the people working at the New York Federal Reserve Bank's ninth floor Open Market Desk do the same thing: supply enough money to the U.S. banking system to keep the overnight lending rate close to the Fed's 5.25 percent target. Aug. 9 and 10 were different only in degree, and in the attention the Fed called to the action in a statement issued on the latter day.

There was no hint of an interest rate cut -- nor is there likely to be unless conditions in world financial markets worsen considerably and threaten continued economic growth in the U.S.... The desk added $24 billion on Thursday and $38 billion on Friday. However, just stating those figures tends to exaggerate their importance. For instance, as recently as Aug. 2, $17 billion had been added and everyone yawned. Furthermore, by the end of the yesterday essentially all the additional liquidity injected to calm markets had been withdrawn....

Routinely, a substantial amount of cash is added each Thursday for a 14-day period. Half of last Thursday's injection was of that type. The other $12 billion was left in the banking system just overnight, that is, the New York Fed returned the securities on Friday and took back the cash.... The lending rate jumped around, ranging from zero to just over 6 percent, as the desk found it necessary to step in three times, adding $19 billion at 8:25 a.m., another $16 billion at 10:55 a.m. and finally $3 billion at 1:50 p.m., according to the New York Fed. All that $38 billion was returned to the Fed yesterday.

With markets under far less pressure, that money was replaced by new agreements of just $2 billion, much less than the usual daily total....

On Aug. 10, after the markets closed, Macroeconomic Advisers released its latest economic forecast, one very similar to the collective forecast of Fed officials. The new predictions include gross domestic product expanding at about a 2.5 percent annual rate in the second half of this year, rising to about a 2.75 percent rate early next year. `Core inflation is projected to remain stable at the upper end of the Fed'scomfort zone' of about 2 percent for core personal consumption expenditure inflation... as well-anchored inflation expectations and a gradually rising unemployment rate offset upward pressure on growth of labor costs,'' the company's explanation of the forecast said....

Obviously the rush to shed risky investments triggered by losses in subprime mortgage-backed securities isn't over. Fed officials will be watching what happens next and will respond to disorderly market conditions, with those folks on the Open Market Desk their front-line troops. Bailing out ailing hedge funds or propping up the stock market isn't on their agenda, however.

The fact that Federal Funds opened Friday at 6% when the Fed's target was 5.25% was a shock. On $100M, that overnight interest rate differential amounts to--if I can still do math in my head--$2.1K. So there were people on Wall Street who would rather spend Friday afternoon explaining why they had bought FF at the opening and thrown away $2.1K rather than waiting three hours and running the risk that the market would blow up in the meantime. Of course, it was a small shock: nothing like 1907, when the overnight premium on $100M in reserve cash was $400K. It may be best read as an indication of how placid our times really are--and of how highly leveraged (at least some of) the Wall Street professionals are, that this is big news.

Also worth noting is the absence of significant moves in stocks and safe bonds. The action is all in the return of risk premia and credit spreads from remarkably low to historically normal levels. People who bet that credit spreads would stay tight have lost--some of them big. People who didn't read the fine print have found that some of their hedges have not performed as they expected. People who did read the fine print and bet that credit spreads would widen are going to report very good quarters.


Slouching Towards Utopia: The Economic World of the Twentieth Century: Pre-WWI China §§

I have a problem. Any history of the world economy in the twentieth century needs a section on China at the start of the century to balance the section on China at the end. Yet I am not well-qualified to write such a section. And I don't think the section I have is particularly good.

Any suggestions?

----

DRAFT: PRELIMINARY AND INCOMPLETE

When in the second half of the nineteenth century the iron-hulled ocean-going steamships began to call at China's ports of Hong Kong, Canton, Tientsin, and Shanghai, China's government and its more than 300 million people of China were in crisis.


China's Relative Apogee

In the Tang Dynasty years before and the Sung Dynasty years after the year 1000, China had been the most progressive and innovative civilization in the world: innovative technologically, organizationally, and militarily. Its population--60 million? 80 million? 100 million?--was one of the most rapidly growing and best-fed populations in the world, thanks to the development of strains of rice that could be wet-planted, irrigated, and produce three crops a year in the fertile soil of China from the Yangtze basin south. China then led the world in non-agricultural technologies as well. At the start of the seventeenth century the British savant, politician, and bureaucrat Francis Bacon had marvelled at three inventions that he said had utterly transformed Europe: gunpowder, printing, and the compass. China had developed all three, and had developed all three before 1000.

China had long had the capability of launching its own "voyages of discovery"--and its governments had chosen not to. The one exception came under the early Ming dynasty: the fifteenth-century imperial court funded its own series of voyages of discovery commanded by the politically-powerful eunuch admiral Zeng He. The fleet reached Zanzibar, and touched Africa. Annoyed at their treatment by a Sri Lankan king, they captured him and brought him back to China to make his apology to the emperor. But the political balance in the Ming court changed, the follow-up expeditions were cancelled, and the exploration program abandoned.

China led the world in political organization as well. No other ruler's writ ran a third as far or has even a third as large a chance of being obeyed as that of China's emperor. Tang Dynasty cavalry has skirmished with Persians on the shores of the Aral Sea. The Sung Dynasty river navy was the only military force to even temporarily stymie Ghengis Khan's Mongols before his descendants took to fighting each other rather than expanding the empire. No pre-industrial central government anywhere ever managed to match the reach, extent, and power of the landlord-scholar-bureaucracy mode of domination invented under the Tang and developed under the Sung.

China in the twelfth century at its pre-industrial apogee produced more iron and saw a greater share of agricultural production sold on markets than Britain would produce and market in the eighteenth. Zheng He's mid-fifteenth century voyages of exploration sailed four times as far with twenty times as many sailors as Columbus, and could land ten times as many soldiers at Dar es Salaam and Trincomalee as Cortez would land at Vera Cruz. The Sung Dynasty capital, Hangzhou, was before the Mongol conquest the largest city in the world--larger than Baghdad or Constantinople or Cordova or Delhi--with perhaps half a million inhabitants: the closest thing to an economic, cultural, and political capital the twelfth-century world had.


China's Relative Stagnation

But by the second half of the nineteenth century China's relative apogee was three-quarters of a millennium past, and the government and the people were in crisis. The people were in crisis because they were more than three times as numerous as their predecessors at the pre-industrial apogee, because they were ruled by a rapacious landed aristocracy, and because progress in agriculture and industry to counterbalance rising population had been nearly absent for most of the second millennium. In 1100 the Chinese people were rich, or at least as rich as pre-industrial peasant societies get. At the start of the second millennium development of new types of crops and new strains of rice had greatly boosted agricultural productivity and triggered the centuries-long spread of China's heartland from the Yellow River to the Yangtze and further south, to Hunan and Guangzhou. But by the second half of the nineteenth century Malthus was having his revenge. China had filled up, with more than 300 million people, which left average farm size less than third of what they had been three quarters of a millennium before, the bulk of peasant families were close to the edge. It is virtually certain that the average Chinese peasant family in the second half of the nineteenth century had less food than its predecessors in the twelfth: think of 1300 calories per person per day as a rough guess.

The technological dynamism and organizational relative edge that China had possessed in the twelfth century was gone as well. Chinese producers still had substantial technological edges in limited industrial segments: high end silk textiles, high-end porcelain, tea. But there had been little internally-driven technological progress in any industry for more than half a millennium. And the bureaucracy that in 1150 had looked efficient and powerful compared to a Europe--a place where no king would even think of asking an Earl of Pembroke to explain anything--by 1870 looked corrupt and incapable.

Why this 750 year relative stagnation is a great mystery. There are many potential suspects to take the blame as the root cause of China's long, long relative stagnation.

Perhaps the root problem was that emperors, grand secretaries, and landlords feared their own generals more than they feared their neighbors' soldiers. European kings, ministers, and landlords sought a strong military to protect them and theirs against the next William the Conqueror or Friedrich II or Francois I or Napoleon. In China there was little to fear from outside the empire as long as the Mongols were kept divided, but a great deal to be feared inside the empire from your own generals--men like the ninth-century An Lu-Shan or the seventeenth-century Three Feudatories. Thus the military-industrial-metallurgy-innovation complex that drove so much of pre-industrial and early-industrial European technological progress was absent.

Perhaps the root problem was that with triple-cropping rice strains the wet-rice fields were too fertile, the governmental bureaucracy too effective, and the avenues of establishment-oriented upward mobility to the striving and aggressive too open. After making a little money the logical next step was to buy some land. Because the land was rich, because labor was plentiful and cheap, and because the empire was (most of the time) strong internally, one could live well after turning one's wealth into land. One could also easily make the important social contacts to pave the way for one's children to advance further. And one's children could do the most important thing needed for upward mobility: study the Confucian classics and do well on the examinations: first the local shengyan, then the regional juren, and then the national jinshi.

Those who had successfully written their eight-legged essays and made proper allusions to and use of the Confucian classics would then join the landlord-scholar-bureaucrat aristocracy that ruled China and profited from the empire. In the process of preparing for the examinations and mastering the material needed to do well on them, they would acquire the habits of thought and values of a Confucian aristocrat landlord-scholar-bureaucrat. Entrepreneurial drive and talent was thus molded into an orthodox Confucian-aristocratic pattern and harnessed to the service of the regime and of the landlord class: good for the rents of the landlords, good for the stability of the government, but possibly very bad indeed for the long-run development of technology and organization. Carlson (1957) quotes an imperial edict of 1724 condemning mining as a potential source of disorder and treason:

[M]iners are easy to recruit but hard to disband. If mining is left to the initiative of merchants there wil be danger of crowds assembling and harboring treachery...

Perhaps the root problem was the absence of a new world rich in resources to exploit and helpless because of technological backwardness, or the lesser weight attached to instrumental rationality as a mode of thought, or the absence of dissenting hidey-holes for ideological unconformity, or the fact that the merchants and hand-manufacturers of China's cities were governed by landlords appointed by the central government rather than governing themselves, or that large muscled animals like oxen and horses turned out to be powerful productive multipliers for temperate rain-irrigated wheat-based agricultural but not for sub-tropical paddy-irrigated rice-based agriculture, or some combination of these, or any of a host of other possibilities over which historians will struggle inconclusively (but thoughtfully and fruitfully) for the rest of time.

Perhaps there were many root problems.

Whatever the cause, the result was China's extraordinary relative stagnation through much of the second millennium. The country and region that had been the world's leader--culturally, economically, organizationally--in 1200 was poor, economically backward, and organizationally decrepit.

The poverty struck eighteenth-century British moral philosopher Adam Smith hard, for in his view China had been for a long time "the richest... most fertile, best cultivated, most industrious, and most populous" country in which even landless peasants were relatively rich: "the wages of labour had ever been more than sufficient to... enable him to bring up a family." Smith had a theory as to why the China he saw in his day--the late eighteenth century--had become poor. Because China would not trade with outsiders and so learn and adapt their ideas, it was bound to stagnate: "a country which neglects or despises foreign commerce... cannot transact the... business which it might do with different laws and institutions." A stagnant economy, Smith thought, was headed for desperate poverty through a Malthusian population crisis. Population would continue to grow while the economy did not. Without technological progress and with increasing population "competition... would soon reduce [wages] to this lowest rate which is consistent with common humanity." At that lowest rate of wages, children would be so malnourished as to be easy prey to disease and women's body fat levels would be so low that ovulation was hit-or-miss.

By the beginning of the twentieth century it looked like that Malthusian crisis had arrived. The more than 300 million people of late nineteenth-century China had no mechanized farm machinery and no industry-produced nitrogen fertilizers. They were crowded into the wet, arable eastern slice of what is "China" on today's maps, with the median family of 6 farming perhaps 4 acres at a time when the Radical Republicans were still hoping to somehow find 40 acres plus a mule for each family of American ex-slaves. Average adult height was, we think, significantly under five feet. There were enough landless and other desperate peasants that perhaps ten million joined the Taiping Rebellion of Hong Xiuquan--who declared himself the younger brother of Jesus Christ after repeatedly failing the shengyan exam--which burned through the Yangtze valley for nearly fifteen years. Perhaps ten million, 3% of China's population, died in that war alone.


China's Crisis

Thus the era when the iron-hulled ocean-going steamships began to call on China was in era in which the government and the economy were in crisis for four reasons:

The first reason is that China's government in the late nineteenth century was the ethnically Manchurian Qing Dynasty, and the Qing Dynasty was weak because it had always been weak. It had seized power in the mid-seventeenth century. An ethnic clan of non-proper-Chinese military adventurers from beyond the Great Wall, from Manchuria, struck at the moment when the previous Ming Dynasty was paralyzed by peasant revolts and hamstrung by a run of bad emperors and more-than-usually-corrupt bureaucrats. The Manchu were unified because they were not Han Chinese: what Manchu prince or mercenary could expect to long survive a victory by any alternative faction? The Manchu were weak because they were not Han Chinese: how many of the 300 million Chinese would give how much loyalty to a ruling dynasty in which the top places were reserved for others?

It was the classic problem of colonial rule. The Manchus tried to solve it by (a) presenting themselves as ideal Confucian sage-kings (presenting themselves as more righteous Confucian rulers than Kung-Fu-Tze himself), (b) giving the landlords through which they ruled free rein throughout central and southern China (curbing rapacious landlords in the interest of protecting the Old Hundred names of China was not on the Qing Dynasty agenda, ever), and (c) opposing all change for change threatened to cause instability and the Qing Dynasty knew that it was unstable already.

This worked as a political strategy: the Qing Dynasty had a run of 250 years, and the last Qing emperor still sat a throne--albeit as a puppet of the Japanese army--in 1945. But it meant that the kind of national and nationalist appeals that those who in Japan spoke for the Emperor Meiji or that Mongkut and Chulalongkorn used to try to preserve the independence of Thailand were impossible for China's late nineteenth-century government. You cannot rally a people against foreign colonialists with the slogan "revere the emperor and expel the barbarians!" when for more than 200 years the emperor has defined himself as a barbarian.

Even in the days of its peak strength, the Qing Dynasty found it wise to tolerate dominant currents of thought that viewed its coming to power as a tragedy and its rule as profoundly illegitimate. Jonathan Spence's In Search of Modern China notes the performances at the court of the Kangxi emperor, the first strong and long-lived Qing dynasty emperor, of "The Peach-Blossom Fan" by Kong Shangren--an author still loyal to the previous Ming Dynasty, and hostile to the idea that a scholar-official could win honor by helping the Manchu conquerors rule China: "[A]t the play's end, with the Ming resistance in ruins, the lovers agree to take monastic vows... the surviving virtuous officials retreat deep into the mountains to escape a summons from the Qing that they take up office."

The second reason that China in the late nineteenth century was that Confucian landlord-bureaucrat-scholar aristocracy through which the Qing Dynasty ruled was not only potentially disloyal but trained to be incapable. As long as the Mongols were kept divided through bribes and the ruling dynasty uncorrupt, no Chinese emperor faced any outside existential military threat. Internal disorder was the main worry. So the central government had discouraged military skill among its bureaucrats and notables since the Tang dynasty rebellion of An Lushan, and discouraged any liking for change--a potential cause of disorder--since the first Ming dynasty emperor had expelled the Mongol descendants of Genghis Khan in the fourteenth century.

As Jonathan Spence also points out, seventeenth-century landlord-scholar-bureaucratic notables like Ming loyalist Kong Shangren were well aware of growing European technological developments:

White glass from across the Western Seas
Is imported through Macao:
Fashioned into lenses big as coins,
They encompass the eyes in a double frame.
I put them on--it suddenly becomes clear;
I can see the very tips of things!
And read fine print by the dim-lit window
Just like in my youth.

Yet neither Kong Shangren nor any of his relatives and descendants ever thought that the optical glass business was worth studying or researching or entering or even financing. It was simply not the kind of thing that a Confucian gentleman would do. One consequence of this lamentable uncuriosity was extraordinary ignorance about the outside world. During the first Opium War of 1840 the staff of High Commissioner Lin, the Qing plenipotentiary on the spot in Canton, appears to have debated whether an embargo of ginseng rhubarb exports might be enough all on its own to win the war for China--the British, they had heard somewhere, needed ginseng as a dietary supplement to have regular bowel movements, and would die without it.

The third reason China's government was in crisis was that the people were in crisis. As I noted above, China's population was on the downswing of a Malthusian population cycle. Compared to the aftermath of the great wave of agricultural technological development nearly a millennium before, the threefold growth in population meant that yields per person low, farms small, and peasants poor--hence malnourished, and with relatively little energy. Population growth also meant larger clans of landlords to be fed off the rents. Combined with an alien ruling dynasty that feels weak and threatened by its own upper class and tells its bureaucrats that it is justice when the landlords win, this means that the peasants have very little to lose. Thus peasant revolts--like those that everyone remembered had brought down dynasties before--burned through China in the mid-nineteenth century.

The greatest was the Taiping Rebellion. The Manchu banner-armies proved useless when Hong Xiuquan proclaimed the "Heavenly Kingdom of Great Peace" and promised his followers not only the Kingdom of Heaven in the hereafter (where he would reign alongside his elder brother Jesus Christ) but that land would be equally divided after all the landlords were killed down here--meaning a roughly fifty percent increase in median peasant standards of living. And Hong Xiuquan supplemented his brand of theocratic landlord-free authoritarian communism with anti-Manchu nationalism: "Ever since the Manchus poisoned China... the poison of corruption has defiled the emperor's throne..." 1300 calories per day versus 2000 plus God on your side plus revenge against the oppressive landlords plus the expulsion of the barbarian Manchus.

The fifteen-year march of the Taiping through south-central China and reign from Nanjing had echoes not just of previous peasant rebellions (like the one that had given the Manchus their opening in the 1640s at the end of the Ming dynasty) but of what Mao Zedong and company would do from 1925 to 1945. Move into a village, get the peasants' hands dirty by having them kill a couple of landlords, divide up the land so all the small peasants are much richer, point out that if the landlord-backed authorities return they will all be in big trouble, and ask for volunteers to join the army and come along to the next village.

The Taiping prohibited opium, foot-binding, prostitution, and female servitude. They instituted equal shares for all, vaccination, low taxes, and encouraged tea and silk exports. Hugh Deane quotes American missionary E.C. Bridgeman's report that the Taiping "appear[ed] like a new race of warriors... well-clad, well-fed, and well-provided for... content and in high spirits, as if sure of success," and asserts that twentieth century Communist leaders like Mao Zedong, Zhu Te, and Peng Dehaui drew inspiration from the stories of the Taiping heroes that they had grown up with in Hunan, Sichuan, and Nanjing.

Outside observers like Karl Marx were impressed enough that they thought that the World Revolution was starting in the late 1850s in China, and that the last moments of the Chinese empire had come. But competent local landlords organized pickup militias, some of which grew into competent--but non-Manchu--battalions and brigades. The merchants and bankers of Shanghai and other ports in contact with and profiting from European trade were desperate for help and knew how to draw on European military-technological competence. The thirty year-old Frederick Ward Townsend--with, Deane reports, two years' experience as a military cadet in Norwich, Vermont followed by service as a Texas Ranger, a Mexican army drill instructor, and in the Crimean War--organized an army on the British Indian sepoy model: officers from Europe and America, rifles and carbines and cannon supplied by the British government, high pay, and river mobility through steampower. The Qing court heard such good things about his army from Li Hongzhang, their commander on the spot, that they named Ward's army "The Undefeatables." Ward was killed at Ningbo in 1862, but his successor the British General Charles "Chinese" Gordon's army proved equally capable. The Taiping were crushed in 1864. China's political revolution was postponed for half a century, and the Qing Dynasty continued to rule until 1911.

The fourth reason China's government was in crisis was that it was so weak relative to the forces that first Britain and later other European powers began to project into the western Pacific.

After 1800 British merchants discovered one commodity besides silver that Indian producers could supply and that Chinese consumers were eager to buy: opium. By the end of the 1830s the Chinese government was beginning to worry about the consequences of opium addiction on the country, and the exchange of European silver for Chinese goods had turned around: the bulk of the China trade was the exchange of Chinese silver for Indian-grown opium. The Chinese government attempted to suppress the opium trade and opium smuggling. The result was the 1839-1842 "Opium War," in which the British fleet intervened on the side of free trade, the sale of opium, and drug addiction. The British Empire acquired the then nearly barren island of Hong Kong as a base, European influence was established in a substantial number of "treaty ports" along the Chinese coast, and the division of China not into European colonies but into regions in the "spheres of influence" of different European powers began.

In the mid-1880s the Qing Dynasty, having bought foreign metal-working machinery and built a navy, arsenals, and docks, thought it was strong enough to oppose the French conquest of Vietnam. The fleet was destroyed in an hour. Jonathan Spence reports that the Chinese navy lost 572 dead, while the French lost five. In 1895 the Qing Dynasty thought it was strong enough to oppose the Japanese extension of their sphere of influence to Korea. It was wrong. The Treaty of Shimonoseki added Taiwan, Korea, and southern Manchuria to Japan's sphere of influence. European and American mercenaries, concessionaires, merchants and manufacturers went where they wanted, did what they wanted, and enforced whatever laws they thought were good.


The Failure of "Self-Strengthening" in China

In the late nineteenth and early twentieth centuries, in the last years of the Qing empire and the first years of the Republic of China, economic growth and development took place around China's coastal fringes in and near foreign enclaves, but not elsewhere. In 1910 China had only a million cotton spindles--one for every 400 people. Contrast that to Britain, that had two spindles per person in 1910. In 1910 China mined 10M tons of coal--that's 40 pounds per person per year. In 1929 China produced 20K tons of steel--less than two ounces per person per year. It produced 400K tons of iron--that's 1.6 pounds per person per year. It mined 27M tons of coal--that's 100 pounds per person per year. Compare this to America's 700 pounds of steel per capita in 1929 or 200 pounds in 1900, or to America's 8000 pounds of coal per capita in 1929 or 5000 pounds of coal per capita in 1900.

China specialists see and can almost touch an alternative history in which late-nineteenth century China managed to match the political and economic achievements of Meiji Japan. They see an alternative in which China stood up economically, politically, and organizationally. Japan, after all, won its short victorious war against Russia in 1905, negotiated as an equal with Britain and the U.S. over warship construction in 1921, and was perhaps the eighth industrial power in the world by 1929. Why couldn't China have done the same?

Jonathan Spence, for example, praises the nineteenth century:

Confucian statesmen [like Li Hongzhang] whose skill, integrity, and tenacity helped suppress the [Taiping and other] rebellions... showed how imaginatively the Chinese could respond to new challenges... managed to develop new structures to handle foreign relations and collect customs dues, to build modern ships and weapons, and to start teaching international law and the rudiments of modern science.... It was true that there remained complex problems... rural militarization... local autonomy over taxation... landlord abuses... bureaucratic corruption... bellicose foreign powers.... But with forceful imperial leadership and a resolute Grand Council, it appeared that the Qing Dynasty might regain some of its former strength...

And laments that:

forceful leadership was not forthcoming... the empress dowager Cixi... coregent for her son Tongzhi from 1861-73... coregent for her nephew Guangxu from 1875-89.... [A]bsolute political authority... while Guangxu [was imprisoned in the palace]... on her orders from 1898-1908.... Cixi had clashed badly in 1869 with Prince Gong.... Zeng Guofan died in 1872... Wenxiang died in 1876... Zuo Zongtang remained preoccupied with the pacification of the Muslims in [Xinjiang].... The grand councilors... worthy... with distinguished careers... lacked the skill or initiative to direct China on a new course. Although self-strengthening programs continued to be implemented... a disproportionate number of them were initiated by one man, Li Hongzhang... governor-general of Hebei... commissioner of trade for the northern ports...

We economists are more skeptical. We note that the "new structures to... collect customs dues" consisted of things like the Qing Imperial Maritime Customs Service build up in the 1860s under Robert Hart--no Chinese officials allowed. We note that the enormous bureaucracies that allegedly managed the Yellow River dike works and the Grand Canal had grown corrupt and incompetent. We note that the Qing could not get their local officials to collect the salt tax. We do not find it satisfactory to attribute China's stagnation through the first decade of the twentieth century to poor choice of ministers by the dowager empress Cixi--even though Spence is following in a long tradition that treats her as the original mold for the figure of the Dragon Lady.

Let's go back to Jonathan Spence's observation that "a disproportionate number" of self-strengthening attempts to adapt and use modern technologies were due to "Li Hongzhang... governor-general of Hebei... commissioner of trade for the northern ports..." Li Hongzhang's achievements were indeed impressive: the 1877 Kaiping coal mine, in 1878 cotton mills in Shanghai, the Tianjin arsenal, the telegraph between Tianjin and Peking, a seven-mile railroad to ship from Kaiping to the river and then downriver to Tianjin, and so forth. And what wasn't undertaken by Li Hongzhang appears likely to have been undertaken by Zhang Zhidong, governor-general of Hunan-Hubei for two decades: the railroad from Hankou to Beijing, the Wuhan Han-Ye-Ping heavy industrial complex. In the last generation of the Qing empire, individual governors-general who made economic development a top priority could make some things happen--elsewhere it didn't, save to some degree in and next to the foreign concessions and treaty ports: Qingdao, Tientsin, Shanghai, Guangdong, Hong Kong.


Manufacturing Location at the Start of the Twentieth Century

It is understandable that China, India, and the other non-European and non-settler-colony regions of the world did not in the years before World War I produce and export the relatively high-value commodities like wheat and wool exported by temperate settler economies: agricultural productivity was too low, and climate was unfavorable. It is understandable why--with heavy downward pressure put on wages in Malaysia, Kenya, and Colombia by migration and threatened migration from very low-wage China and India--the prices of the export commodities that they did produce were and remained relatively low.

What is more puzzling is why industrialization did not spread much more rapidly in the years before World War I. After all, the example of the industrial core seemed easy to follow. Inventing the technologies of the original industrial revolution--steam power, spinning mills, automatic looms, iron- and steel-making, and railroad-building--had required many independent strokes of genius. But copying the technologies did not, especially when you could buy and cheaply ship industrial capital goods made in the same New and Old England machine shops that supplied the industries of England and of America.

As industries in the industrial core became more and more mechanized--more and more characterized by what would be called "mass production"--they should have become more and more vulnerable to foreign competition from other, lower wage countries. Even at the start of the twentieth century, the U.S. had the highest wage level in the world; inside the U.S., firms devoted immense time, energy, and thought to redesigning their production processes so that lower-skilled, and lower paid, workers could replace highly-skilled craftsmen. One would think that manufacturing would have fled the United States even in the late nineteenth century. If Ford could redesign production immediately after World war I so that semi-skilled assembly line workers could do what highly-skilled craftsmen used to do, why couldn't Ford also--or someone else--redesign production before World War I so that it could be carried out by low wage Peruvians or Poles or Kenyans rather than by Americans, who were extraordinarily expensive labor by world standards eve back then?

Industries do migrate, but they have done so surprisingly slowly in the twentieth century. One reason is added risk: political risk of all kinds tends to make investors wary of committing their money in places where it is easy to imagine political disruptions from the left or the right. Moreover, there are substantial advantages for a firm in keeping production in the industrial core, near to other machines and near other factories making similar products. It is much easier to keep the machines running. A reliable infrastructure is much more likely to be found in the industrial core. And so are the services of specialists needed to fix the many things that can go wrong: minimum efficient scale for an industrial civilization can be far larger than the apparent minimum efficient scale for a plant.

Arthur Lewis hypothesized that barriers to starting up an export-oriented industry were large, that infant industries on the periphery of the world economy had to rely on domestic demand, and that where domestic demand was low because of mass poverty modern industry could not flourish. Thus only a small share of output in what was to become the third world came from the industries of the industrial revolution. But we still understand far too little about why the pace of technological diffusion out of the industrial core was so slow back before World War I: why "peripheral" economies did such a good job at specializing in plantation agriculture for export, and such a bad job at creating modern manufacturing industries.

Gregory Clark at the University of California at Davis has counted the staffing levels--how many operatives for each machine--at textile firms worldwide early in the twentieth cenury, and found enormous differences in how many workers watch, operate, and maintain the same machine across countries and continents. It is not that places where labor is abundant use the same machines more efficiently: it is that it appears to take many times the workforce to achieve the same level of machine performance. Clark argues that in 1910 typical labor productivity in English-speaking countries in cotton spinning was fifteen times that of China, ten times that of Japan, three times that of Mexico or Russia, and twice that of continental northern Europe. Workforces in the industrial core appear to have had an acquaintance with machines and how they work, which was very, very hard to duplicate.


The Kaiping Coal Mines

Let's take a look at one of these in detail: the first one, the Kaiping coal mine. We are lucky in that we can draw on Ellsworth Carlson's 1957 Harvard east asian monograph to understand how and to what extent Li Hongzhang could midwife modern coal-mining technology in late-nineteenth century China.

In 1877 Li Hongzhang--a senior scholar-landlord-bureaucrat high in the confidence of the Qing court--joined forces with Tang Tingshu--a prominent, experienced, and wealthy treaty port comprador-merchant who had managed Jardine, Matheson's interests along the Yangtze--to establish a modern, industrial, large-scale coal mine in Kaiping, in Chihli. Li Hongzhang and Tang Tingshu faced unusual forms of opposition to their mining plans. Carlson quotes a British cable of 1882 stating that mining work had been stopped because Chi Shihchang, a vice-president of the Board of Civil Offices, had declared that "foreign mining methods angered the earth dragon... [and so] the late empress could not rest quietly in her grave" sixty miles away from Kaiping:

The Governor-General [Li Hongzhang] has been ordered to make inquiry and report... work has partially ceased.... Either he must throw over a company... formed with his direct sanction... [and] a very large quantity of capital, or he must... declare the mines harmless with the knowledge that he will then be considered responsible for any bodily ailment or other ill which may befall the Emperor or his family...

Tang Tingshu had originally proposed to build a steam railway to get the coal from the mines to the port of Tientsin, but dropped that idea and replace it with a proposal for a seven mile mule-drawn tramway to be connected to a twenty-one mile canal. Shen Pao-chen had in 1877 dismantled China's first railway--the Shanghai-Woosung. According to David Pong, Li Hongzhang was furious, blaming the destruction on Shen's narrow-mindedness and his desire to curry favor with anti-foreign elements. Moreover, the Manchu court had just rejected Liu Mingchuan's request for permission to build railways. When the mining began and the tramway started up, however, there were no mules: there was a locomotive--the "Rocket of China" with, engineer Claude Kinder reported, a boiler from "a portable winding engine, the wheels had been purchased as scrap castings, the frames... made of cast iron." Ellsworth Carlson believes that Li Hongzhang and Tang Tingshu were able to get their steam railroad going because of three reasons. First, it was built in a remote and sparsely populated area with no Confucian scholar-landlord-bureaucrats around. Second, Li Hongzhang used all his political skills to keep the existence of the steam railroad. Third, Carlson believes that Li had the blessing of the empress dowager Cixi to proceed--and thus her protection from his superiors on the Grand Council and elsewhere.

Tang Tingshu and Li Hongzhang persevered. Production began with modern machinery in 1881 excavating coal seams about ten feet in diameter 200, 300 and 500 feet down. 200 tons of coal a day were excavated by 1883. By 1889, 3000 workers in three shifts were producing was 700 tons of coal a day, nearly 500 pounds per worker per day, using steam lifts underground coal cars on rails, and pneumatic drills--but still only two pounds a year for every person in China. At the end of 1888 a railway to carry the coal from Kaiping down to Taku was finally opened. But it could not be extended to Tientsin. As chief engineer Claude Kinder wrote:

high officials who detested the railway... foster[ed] trouble with the junk people.... So great was the clamor... that the Viceroy... gave the order for the nearly completed bridge [over the Peiho to Tientsin] to be destroyed, although hundreds of the largest junks had already safely passed through...

Starting in 1889 the company began paying dividends: annual dividends amounted to 10 to 12% on the company's equity capital of 1.5M taels--about £150,000 pounds, or $750,000 dollars of the time. The mine had 3000 workers in 1889, and 9000 in 1900, paid about $6 a month (with the highest-paid Chinese-born technical employees earning some $60). About four miners died each year. As Herbert Hoover reported to his bosses at Bewick, Moreing: "The disregard for human life permits cheap mining by economy in timber [supports].... The aggrieved relatives are amply compensated by... $30 per man.... cases have been proved of suicide for that amount..." Hoover's judgment was that the miners were producing 1/4 to 1/8 of what was expected of miners in America or Australia. By 1912 Kaiping was producing 1.4M tons of coal a year--seven pounds for each person in China--and accounted for perhaps 20% of China's total coal production.

Without the aegis of Li Hongzhang and his position as governor, the enterprise is unlikely to have survived. Ellsworth Carswell quotes Tang Shouchien on the difficulties that merchants and entrepreneurs had outside the coastal foreign concessions: "The officials have rights; the merchants have no rights; their influence does not go beyond the bringing together of capital; and naturally the profits of the merchants are lost to the officials ceaselessly..." Even with his aegis, not everything went smoothly. Carswell quotes the North China Herald of June 24, 2007 as pessimistic about the future of Kaiping as a capitalist economic enterprise: "if a mine is at a promising state, Kaiping to wit, the kinsmen of the Director, Managers, and officials, come in shoals, and without the slightest regard to competence are provided with posts and fatten..." But as long as Li Hongzhang was in control and his attention was focused on making the mine a successful economic enterprise, Tang Tingshu, his team, and his specialist foreign engineers could do their work. Their position, however, was shaky, for the mine was both a public governmental project and a private capitalist enterprise: shang-pan kuan-tu: official supervision and merchant management. This meant that each manager of the mine wore two hats: on the one hand, they were intendants in the Qing administrative bureaucracy with jurisdiction not over a town and its villages but over a mining enterprise, and on the other hand they were employees of the shareholders. Should push come to shove, it would turn out that they worked for the governor of Chihli rather than the shareholders of the company.

Mine director-general Tang Tingshu died in 1892. His successor was a very different man. Tang Tingshu was a merchant. Chang Yenmao was a bannerman--a hereditary retainer of Prince Qun. Tang Tingshu was a merchant who had worked extensively for British bosses. Chang Yenmao was a retainer and fixer. He had little education. In spite of his lack of literary attainment, he somehow acquired official rank, played on his connections with the empress dowager Cixi, and was slotted to become an intendant in Kaingsu when the director-generalship of Kaiping fell vacant. In The Making of Herbert Hoover, Rose Wilder Lane, claims that Chang Yenmao played a key role in Cixi's coup of 1885 when she placed the Gwangxu emperor on the throne.

By 1900 Chang Yenmao--once a poor bannerman and retainer--was one of the wealthiest men in Tientsin. When Herbert Hoover looked at the books of Taiping in 1901, he reported that the 9000-worker payroll had been padded by 6000 names, and that the director of personnel doing the padding and collecting the wages had paid Chang Yenmao $50,000 for the post. Chang Yenmao's company paid £20000--$100000--a year in dividends. After Herbert Hoover took over as director-general in 1901, he was able to pay out £150,000--$750,000--a year.

Herbert Hoover? you say. Yes, Herbert Hoover: at the time a 26 year old mining engineer on the make, later to become the architect of food relief to Europe after World War I to prevent mass starvation, the wonder-working Commerce Secretary during the Roaring Twenties, and president during the slide into the Great Depression.

What happened was this: Herbert Hoover, mining expert, arrived in Tientsin in 1900 just in time to be besieged in the city by the Boxers (a better translation for this grassroots uprising influenced and encouraged but not controlled by the Forbidden City would have been "Fighters United for Justice"). In Tientsin Hoover met Gustav Detring of the China Maritime Customs Service, a friend of Chang Yenmao's. He also met Chang Yenmao. Chang had fled to Tientsin as well, fearing that the Boxers would execute him as a corrupt puppet of the Europeans; in Tientsin, however, the Europeans arrested Chang--fearing, probably correctly, that he was passing intelligence to the besieging Boxer armies as a way of hedging his bets. The British charge d'affaires on the scene later said that Chang "ought to have been shot in 1900."

Somehow Detring and Hoover, probably, got Chang released from prison. Somehow Chang decided to reincorporate the Kaiping mines as a British-flag enterprise incorporated in London in order, he said, to make it easier to raise capital to expand the mines and to provide some political cover: Russian or Japanese proconsuls would love to confiscate a working Chinese-flag industrial property as reparations or indemnities, but would not dare touch a British-flag industrial property. Chang commissioned Detring and then Detring and Chang commissioned Hoover and then Hoover commissioned his boss C. Algernon Moreing back in London to do the deal.

The old company had owned the mine works, had little spare cash, and had owed £250,000--$1.25M--in bonds that paid 12% per year interest. When the dust cleared, the new company owned the mine works, had about £250,000 in free cash, and owed £500,000 in bonds that paid 6% per year interest. When the dust cleared, the shareholders of the old company found that they owned 37.5% of the new company, and that C. Algernon Moreing and his friends owned 62.5% of the new company without having contributed more than a few cents to the enterprise. The old company had been controlled completely by Chang Yenmao in his dual status as director-general both elected by the shareholders and appointed by the governor of Chihli. The new company was controlled completely by Herbert Hoover as the representative on the spot of the London majority shareholders. The old company had a management and advanced technical staff of 620 Chinese managers and 10 foreign-born engineers and foremen. The new company had a management and advanced technical staff of 170: 120 from china and 50 from abroad. The new company also had a Europeans-only club.

Charge d'affaires Townley was disgusted. He wrote to Britain's foreign secretary, Lord Salisbury, recommending against the British government's "giv[ing] its countenance to a financial transaction which had fleeced Chinese shareholders and lined the pockets of an Anglo-Belgian gang.... Moreing and others have made a pretty pile at the expense of the Chinese.... legally the Board of Directors were unassailable... but... morally they were in the wrong." Others were upset as well--especially Detring and Chang Yenmao. Townley's interpretation was that they were "wild... [because] they thought themselves rather smarter... and got themselves fairly had by a Yankee man of straw [Hoover] acting for Moreing..."

We have a pretty good idea of what Algernon Moreing and Herbert Hoover would have said if they could have been gotten to speak truthfully about the transaction. First, they would have said, if we had not done the deal then the Russians would have confiscated the mine in 1901 as reparations: we brought the British flag's protection to the table, and that is easily worth 62.5% of the company. We gave the original-company shareholders 37.5%, while the Russians would have given them zero. Second, they would have said, Chang Yenmao was a corrupt thief stealing from the company and untouchable because of the protection of the governor of Chihli. 6000 extra workers at $50 a year is $300,000 a year, at least, stolen from the company. Third, they would have said, Chang Yenmao is neither a mining engineer nor a merchant. Herbert Hoover is both, and can make the mine run. 37.5% of the $750,000 a year in dividends that the new company paid is about $270,000--almost three times the $100,000 the old company paid. We did the original shareholders three big favors, they would have said, and 62.5% of the company is a bargain for all we have done.

Chang Yenmao was displeased. He had to explain to the new governor of Chihli, the formidable Yuan Shihkai, why the Imperial flag was not being flown over the mine, which meant that he had to admit that he had conspired or western sharpies had tricked him or something had happened by which the Kaiping mines were now the property of a British-Belgian investors' syndicate. Yuan Shihkai was then displeased:

Although Kaiping had sold commercial shares, it was not a private property that could be bought or sold by people like Chang and Hoover. The mines had not been started... [until] Li Hongzhang had... obtained imperial approval... they could not be alienated without imperial approval.... Chang, said Yuan, was a person of humble origins to whom the country had given great favors, but he had not been properly grateful... [had sold] mining land [to foreigners] without authority... deceived the throne... about Chinese-foreign joint management.... If unpunished, Chang's action might become a precedent... losses of the country's mines, the merchant's capital, and the dynasty's ports...

It turned out that in the process of browbeating Chang Yenmao, Herbert Hoover had signed a "Memorandum of Understanding" that the change of corporate form would not alter Chang Yenmao's status: that he would remain director-general of the mine "as before." Chang Yenmao, ordered to recover the mines, went to London and sued. One British judge was shocked at the deception and dishonor, and ruled that the "Memorandum" was a valid instrument that had to be followed by the new company. Other British judges in London ruled that the "Memorandum" was a valid instrument only insofar as the powers granted Chang by the memorandum were legal according to British corporate law, but that those powers weren't. In the end Yuan Shihkai started up another coal company with rights to much more extensive deposits in the area, and the two were amicably merged. Later on, Herbert Hoover scrambled as he launched his political career to buy up and destroy all copies of the trial record containing his testimony--missing the one in Oxford's Bodleian Library.

As Albert Feuerworker summed up the story of Kaiping in the 1959 Journal of Asian Studies:

Despite its pioneering achievements, Kaiping faltered... [like] other kuan-tu shang-pan enterprises in the late nineteenth century. The first was the lack of sufficient capital and the inability to raise more from domestic sources. The second was the unpropitious political environment into which it was born. Little aid could be expected from the tottering Manchu regime either in the form of financial assistance to compensate for the reluctance of private investors, or protection from foreign encroachment such as eventuated in British domination of this enterprise.... [T]he contrast with the history of early industrial efforts in Meiji Japan is a striking one...

Feuerworker sees three things going wrong: no private capital, a poor cash-strapped government that could not contribute public capital, and a weak government that could not protect incipient enterprises against rapacious foreigners. These three were certainly important, yes, but I see three others that were even more important:

  • a social-economic structure that could not find and promote executives, but instead replaced Tang Tingshu with a corrupt political fixer like Chang Yenmao
  • a political-ritual culture that required that a modernizing governor focus his attention constantly on the enterprise and run interference to protect it from anti-modernizers
  • an educational system that continued to turn out literati instead of engineers and thus required foreign technical personnel for everything

The fact is that, outside the charmed circles created by the extraterritorial foreign concessions, and to a slight degree the immediate span of control of the few modernizing governors, modern industries did not develop and modern technologies were simply not applied in late imperial China. The typical Qing bureaucrat was hostile. But the typical Qing bureaucrat was also interested. There was rough equilibrium in how much money Qing bureaucrats were expected to squeeze from landlords (not that much), merchants and traders (significant but limited), and others who needed government action (as much as they could grab). New people doing new things had no customary, social, or countervailing power protections against their overlords. And overlords with limited intelligence, limited types of experience, and limited official tenure could not be expected to nurture economic growth when there were loose assets to be stripped. And, as the shareholders of Kaiping and Chang Yenmao discovered, to flee into the arms of foreign legal systems was to flee from Scylla to Charybdis.


China's First Revolution: 1911

The loss of the Japanese-Chinese War in 1895 brought matters to a head: was the government going to make a more serious effort to mobilize the country for modernization and progress or not? The Guangxu emperor said yes: he allied himself with reformer Kang Youwei and launched the "hundred days of reform" of 1898. The dowager empress Cixi--who we have seen before as patron and protector of modernizer Li Hongzhang--said no. she imprisoned the emperor inside the palace and encouraged the grassroots "Fighters United for Justice" to see what would happen. The attempt to mobilize anti-European sentiment to support the conservative regime failed, as an all-European expeditionary force relieved the beseiged European embassies in Beijing, exacted indemnities, and wreaked destruction. A tack back to the left was not possible. Kang Youwei's memoranda on such things as the partition of weak-government poland by Russia, Prussia, and Austria and on the successful Meiji reforms in Japan could still be read, but Cixi had executed Kang Youwei's younger brother and other reformers in 1898. And when Sun Yatsen had offered his services to Li Hongzhang in 1894, Li had sent him away.

Sun Yatsen built up a financial and propaganda network among Chinese emigrants beyond the reach of the government. Military politicians like Yuan Shihkai came to the conclusion that working with the Manchu court was useless. And at the beginning of 1912 the last Chinese imperial dynasty fell, as Yuan Shihkai and his peers refused to suppress Sun Yatsen's rebellions. The six-year-old emperor abdicated. But the new Chinese republic's president was military politician Yuan Shihkai. And his authority over his peers and near peers--army commanders, provincial governors, and other would-be warlords--was nil. China descended into near-anarchy. On a provincial scale, order was maintained by "warlords": military politicians with soldiers at their command who chose local gentry notables to maintain order in the countryside and chose mayors and councillors in the cities. They taxed and plundered what they could, and their soldiers taxed and plundered and fought. It would take until the end of the 1920s before China had anything that could be called a functioning government again.


Abu Aardvark: Crocker vs Petraeus

The Aardvark's Father--Mark Lynch--points out A flaw at the heart of current Bush policy in Iraq;

Abu Aardvark: Crocker vs Petraeus: Everyone is getting ready for a Crocker-Petraeus report which will most likely highlight tactical military success, downplay the political fiasco, and argue for more time.  The conventional reading of this (at least in DC) is probably that the military and political tracks are moving at different speeds along parallel tracks, with Petraeus making some progress on the military track and Crocker having less success on the political track.  I think this misreads the relationship between the military and political tracks.  The divergent trends on the two tracks is not a coincidence.  No matter how close their reported working relationship, or their very real skills, Ambassador Crocker and General Petraeus are actually working at cross-purposes.  Petraeus's military 'successes' and local initiatives come at the expense of the national political track, not in support of it. 

Crocker's job is to encourage political reconciliation at the national level, which has been the Bush administration's stated goal from the start and which was the declared goal of the 'surge'.   The improved security environment was meant to provide breathing space for the political reconciliation, as we all remember.  Crocker's diplomacy is therefore in principle aimed at fostering the evolution of an Iraqi state which is broadly inclusive of all of Iraq's ethnic and religious communities.   Most of the benchmarks - a resolution of the deBaathification laws, the oil law, etc. - are ultimately steps towards achieving a political bargain minimally acceptable to the Sunnis, Shia, and Kurds.  The government, therefore, should reflect the ethnic realities of Iraq and include meaningful Sunni participation. The army and security forces should include Sunnis, and should not be in the hands of sectarian militias.  And so on - in short, things which encourage the integration of the Sunnis (especially) into the state.

Petraeus's strategy thus far has been to work at the local level.  His signature initiative to date, the arming and tactical alignment with Sunni tribes and former insurgents, largely ignores the Iraqi state.   The Anbar Salvation Council and the other 'Awakenings", the "rent-a-shaykh" and "rent-a-fighter" policies, and so forth all take place not just at the local level but outside the institutions of the state.  They may improve the local security situation but do not encourage the integration into an Iraqi state which most Sunnis - by all available evidence - still see as monopolized by the Shia and controlled by Iran.  The former insurgents fighting alongside the Americans against al-Qaeda don't report to Nuri al-Maliki... they report to David Petraeus.    Meanwhile, on the Shia side American forces strike the Sadrists, but don't seem to care much about SCIRI SIIC ISCI penetration of the Iraqi military or security forces - once again suggesting that national state institutions just don't enter into the equation.

Petraeus, Bush, and their defenders argue that the local initiatives might provide the foundations for a national reconciliation down the road.  Perhaps.  But for now it looks more like the local initiatives, which are providing the temporary 'successes' which will justify continuing the administration's course of action, aren't just not being matched by political progress but are actually undermining the national political process.  They are organizing the Sunnis outside of the state rather than fostering integration.  And by heightening Sunni military weight and political expectations, these policies likely encouraged the political trainwreck we saw over the last few weeks:  Sunni leaders felt emboldened to demand more, while Shia leaders worried about making concessions to a group accumulating military and political power outside their control.

I understand why Petraeus has chosen this route. Iraqi political institutions and the Iraqi state are so far gone, and so implicated in one side of the sectarian conflict, that avoiding them and starting over at the local level probably made good pragmatic sense.   And I understand that Petraeus felt an urgent need to demonstrate early success to maintain political support, and probably didn't feel that he had the luxury of a longer time-frame.  And readers of this blog know that I'm certainly not opposed in principle to the US working with former Sunni insurgent groups, as long as their eyes are open about the real goals and strategies of those groups.   But this is what I meant  few weeks ago when I wrote about tactics working against the strategy. 

When the Crocker-Petraeus report comes in, questions should be raised not only be about the reality of the military progress (though there are many questions there to be asked) or about the stalled political process (though those should definitely be pushed hard).  I would like to see more fundamental questions raised than quibbling over how to evaluate progress in this city or that province.  Does this military strategy lead to the political outcome to which we are publicly committed?   If the goal is to create a functional, inclusive Iraqi state, then are these tactics furthering that goal or undermining it?  Or has the US changed its goals without acknowledging the change, giving up on a multi-ethnic centralized state and paving the way to soft partition?


Why Oh Why Can't We Have a Better Press Corps? (Gina Kolata of the New York Times Edition)

Ouch.

Our own David Gale from the tenth floor is made to look ridiculous by Gina Kolata--you see, she didn't tell him that the survey didn't ask about means--about averages--but about medians. Which means that she doesn't know the difference between means and medians. Which is a very bad thing for a science reporter:

The Myth, the Math, the Sex - New York Times: By GINA KOLATA: In study after study and in country after country, men report more, often many more, sexual partners than women. One survey, recently reported by the federal government, concluded that men had a median of seven female sex partners. Women had a median of four male sex partners.... But there is just one problem, mathematicians say. It is logically impossible for heterosexual men to have more partners on average than heterosexual women. Those survey results cannot be correct.

It is about time for mathematicians to set the record straight, said David Gale, an emeritus professor of mathematics at the University of California, Berkeley. “Surveys and studies to the contrary notwithstanding, the conclusion that men have substantially more sex partners than women is not and cannot be true for purely logical reasons,” Dr. Gale said...


Mark Gertler Defends Alan Greenspan and Ben Bernanke

Mark writes:

Economics Blog : Bernanke Co-Author Says Fed Was NOT 'Too Easy for Too Long': For the second time in recent days The Wall Street Journal’s editorial page suggests that the recent turmoil in credit markets is due to “the Federal Reserve’s willingness to keep money too easy for too long” during 2003-2005. This kind of reasoning leaves me scratching my head: There is simply no hard evidence to support it. The only telltale sign of when a central bank has been too easy is rising inflation. While it is true that the Fed’s preferred inflation gauge, the personal consumption expenditures price index excluding food and energy, crept a bit above 2% for a period of time, this is hardly an indication of profligate monetary policy.

Understanding the recent financial market turbulence requires a more nuanced view: Since the early 1980s there has been a significant drop in the volatility of the macroeconomy. The standard deviation of output growth has dropped roughly in half and recessions have become milder and less frequent. This phenomenon, known as the Great Moderation, is true not only for the U.S. economy but also for industrialized economies across the globe, with the notable exception of Japan. Most serious observers attribute the Great Moderation to three main factors: (i) good luck (smaller shocks); (ii) structural change (e.g. financial market innovations that have improved borrowing capacity); and (iii) improved monetary policy. While there is debate over the relevant importance of each factor, my own view is that each deserves about equal credit.

The decline in the aggregate volatility of the macroeconomy has naturally lead to a decline in both risk premia and credit spreads. This in itself should not be a problem. However, it is also possible that the relatively long period of tranquility in the macroeconomy has lead to a sense of complacency in financial markets, which in turn has lead investors to fail to appropriately discount risk and lenders to not apply standards that are sufficiently tight. It is also possible that there has been abuse of the existing regulatory system, particularly involving mortgage lending. These kinds of factors play out once the markets are put under stress and only serve to magnify the turmoil, as has been the case recently.

Now, about monetary policy during 2003-2005: By keeping interest rates low in the absence of inflationary pressures, the Fed prudently insured against a Japan-style stagnation. It is not unreasonable to suggest, further, that this period provides an illustration of how the Fed has contributed to the Great Moderation. So, oddly enough, Fed policy may be relevant to current financial market volatility not because it was bad, but rather because it was good!


Tobin Harshaw of the New York Times: "I Am Not Authorized to Explain Why I Am Not Authorized..."

As you may recall, last Friday there was a lot of discussion about revisions to the GISS global warming series of estimated average temperatures in the United States--a revision that changed the hottest year to date from 1998 (which in the old data was 1/100 of a degree hotter than 1934) to 1934 (which in the new data is 2/100 of a degree hotter than 1998) http://delong.typepad.com/sdj/2007/08/why-oh-why-ca-1.html. One surprising thing was that the New York Times's Opinionator weblog http://opinionator.blogs.nytimes.com/, run by the thoughtful and intelligent Chris Suellentrop, went way overboard on the story:

Among global warming Cassandras, the fact that 1998 was the “hottest year on record” has always been an article of faith.... James Hansen, the climate scientist who has long accused the Bush administration of trying to “silence” him.... [A] Y2K bug played havoc with some of the numbers.... Michael Ashe... explains.... "The changes are truly astounding. The warmest year on record is now 1934. 1998 (long trumpeted by the media as recordbreaking) moves to second place.... [T]he effect on the U.S. global warming propaganda machine could be huge...

This surprised me: "effect... huge," "havoc," the scare quotes around "silence," "data meltdown," et cetera seemed very out of place for a three-one-hundredths of a degree shift--either complete mendacity or total innumeracy, or both. So I swung by the Opinionator, and found:

  • The Opinionator is no longer written by Chris Suellentrop alone, but also by Tobin Harshaw, who wrote the post in question.
  • Tobin Harshaw also served as an enthusiastic stenographer for last Friday's Stupidest Man Alive nominee, Tom Nugent of National Review, who slipped a decimal points and wrote a totally off-the-rails piece about taxing university endowments http://delong.typepad.com/sdj/2007/08/sell-victoria-c.html overestimating how much money such a tax might raise by a factor of ten.

It seemed that Harshaw had failed to do the slightest amount of quantitative due diligence on either story before he committed fingers to keyboard and thus electrons to the noosphere.

It struck me that here I had an interesting angle: an opportunity to strike while the iron is hot, and find out why the New York Times has employees for whom it is unthinkable that they eyeball a graph or look at a table or even add up twenty numbers to see if what they are about to say makes any sense at all. The quantitative innumeracy of so many journalists is a big problem, and it would be nice to gain more insight into why innumerate journalists don't regard it as a problem.

So I called Toby Harshaw. I don't think he did himself any favors: it seems to me that he and the New York Times have much bigger problems than simple innumeracy:

Brad DeLong: Good afternoon. I'm Brad DeLong, an economics professor calling from UC Berkeley. I read your Cassandra post about global warming data revisions, and had a couple of questions. Can you help me out?

Tobin Harshaw: Certainly.

Brad DeLong: Did you eyeball the data--either in a graph or a table--before you wrote your "Cassandra" post about GISS global warming data revisions?

Tobin Harshaw: Are you writing something about this?

Brad DeLong: I will be, yes.

Tobin Harshaw: Then no, I cannot speak to you. You will have to speak to our public relations department.

Brad DeLong: Why won't you talk to me?

Tobin Harshaw: Because I am not authorized to speak to the press.

Brad DeLong: Because?

Tobin Harshaw: Because that is our policy. Our policy is that editorial staff are not allowed to speak to the press.

Brad DeLong: Seriously? Why is that your policy?

Tobin Harshaw: I am not authorized to speak. You will have to speak to our public relations department.

Brad DeLong: So you cannot even explain why your policy is that you cannot explain what you write?

Tobin Harshaw: I will have to transfer you to the operator.

Brad DeLong: But surely you can at least give a reason for the policy that keeps you from explaining...

Tobin Harshaw: I've spoken to you clearly.

Brad DeLong: You have not.

Tobin Harshaw: I've explained to you that our policy is that I am not authorized to speak to the press.

Brad DeLong: Why aren't you authorized to explain and elaborate on what you wrote?

Tobin Harshaw: I am not authorized to say why I am not authorized. It is our policy...

Brad DeLong: You are sure?...

Tobin Harshaw: Goodbye Mr. DeLong.

I thought about calling public editor Clark Hoyt, but he picks up his voice mail about once a week.

Why oh why can't we have a better press corps?


The Perseids Are Here!

And it is a new moon:

SPACE.com -- Shooting Stars! Viewer's Guide to the Perseid Meteor Shower: Though they vary, the Perseids are more predictable than most meteor showers. And while never grand on the scale of historic meteor storms caused by the November Leonid meteor shower, the Perseids are dependable. "From every northern location in the world, a fair number of nice meteors will be seen," says Rainer Arlt, an astronomer at Astrophysikalisches Institut Potsdam in Germany. "The only hindrance is artificial light." The Perseids regularly produce 50 to 150 meteors per hour -- more than 1 per minute -- under dark skies. There have been years when they produced only a handful, and other years when the count soared above 200 per hour. The first records of the shower date back to 36 A.D., with a Chinese account of "more than 100 meteors" being sighted one early morning. This year's peak hourly rate is expected to be on the low end of the range, likely around 50...


Hoisted from Comments: Speaking About War

Hoisted from comments: md sends us to Paul Fussell's The Great War and Modern Memory:

Grasping Reality with Both Hands: Brad DeLong's Semi-Daily Journal: A long paragraph from Fussell's The Great War and Modern Memory (pp169-170, 1975 pbk ed.) hits hard on some of this. Replace the antebellum faith in Progress with one in America.

One of the cruxes of the war, of course, is the collision between events and the language available--or thought appropriate--to describe them. To put it more accurately, the collision was one between events and the public language used for over a century to celebrate the idea of progress. Logically there is no reason why the English language could not perfectly well render the actuality of trench warfare: it is rich in terms like blood, terror, agony, madness, shit, cruelty, murder, sell-out, pain and hoax, as well as phrases like legs blown off, intestines gushing out over his hands, screaming all night, bleeding to death from the rectum and the like. Logically, one supposes, there's no reason why a language devised by man should be inadequate to describe any of man's works. The difficulty was in admitting that the war had been made by men and was being continued ad infinitum by them. The problem was less one of "language" than of gentility and optimism; it was less a problem of "linguistics" than of rhetoric. Louis Simpson speculates about the reason infantry soldiers so seldom rendered their experience in language: "To a foot-soldier, war is almost entirely physical. That is why some men, when they think about war, fall silent. Language seems to falsify physical life and to betray those who have experienced it absolutely--the dead." But that can't be right. The real reason is that soldiers have discovered that no one is very interested in the bad news that they have to report. What listener wants to be torn and shaken when he doesn't have to be? We have made unspeakable mean indescribable: it really means nasty.

Posted by: md 20/400 | August 12, 2007 at 05:20 PM


links for 2007-08-13


The Curse of the Were-Rabbit!

After praising Floyd Norris, we are confronted with this!

In a Credit Crisis, Large Mortgages Grow Costly - New York Times: by Floyd Norris and Eric Dash: When an investment banker set out to buy a $1.5 million home on Long Island last month, his mortgage broker quoted an interest rate of 8 percent. Three days later, when the buyer said he would take the loan, the mortgage banker had bad news: the new rate was 13 percent. “I have been in the business 20 years and I have never seen” such a big swing in interest rates, said the broker, Bob Moulton, president of the Americana Mortgage Group in Manhasset, N.Y. “There is a lot of fear in the markets,” he added. “When there is fear, people have a tendency to overreact.”

The investment banker’s problem was that he was taking out a so-called jumbo mortgage — a loan greater than the $417,000 mortgage that can be sold to the federally chartered enterprises, Freddie Mac and Fannie Mae. The market for large mortgages has suddenly dried up.... Those with poor credit, whether companies or individuals, are finding it much harder to borrow, if they can at all. It appears that many homeowners who want to refinance their mortgages — often because their old mortgages are about to require sharply higher monthly payments — will be unable to do so....

The Wall Street investment banker who wanted a jumbo mortgage had a good credit score, and is not a subprime borrower. But private mortgage securities are now hard to sell, leading to his problem.... [T]he average jumbo rate is now 6.94 percent. The spread between the two rates [conforming and jumbo] rose from less than a quarter of a percentage point to more than two-thirds of a point. Jumbo mortgages are most important in areas with high home prices, most notably on the East and West coasts. “In California, it has shut down the purchase market,” said Jeff Jaye, a mortgage broker in the Bay area. “It has shut down the refi market.”...

Fannie Mae and Freddie Mac, the government-sponsored enterprises, can still purchase mortgages and issue securities, guaranteeing that the underlying mortgages will not default. Those guarantees are still accepted by investors, and borrowers who meet their standards — meaning they can get so-called conforming mortgages — still can borrow. But those who want larger mortgages, or cannot make down payments, face a harder burden...

The investment banker's problem is not that he is taking out a so-called jumbo mortgage. The investment banker's problem is that he--must be a he--was putting so little money down that the lender was not confident it could resell the house in two years for the amount of the mortgage if necessary, and the lender was also not confident that the investment banker would have a job in six months. As Norris and Dash say later on in the article: the average jumbo mortgage rate is 6.94%--not 13.


Arctic Sea Ice

RealClimate:

RealClimate » Arctic sea ice watch: A few people have already remarked on some pretty surprising numbers in Arctic sea ice extent this year (the New York Times has also noticed). The minimum extent is usually in early to mid September, but this year, conditions by Aug 9 had already beaten all previous record minima. Given that there is at least a few more weeks of melting to go, it looks like the record set in 2005 will be unequivocally surpassed.... Just to give a sense of how dramatic the changes have been over the last 28 years, the figures... show the minimum ice extent in September 1979, and the situation today (Aug 9, 2007). The reduction is around 1.2 million square km of ice, a little bit larger than the size of California and Texas combined.


RealClimate Gives the "New York Times's" Tobin Harshaw the Coveted "Worst Journalist" Award

Gavin at RealClimate writes:

RealClimate » 1934 and all that: However, there is clearly a latent and deeply felt wish in some sectors for the whole problem of global warming to be reduced to a statistical quirk or a mistake. This led to some truly death-defying leaping to conclusions when this issue hit the blogosphere. One of the worst examples (but there are others) was the 'Opinionator' at the New York Times (oh dear). He managed to confuse the global means with the continental US numbers, he made up a story about McIntyre having 'always puzzled about some gaps' (what?) , declared the the error had 'played havoc' with the numbers, and quoted another blogger saying that the 'astounding' numbers had been 'silently released'. None of these statements are true. Among other incorrect stories going around are that the mistake was due to a Y2K bug or that this had something to do with photographing weather stations. Again, simply false.


The Subprime Meltdown Hits Quant Hedge Funds

If you had asked me where the subprime meltdown was going to hit first, I would never have guessed "heavy-quant hedge funds." Yet so it has:

Blind to Trend, 'Quant' Funds Pay Heavy Price: by Henry Sender and Kate Kelly: Computers don't always work. That was the lesson so far this month for many so-called quant hedge funds, whose trading is dictated by complex computer programs. The markets' volatility of the past few weeks has taken a toll on many widely known funds for sophisticated investors, notably a once-highflying hedge fund at Wall Street's Goldman Sachs Group Inc. Global Alpha, Goldman's widely known internal hedge fund, is now down about 16% for the year after a choppy July, when its performance fell about 8%, according to people briefed on the matter. The fund, based in New York, manages about $9 billion. The fund's traders in recent days have been selling certain risky positions, according to these people. Early this week, those moves sparked widespread rumors on Wall Street that the entire fund might be shut down. A Goldman spokesman has said the rumors are "categorically untrue."

Campbell & Co., an $11 billion hedge fund that trades in the futures market as well as in stocks and bonds and is completely driven by such computer programs, was down 10% to 12% by the end of July. Quant funds -- "quant" stands for quantitative -- generally operate by building computer models of market behavior and then allowing the computer programs to dictate trading. A recurring characteristic of the recent trouble in financial markets is that many lenders, funds and brokerages were following statistical models that grossly underestimated how risky the market environment had become. "Our risk models failed to pick up the fact that we were due for a correction," says Keith Campbell, founder of Campbell & Co. "We were highly diversified. It was the perfect negative storm."... He told investors that the losses stemmed from "a unique combination" of factors.... "All [computer-driven] managers say the models make sense and look like they are working," says Bill Johnston, founder of Bayon Capital, an investment fund based in San Francisco that isn't computer-driven. "But then something happens which statistical probability suggests would never happen."... Renaissance Technologies Corp.... is holding up despite the market's downturn.... Other hedge funds declined to disclose to brokers or portfolio managers in charge of so-called funds of hedge funds just how badly wounded they have been by the recent extreme swings...

"Our strategy is fine. We were just hit by a sixteen-standard-deviation event." "Then it didn't happen: the universe isn't old enough for even one sixteen-standard-deviation event to have ever happened."

Tails are fat.


Reporters Should Be Subject-Matter Experts and Honest Brokers

Kevin Drum asks:

The Washington Monthly: OBJECTIVITY....Mark Kleiman comments on the convention of objectivity in the reporting of straight news:

A news account isn't an editorial. The ideal-type "reporter" is supposed to give "just the facts, ma'am," and not his or her own opinions.

This creates a problem when a reporter has to report false statements, especially by candidates for office. If a candidate says that the Earth is flat....should the reporter "objectively" simply report the statement, or should she add the objective fact that the world is actually round?

Mostly, reporters find it more comfortable either to copy down the b.s. and let the reader sort it out, or to find a source willing to be quoted as saying that the world is round.... So the conventions of reportorial objectivity give a big advantage to liars, who get their lies reported on equal terms with the truth.

In theory, everyone agrees with this. The problem is, I haven't yet come across a single person who's proposed a workable solution. Who gets to decide whether an issue is still debatable? The reporter? But most reporters aren't subject matter experts. Would you trust the average reporter to take on this role on a daily basis? And even if we do believe reporters should be routine arbiters of the truth, how exactly should they express this? Flatly call things lies? Insert contrary evidence in their own voice whenever they decide someone has crossed the line? Something more subtle?

The problem with the convention of objectivity isn't that no one recognizes that it's a problem. Everyone recognizes that it's a problem. Entire tank cars of ink have been spilled discussing it. The real problem is that so far no one has come up with a solution — a practical, functional, real-world solution — that's broadly acceptable. Any ideas?

The pressure point is "most reporters aren't subject-matter experts." Why not? Replace non-subject-matter expert reporters with expert subject-matter reporters who have reputations as honest brokers. You need both: subject-matter expertise, and a willingness to be an honest broker interested in informing readers rather than a propagandist or a stenographer. The Washington Post should throw Nell Henderson out the window and buy its Federal Reserve coverage from the Wall Street Journal and Jackie Calmes. The New York Times should throw Michael Gordon out the window and buy its Iraq coverage from Steve Negus of the Financial Times and Nancy Youssef and Leila Fadel of McClatchy.


Why Is the Chickenhawk Right so Crazy About Scott Thomas Beauchamp?

The New Republic is bewildered and confused:

A Scott Beauchamp Update | User Comments: by the Editors: For several weeks now, questions have been raised about Scott Beauchamp's Baghdad Diarist "Shock Troops." While many of these questions have been formulated by people with ideological agendas, we recognize that there are legitimate concerns about journalistic accuracy. We at THE NEW REPUBLIC take these concerns extremely seriously. This is why we have sought to re-report the story, in the process speaking with five soldiers in Beauchamp's company who substantiate the events described in Beauchamp's essay...

at what their friends among the right-wing chickenhawks have been doing to them since they published Scott Thomas Beauchamp:

[Beauchamp's] whole story -- and the whole morality tale it was meant to suggest -- collapses. And it makes the rest of the narrative banal and uninteresting. It's the story of a disgusting human being, a mocker of the disfigured, who then goes to Iraq and, as such human beings are wont to do, finds the company of other such human beings who kill dogs for sport, wear the bones of dead children on their heads and find similar amusement in mocking the disfigured.

We will soon learn if there actually was a dog killer or a bone wearer. But the New Republic seems not to have understood how the Kuwait "detail" undermines everything. After all, what made the purported story interesting enough to publish? Why did the New Republic run it? Because it fits perfectly into the most virulent narrative of the antiwar left. The Iraq war -- "George Bush's war," as even Hillary Clinton, along with countless others who had actually endorsed the war, now calls it -- has caused not only the sorrow and destruction that we read about every day. It has, most perniciously, caused invisible damage -- now made visible by the soul-searching of one brave and gifted private: It has perverted and corrupted the young soldiers who went to Iraq, and now return morally ruined. Young soldiers like Scott Thomas Beauchamp.

We already knew from all of America's armed conflicts -- including Iraq -- what war can make men do. The only thing we learn from Scott Thomas Beauchamp is what literary ambition can make men say...

Some background reading on why Scott Thomas Beauchamp's stories about Iraq are important:

From David Drake, who was with the Blackhorse ACR when it went through the Cambodian town on Snuol in 1970:

The Complete Hammer's Slammers: And I'm going to do more stories than this one in the series... [which has] become a vehicle for a message that I think needs to be more widely known. Veterans who have written or talked to me already understand, but a lot of other people don't: When you send a man out with a gun, you create a policymaker. When his ass is on the line, he will do whatever he needs to do [to try to survive, physically and psychologically]. And if the implications of this bother you, the time to do something about it is before you decide to send him out.

From Phillip Carter:

INTEL DUMP - - : Every soldier has a story. Some are even true. As soldiers, we learn to hide our worst stories from people outside the brotherhood of the close fight. And so the picture of war that gets transmitted back to America is incomplete, always lacking in the awful, gory, human details that flesh out the narrative of combat. These stories are reserved for unit reunions and American Legion halls. Army Pvt. Scott Thomas Beauchamp broke that code when he pseudonymously wrote a series of colorful dispatches for the New Republic about his experiences as an infantryman in Iraq. He offered often gruesome details about the realities of war, details that have ignited a firestorm between left- and right-wing magazines willing to stake their reputations upon their truth and falsity. One question today is whether Beauchamp's dispatches are true. A second, more pressing question is how to better gather and report such stories, and how we should evaluate and verify them. I am deeply skeptical about the veracity of Beauchamp's dispatches, particularly the last one, but disinclined to offer definitive pronouncements at this time. Partisans on both sides of the political spectrum seem to harbor no such doubts. Based solely on the content of these dispatches, some were happy to leap to conclusions about the author's veracity without regard for the facts. And as the argument grows louder, each side turns toward the troops, using them to stand in for their own preconceived ideas about this war....

Update II: I wanted to include a quote from this passage in my column, but ultimately decided to cut it for space reasons. In his powerful memoir of Vietnam titled The Things They Carried, infantryman-turned-writer Tim O'Brien tells us the truth (as he sees it) about war stories:

A true war story is never moral. It does not instruct, nor encourage virtue, nor suggest models of proper human behavior, nor restrain men from doing the things they have always done. If a story seems moral, do not believe it. If at the end of a war story you feel uplifted, or if you feel that some small bit of rectitude has been salvaged from the larger waste, then you have been made the victim of a very old and terrible lie. There is no rectitude whatsoever. There is no virtue. As a first rule of thumb, therefore, you can tell a true war story by its absolute and uncompromising allegiance to obscenity and evil. Listen to Rat Kiley. Cooze, he says. He does not say bitch. He certainly does not say woman, or girl, He says cooze. Then he spits and stares. He’s nineteen years old—it’s too much for him—so he looks at you with those big gentle, killer eyes and says cooze, because his friend is dead, and because it’s so incredibly sad and true: she never wrote back. You can tell a true war story if it embarrasses you. If you don’t care for obscenity, you don’t care for the truth; if you don’t care for the truth, watch how you vote. Send guys to war, they come home talking dirty...

From Nathaniel Flick:

Fight Less, Win More - washingtonpost.com: On a highway north of Kabul last month, an American soldier aimed a machine gun at my car from the turret of his armored Humvee. In the split second for which our eyes locked, I had a revelation: To a man with a weapon, everything looks like a threat. I had served as an infantry officer in Afghanistan in 2001-02 and in Iraq in 2003, but this was my first time on the other end of an American machine gun. It's not something I'll forget. It's not the sort of thing ordinary Afghans forget, either, and it reminded me that heavy-handed military tactics can alienate the people we're trying to help while playing into the hands of the people we're trying to defeat.

Welcome to the paradoxical world of counterinsurgency warfare -- the kind of war you win by not shooting.

The objective in fighting insurgents isn't to kill every enemy fighter -- you simply can't -- but to persuade the population to abandon the insurgents' cause. The laws of these campaigns seem topsy-turvy by conventional military standards: Money is more decisive than bullets; protecting our own forces undermines the U.S. mission; heavy firepower is counterproductive; and winning battles guarantees nothing...

[T]he more force you use, the less effective you may be. Civilian casualties in Afghanistan are notoriously difficult to tally, but 300-500 noncombatants have probably been killed already this year, mostly in U.S. and coalition air strikes. Killing civilians, even in error, is not only a serious moral transgression but also a lethal strategic misstep. Wayward U.S. strikes have seriously undermined the very legitimacy of the Karzai government and made all too many Afghans resent coalition forces. If Afghans lose patience with the coalition presence, those forces will be run out of the country, in the footsteps of the British and the Soviets before them....

The academy's final lesson is that tactical success in a vacuum guarantees nothing. Just as it did in Vietnam, the U.S. military could win every battle and still lose the war. That's largely because our primary enemies in Afghanistan still have a sanctuary in neighboring Pakistan. Rather than make a suicidal stand against the allied forces invading Afghanistan after Sept. 11, 2001, many Taliban and al-Qaeda fighters melted away to create a parallel "Talibanistan" in the lawless tribal areas of western Pakistan. Last fall, Gen. James Jones, then NATO's supreme commander, testified before the Senate Foreign Relations Committee that the Taliban leadership now operates openly from Quetta, a Pakistani border city that's long been a hotbed of Islamic militancy. Karzai reiterated this point during his visit to Camp David last week...

I think the attacks on TNR are not the organized right-wing conspiracy eating one of its own, but rather a combination of bad consciences--the bad conscience of the civilian chickenhawk, on the one hand, and the bad conscience of a military that has a tradition of shielding civilians from what war is. Beauchamp reminds the chickenhawks of what war is--and how your foreign policy winds up being a byproduct of the decisions young men (and women) make trying to keep themselves alive and to cope psychologically withe the horrors they see. Beauchamp publicizes this. The civililan chickenhawks don't want to be told that their fantasies of nice, clean victories--throwing some crappy country against the wall, in Tom Friedman's words--are fantasies. The military brass doesn't really want American civilians to know that soldiers are human beings doing the best they can in the middle of a total clusterf---.


The Earth Is Doomed!

Correspondent Olivia Nelis writes:

The Earth Is Doomed!! A stretch Humvee. I need to say that again. A stretch Humvee. A stretch Humvee. In London. Right there before my affronted gaze. There were .... ribbons on it.

ROU Stretch Humvee
ROU No, Really, A STRETCH HUMVEE!


SELL VICTORIA CAPITAL MANAGEMENT NOW!!!!

Oh this is funny!

Thomas E. Nugent is executive vice president and chief investment officer of PlanMember Advisors, Inc., and principal of Victoria Capital Management, Inc. He also writes for the National Review:P

Thomas E. Nugent on Taxing Foundations and Endowments on NRO Financial: According to a recent study prepared by Bloomberg, the value of the top-25 school endowments alone is a whopping $180 billion. So let’s do some math. The growth rate of these endowments over the past twelve months was 16.2 percent, with the managers of these funds retaining about 11.2 percent of that gain (based on a 5 percent payout). So if we assume these funds grow at a 12 percent rate over the next twenty years and distribute that 5 percent each year, their total value would be about $697 billion from growth alone. (Ongoing donations would make this total even bigger.)

Now, if the federal government imposed a 30 percent foundation tax on the investment gains of these endowment portfolios, the following would happen: The future value of the top-25 foundations would be “only” $469 billion twenty years from now — much less than $697 billion, but certainly enough to take care of each school’s related needs. However, the total revenues generated by taxing these endowments would be about $1.9 trillion over this time, enough to keep the tax man off the back of hard working Americans.

Yes, let's do some math. Collecting $1.9 trillion over the next twenty years means you collect an average of $95 billion a year. If this is 30% of investment gains, that means that average investment gains are $317 billion a year. If the average return over the next twenty years is 16.2%, that means the average value of the endowments over the next twenty years is $317/0.162 = $1,956 billion.

But endowments start at $180 billion (a "whopping" $180 billion). They grow over the next twenty years to $469 billion. The average value has to be somewhere between the highest and the lowest value, doesn't it? The average value has to be somewhere between $180 billion and $469 billion--and yet Nugent says the average value is $1,956 billion.

Stupidest man alive.

Why oh why can't we have a better press corps?


Why Oh Why Can't We Have a Better Press Corps?

Tim Lambert of the weblog Deltoid writes:

Deltoid: Global warming totally disproved again: Steve McIntyre found an error in the GISS temperature data for the US. The GISTEMP page says:

USHCN station records up to 1999 were replaced by a version of USHCN data with further corrections after an adjustment computed by comparing the common 1990-1999 period of the two data sets. (We wish to thank Stephen McIntyre for bringing to our attention that such an adjustment is necessary to prevent creating an artificial jump in year 2000.)

How much difference did the adjustment make to the US temperature series? Well, it changed this:

gissusold.png

to this:

gissusnew.png

Not much difference. The right hand end of the red curve has moved down a little bit, but this decade is still the warmest ever recorded in the US. The change to the global temperature series is imperceptible...

But Tobin Harshaw of the New York Times Opinionator writes:

Hottest Year Data Meltdown: by TOBIN HARSHAW: You just thought you were sweating? Among global warming Cassandras, the fact that 1998 was the “hottest year on record” has always been an article of faith. Stephen McIntyre, who runs the Climateaudit blog was always puzzled by some gaps he saw in the raw data provided by NASA that supported the claim (data compiled in part by James Hansen, the climate scientist who has long accused the Bush administration of trying to “silence” him). McIntyre says he has “reverse engineered” the data to find NASA’s algorithm, discovered that a Y2K bug played havoc with some of the numbers, and notified the space agency.

Michael Asher at DailyTech explains the fallout:

NASA has now silently released corrected figures, and the changes are truly astounding. The warmest year on record is now 1934. 1998 (long trumpeted by the media as recordbreaking) moves to second place. 1921 takes third. In fact, 5 of the 10 warmest years on record now all occur before World War II. Anthony Watts has put the new data in chart form, along with a more detailed summary of the events.

The effect of the correction on global temperatures is minor (some 1-2% less warming than originally thought), but the effect on the U.S. global warming propaganda machine could be huge.

That's all Tobin Harshaw wrote.

Really sad. I don't think Tobin Harshaw looked at the data series. I don't think he could have looked at the data series and still written those paragraphs.

I don't understand why Tobin Harshaw has his current job.


UPDATE: Tobin Harshaw whines:

Note: Many commenters on this post have assumed that the author intended the term “Cassandras” to be pejorative, and also that he was unaware that the predictions made by the prophetess Cassandra, daughter of King Priam of Troy, came true. Rather, the term was being used in its common modern sense: one whose dire predictions, true or false, go unheeded.

And a few comments on Harshaw:

I just talked to someone at GISS (the group Jim Hansen heads) who said they fixed it in less than a day when they did learn about it from McIntyre (who didn’t actually “reverse engineer” anything), and when they fixed it nothing much changed. They saw a 0.15 deg C change for 2000-2006 in the US numbers (since the problem was melding the US data with the global numbers) and some very minor adjustments down the line. The global mean change was zero. 2005 was still the warmest year in the corrected GISS analysis, as it is with the NCDC analysis. Amazing what a little reporting will turn up. — Posted by Ken

This post is almost entirely incorrect. NASA’s much-ballyhooed data showing that 1998 was the warmest year on record for the Earth was right. The error was in the temperature record for the contiguous 48 states (I commend Steve McIntyre’s work), not for the global temperature record. The US temperature record has, as one would expect, a much greater interannual variability than the global record. The DailyTech article fails to point this out. I hope you will make this clear. Actually, I made a mistake. NASA’s data shows that 1998 is the second-warmest year on record for the Earth. The warmest year? 2005. The top twenty hottest years on earth since 1880: * 2005 * 1998 * 2002 * 2003 * 2006 * 2004 * 2001 * 1997 * 1995 * 1990 * 1991 * 2000 * 1999 * 1988 * 1996 * 1987 * 1983 * 1981 * 1994 * 1944 — Posted by The Cunctator

The term “hottest year on record” isn’t appropriate unless you’re talking about global climate. But you’re only talking about the lower 48 states. Why would you use such misleading language if you’re trying to educate people? By the same token, why use terms like “U.S. global warming propaganda machine” and use scare quote around the word “silence.” Hansen claimed that NASA tried to silence him, not “silence” him. If you want to discuss facts, there’s plenty to discuss. If you want to use inflammatory and misleading language that is certainly your prerogative, but aren’t there more appropriate places to do that than the New York Times? NB: Cassandra was right, remember? Her curse was to accurately predict the future but not to be believed. So calling someone a Cassandra is to imply that they are correct but unpopular. — Posted by Debra


links for 2007-08-11


Paul Krugman Recommends Floyd Norris Today

Floyd Norris writes:

A New Kind of Bank Run Tests Old Safeguards: A few generations ago, savers responded to financial panics with runs on banks, and even healthy institutions could fail if they could not raise enough cash quickly enough. For a long time, that all seemed to be safely relegated to the past. But now the runs are back — and this time the targets are not banks but the securities that have replaced them as the prime generators of credit in the new financial system.

“Our current system of levered finance and its related structures may be critically flawed,” said William H. Gross, the chief investment officer of Pimco, a mutual fund company. “Nothing within it allows for the hedging of liquidity risk, and that is the problem at the moment.” This problem has plagued the United States at regular intervals. The Panic of 1907 was halted only when the banker J. P. Morgan persuaded banks to stand together and halt the string of closings by lending money to threatened institutions. That led to the creation of the Federal Reserve, as Congress recoiled from the notion that the country’s financial health had relied on the wealth and wisdom of one private citizen. Then the Depression, with a wave of bank failures, led to the establishment of deposit insurance. With that, savers became convinced that they need not worry about the health of their bank, and bank runs vanished.

But a new financial architecture emerged in the last decade — one that relied more on securities and less on banks as intermediaries. With the worth of those securities now being questioned — and no equivalent of deposit insurance — some who financed the securities want their money out, a fact that has created the 21st-century equivalent of a run on a bank. Left to deal with the run are the institutions that were created to deal with the old system’s problems — notably the central banks like the Federal Reserve and the European Central Bank. But, in contrast to their close involvement with the banking system, these banks have little regulatory oversight of the securities that are in trouble and may not even know who is holding them....

The problem first gained widespread attention when two hedge funds run by the brokerage firm Bear Stearns collapsed and a third Bear Stearns fund had to suspend redemptions as investors sought to get out even though there was no evidence that the fund was in trouble. “The third Bear Stearns fund announcement was the key,” said Robert Barbera, the chief economist of ITG. “You have to believe that in the hedge fund and mutual fund complexes, there is a decision that is building that says, ‘I want to hold some Treasuries to have a cushion if I see redemptions.’”...

Yesterday, BNP Paribas, a major French bank, said it could no longer value three investment funds that it managed, whose assets had been invested in highly rated securities that were backed by dubious mortgages. “The complete evaporation of liquidity in certain market segments of the U.S. securitization market,” the French bank said, “has made it impossible to value certain assets fairly, regardless of their quality or credit rating.” Adding to the problem is that the questionable securities are widely owned and sometimes have been repackaged to form the basis of other securities. European banks and funds own paper tied to subprime mortgages, and it is not clear who else does, or how investors will react....

The central banks, while clearly crucial to dealing with the loss of faith in the new financial system, lost influence under that system. Loans could be arranged by nonbanks, not subject to bank regulators, and the regulators were hesitant to impose rules that would not apply to all lenders.... Prices in the futures market for federal funds show that just a few weeks ago investors thought there would be no Fed easing this year. Now they seem to think such a move is highly likely, and some expect it as early as next month. But the Fed’s influence is limited when lenders are suddenly risk-averse. “The impetus of lowering interest rates may not help, if they don’t let you borrow in the first place,” said Kingman Penniman, the president of KDP Investment Advisors.

The new financial system is not the one the Fed was created to deal with, but it is the one it must try to handle.


Today Is a Great Day in Finance!

Today is a great day in finance! That is, it is a great intellectual day for those of us who are friends of and committed to the intellectual project of Shleifer and Vishny, for today one of their theories is made flesh, and stomps about Wall Street like Godzilla:

Andrei Shleifer and Robert W. Vishny (1997), "The Limits of Arbitrage," Journal of Finance, 52:1, pp. 35-55. Abstract: Textbook arbitrage in financial markets requires no capital and entails no risk. In reality, almost all arbitrage requires capital, and is typically risky. Moreover, professional arbitrage is conducted by a relatively small number of highly specialized investors using other people's capital. Such professional arbitrage has a number of interesting implications for security pricing, including the possibility that arbitrage becomes ineffective in extreme circumstances, when prices diverge far from fundamental values. The model also suggests where anomalies in financial markets are likely to appear, and why arbitrage fails to eliminate them...

Yes, today we have reached the limits to arbitrage: most of the people who spend their lives trying to buy low and sell high using other people's money and leverage have given up extending their positions (and so pushing prices back toward normal-time fundamentals), and are hunkered down simply hoping to survive the next month.

Whether this will have macroeconomic implications is unclear, but I would bet not. The Fed and the ECB are pegging the prices of liquid securities, and injecting as much in the way or safe, liquid, short-term assets into the system as needed to keep that so. They are also in the market in other ways. And the nightmare scenarios always involved a simultaneous collapse in the dollar and in consumer demand, and a Fed that couldn't decide whether to fight the inflation coming from rising import prices or the unemployment coming from collapsing consumer spending. Neither of those show any signs of happening.

Yet.

http://scholar.google.com/scholar?q=shleifer+vishny+limits+to+arbitrage&num=100&hl=en&c2coff=1&safe=off&client=safari&rls=en-us&pwst=1&um=1&oi=scholart


The Fed Is Buying Mortgage-Backed Securities? Hoisted from Comments

PSP: Hoisted from Comments http://delong.typepad.com/sdj/2007/08/central-banking.html#comment-79038528:

Fri morning's N.Y. Times online edition:

The E.C.B. injected another 61 billion euros ($84 billion) into the banking system, after providing 95 billion euros the day before. The Federal Reserve today added $19 billion to the system through the purchase of mortgage-backed securities, then $16 billion in three-day repurchase agreements. The Fed also added money on Thursday.

I thought the Fed only bought and sold Federal debt. This says it is intervening directly in the mortgage-backed securities market. Is this as unusual as I think it is?

Yes.


Keeping the Federal Funds Rate "Close to" Its Target Level

Out of the many things about the current economic situation that cross my desk each day, perhaps the most informative--to me at least--are those that come from ex-Fed Governor Larry Meyers, Joel Prakken, and Macroeconomic Advisers http://www.macroadvisers.com/. It's well worthy paying for if you are in a business where learning two extra nuances about the Fed a week earlier is worth the $$$$. (If not, then just read John Berry at Bloomberg http://www.bloomberg.com/news/commentary/berry.html.)

Just one taste from this morning:

The Federal Reserve Board this morning released a statement aimed at reassuring markets that it is "providing liquidity to facilitate the orderly functioning of financial markets."... The press release does not introduce any policy changes. It simply says that the Fed is going to use its existing tools to get the job done.

We can also infer a few more subtle messages.... [O]pen market operations will be directed to bring the actual funds rate "close to" its target level. That... says that the Fed sees leaving the actual funds rate well above its target, even for a short period, as unacceptable. It also tells us that the Fed is not intending to inject "super abundant" reserves that would let the actual funds rate fall well below target.... The Fed appears to be taking steps to address the liquidity situation. That still leaves open the question of whether the liquidity situation will evolve into a macroeconomic situation....


Fed Adds $24 Billion to Bank Reserves

Central banking in practice:

Today's Markets - WSJ.com: The specific worries on Thursday came after French banking group BNP Paribas suspended three asset-backed securities funds, spooking European investors and inspiring the European Central Bank to flood markets with money. The Federal Reserve subsequently poured a little more cash than usual into the U.S. banking system in order to deal with demand spilling over from Europe. BNP Paribas said it had suspended three funds with exposure to the U.S. credit markets as it has become impossible to accurately value them after "the complete evaporation of liquidity." Subsequently the ECB loaned more than $130 billion in overnight funds to banks at a bargain rate of 4% in order to provide more cash for a financial system jolted by the collapse of the U.S. subprime mortgage market.

Shortly after this news, federal funds futures contracts on the Chicago Board of Trade priced in a 100% chance of a Federal Reserve rate cut in September. On Wednesday, the market odds of a cut at that time were just 25%.

The Fed also arranged a 14-day repurchase agreement -- a tool the central bank uses to temporarily add to banking reserves -- of $12 billion. A little while later, it added a one-day repo agreement of an additional $12 billion...


Brad Setser: Can the Fed Control Long-Term Interest Rates?

Brad Setser notes Greenspan hinting: perhaps not:

RGE - Did Greenspan suggest that the Fed no longer completely controls US monetary policy?: One of the most intriguing passages in the magisterial Ip/Hilsenrath account of the origins of easy credit in Tuesday's soon-to-be Murdoch Journal comes when Ip and Hilsenrath quote Alan Greenspan discussing how long-term rates stayed far lower than the Fed expected once the Fed started to raise short-term rates:

Looking back, he [Alan Greenspan] says today: "We tried in 2004 to move long-term rates higher in order to get mortgage interest rates up and take some of the fizz out of the housing market. But we failed." Something besides Fed policy was at work. Both Mr. Greenspan and his successor, Ben Bernanke, point to an unanticipated surge in capital pouring into the U.S. from overseas.

That seems -- at least to me -- to be a rather remarkable admission.  After all, the Fed controls at least short-term US interest rates, the expected path of short-term rates should have an impact on long-term rates and the housing market is rather interest rate sensitive. We are only now -- after the most recent Treasury survey and the subsequent revisions to the BEA's data on official purchases of Treasuries and Agency bonds getting a real sense of just how big a role foreign central banks played in that "anticipated surge in capital" from abroad....

Ip and Hilsenrath frame the debate over foreign inflows in terms of Bernanke's global savings glut.   But Bernanke's formulation sets aside what to me is a key question -- did the savings glut emerge because the rest of the world just wanted to save more (or invest less), or is it a reflection of the policies adopted by other governments?

Brad DeLong raises a similar point.  He argues that Ip and Hilsenrath downplay the magnitude of official inflows and that they ignored that the world's spare savings stem as much from a shortage of investment as a surge in savings. I agree with DeLong's first point, but fully with his second point.   The "investment death" argument worked better in 2004 than in 2005 or in 2006.   That is when China's current account surplus started to really surge, as savings grew even faster than investment.  And that is also when the surge in oil and commodity prices led to a surge in government savings in the oil exporters, as commodity revenue grew far faster than domestic spending and investment.    The increase in Chinese, Indian and oil savings seems more relevant than ongoing weak investment in southeast Asia (Thailand and Malaysia most notably). I consequently do believe that there was something of a savings glut.   But I also think that savings glut stemmed in large part from government policy choices -- not a surge in private savings....

The role government policy played in increasing Chinese savings isn't quite as obvious, but there is, at least in my view, a tight link.  I have long found Martin Wolf's argument that China's government had to take a series of policy steps -- restricting bank lending, running a relatively restrictive fiscal policy, allowing the SOEs to hold on to their rising profits rather than pay dividends -- that pushed up China's savings rate if it wanted to avoid a burst of inflation that would undo the RMB's nominal depreciation to  be rather persuasive.  In this interpretation, the recent surge in China's savings rate stems directly from its exchange rate policy....

This of course doesn't mean that the Fed is powerless.  It still exercises a lot more control over US monetary conditions than say China's central bank.   But if China's central bank is buying lots of long-term bonds, it also implies that the Fed may have to push short-term rates up by more than it otherwise would in order to slow interest-rate and credit sensitive parts of the economy.


The Wall Street Journal Rounds Up Opinion on the Liquidity Event

The Wall Street Journal writes:

Economics Blog : Economists React to Central Banks’ Moves: This morning, the ECB allocated about $130 billion in a one-day quick tender to calm jittery markets. The scramble for liquidity in Europe spilled over into the U.S.: The Fed, in an effort to get the federal funds rate back down to its target 5.25% and meet the spike in demand for cash, twice entered the market today to inject cash.

Economists and others react to the developments....

The Fed’s actions to this point appear designed to emphasize that the latest wave of fear in the markets is short-term in nature and, at least for now, centered more in Europe than in the United States. … In coming days, the Fed will probably continue to try to walk a fine line between providing what it judges to be sufficient liquidity, on the one hand, and trying not to be pushed into a policy change by the market, on the other. – Goldman Sachs U.S. Economic Research

The ECB’s unusual move to inject liquidity in a one-day repo also seems to have unnerved many investors. It has even encouraged talk of emergency policy meetings to cut official interest rates – although we think this is extremely unlikely as long as underlying economic fundamentals remain strong. – Capital Economics

What is unsettling today is the failure of the Fed and the ECB to have greater foresight into the extraordinary strains that developed overnight in the European money market. The Fed’s failure to know or sense more about what has transpired in the market it controls–the money market, the banking system it supervises, and the international financial system it is intertwined with, is alarming. – Tony Crescenzi, Miller Tabak

Financial markets continue to experience distress from a sharp rise in spreads on borrowing across the whole spectrum of risk classes, combined with a sudden reduction in appetite for investing in these assets. This credit squeeze recently entered a new, and potentially more dangerous phase, with a sharp increase in inter-bank lending rates in Europe.... The European Central Bank stepped in to add liquidity today, and we expect the Fed will also add short-term liquidity to the financial markets in the very near future. This will not yet signal a change in monetary policy, or administered rates – we expect the Fed funds rate to remain unchanged. A deeper, or persistent credit crunch might lead to a rate cut, but the first mission of the Fed is to maintain market liquidity. – Brian Bethune, Nariman Behravesh and Nigel Gault, Global Insight Inc....

Developments over the past day highlight the changing nature of the credit market adjustments roiling financial markets. The concern in recent days that short term liquidity for financial institutions might dry up became something of a reality in European markets. Commercial paper and repo markets dried up, pushing up overnight rates significantly.... The drying up of short-term liquidity to financial institutions is a more serious concern to central banks than the shutdown in term credit financing as credit reprices in a disorderly fashion. As a result, the ECB took action in order to protect the functioning of the Euro area money markets. – Bruce Kasman, J.P. Morgan


Linda Perlstein Talks About Educational Reform Choices

From USA Today:

'Tested' examines difficult choices - USATODAY.com: Linda Perlstein, a former Washington Post reporter, wanted to see the effects firsthand, so she spent an academic year inside a high-poverty elementary school in Annapolis, Md. The result is Tested: One American School Struggles to Make the Grade. USA TODAY's Greg Toppo talks with her about testing:

Q: You spent a year getting to know kids at Tyler Heights Elementary School. How did this change your outlook on their education and tests?

A: I don't have a problem with testing children. I have a problem with thinking test results tell you most of what you need to know. They simply don't — these tests are often very narrow instruments. Where reforms have forced educators to notice children who might otherwise have been neglected, I give credit. But I wrote this book because school reforms intended to abolish a two-class system were in some ways exacerbating it. There's one world where students pass the test as a matter of course and get to write poems, and another where children write paragraphs about poems. Meanwhile, there's supposed to be a movement in American schools to educate each child as an individual. The teachers at Tyler Heights work mightily to do that, but they have to get everybody to the same place in the same amount of time, and follow daily curriculum agendas handed down from above.

Q: President Bush says the "soft bigotry of low expectations" preceded his school reforms, but you say condemning kids to a "rudimentary education" is just as bad. What's so rudimentary about the education at Tyler Heights? And what about similar schools that keep a rich curriculum while doing well on tests?

A: Tyler Heights kids in some ways are very fortunate: Even though many are poor, their well-off district provides them a safe, clean building, plenty of learning tools and a smart, hard-working staff who cares immensely about them. But those educators feel constrained because of rigid curriculum strictures, the low skills of many kids and the pressure to excel on the test. So a teacher suspects her third-graders might be asked on the test to write a paragraph enumerating the elements of a poem. The kids can't get it right. Does she have them write that paragraph over and over until they do, or does she let them actually write poems? The latter would be more engaging and, in the long run, instructive, but the school might calculate that drilling is the more direct, reliable line between two points. Or that science experiments, since they won't be on the test, aren't the best use of a too-short school day. These aren't choices I agree with, but I understand why they're made. The schools with rich curricula exist here and there, most likely with daring staffs and flexible school districts that give educators plenty of room to innovate.

Q: In one memorable scene, a district supervisor watches kindergartners in gym class waft a parachute into the air and scamper beneath it. She says of the teacher, "I can't see his goal." It seems absurd, but does she have a point?

A: No. The silliest thing I have seen in my decade of education reporting is the insistence that every "learning outcome" be posted — the more jargon, the better. Do 5-year-olds need to know that they are tossing balls onto a parachute and running underneath to "demonstrate ways to send and project an object using a variety of body parts and implements" and "move safely in personal and general space"? Can't they just think they're having fun?

Q: Reading your account of a teacher dropping nonsense words into lessons to prep for their appearance on a vital speed-reading test, I thought about Thoreau's warning against becoming "the tools of our tools." What is wrong with this picture?

A: The teacher wanted her kindergartners to be prepared for their assessment, which makes sense. Kids should learn to sound out letter combinations whether or not they make actual words. But she would have preferred to use that time teaching her kids real vocabulary.

Q: I won't give away the ending, but Tyler Heights seems a different place after the big state test is over — science fairs, creative writing and field trips return. Are tests really calling the shots?

A: After I left Tyler Heights, the principal eased up a bit on her "laser-sharp focus." Activities were spread more evenly throughout the year, third-graders wrote poems, there were more attempts at critical thinking. Compared to the previous year, the percentage of kids passing the state test decreased in more categories than it increased. But I don't think the teachers would tell you the students learned any less.


Yet More Misleading Budget Reporting: Peter Baker of the Washington Post Drives Matthew Yglesias Insane

I see that the shrill and unbalanced Matthew Yglesias badly needs a shot of Thorazine after reading Peter Baker's information-subtracting budget story in the Washington Post: "It's barely worth mentioning because this happens all the time, but it's necessary to mention precisely because it happens all the time.

Matt writes:

Matthew Yglesias: Yes, He Accused Them, But Did It Happen?: One could drive oneself insane blogging this all the time, but I genuinely think that every single person involved in covering politics for a major newspaper needs to take some time to think about the possibilities that their articles, as written, reduce the level of informedness in the population. Say, for example, you didn't follow American politics or public policy at all. You'd probably have no opinion as to whether or not the Democratic congress is plotting the largest tax increase in American history. Then you read Peter Baker's Washington Post article:

Appearing before cameras at the Treasury Department alongside his economic team, the president vowed to veto spending bills that exceed his targets, and he accused Democrats of plotting the largest tax increase in history to fund an additional $205 billion in discretionary spending over five years. . . .

Democrats quickly returned fire, noting that Bush inherited a surplus that turned into a deficit and that he never vetoed a spending bill during the six years that Republicans controlled Capitol Hill, even as the budget grew by 50 percent.

Now, based on this, one would probably conclude that Democrats are, in fact, planning the largest tax increase in American history. One certainly would not conclude that what Democrats are proposing is that tax legislation that Bush himself proposed years ago be allowed to proceed in the manner that Bush proposed, and that all of the arguments about affordability that Bush made, when proposing this tax legislation back in the day, were founded on the premise that the legislation would operate as proposed, complete with a phase out and so forth.

It's barely worth mentioning because this happens all the time, but it's necessary to mention precisely because it happens all the time. Baker's article is by no means a bad one relative to the prevailing standards of the day, but even so it does more to assist the powers that be in their effort to mislead people than it does to help people understand what the powers that be are doing.

Why oh why can't we have a better press corps?


links for 2007-08-09


Ezra Klein on Rudy Giuliani on Health Care: He Is Shrill!

Ezra Klein is not pleased, not pleased at all:

A Man With a (Non-)Plan: I'm supposed to be writing about Rudy Giuliani's health care plan today. And I would, if Rudy Giuliani had a health care plan. But Rudy Giuliani doesn't have a health care plan. What he has is a pretext with which to attack the Democrats. Indeed, just about all you need to know about Giuliani's thoughtfulness on the issue can be summed up by the following: In the speech introducing and detailing his new health care proposal, Giuliani refers to the "Democrats" six times. "Single-payer" is said eight times. "Socialized medicine," or some variant thereof, makes nine appearances. "Uninsured" is never uttered -- not once.

But we'll get to the speech in a moment. First, it's worth wondering why anyone is even crediting Giuliani with a health care plan. The New York Times headlined their story "Giuliani Seeks to Transform U.S. Health Care Coverage," before telling us, in the tenth paragraph, that "Mr. Giuliani's speech offered very little in the way of specifics. He said his goal was to outline his 'vision,' with more details to come in the fall." I guess the headline "Giuliani Seeks to Transform One-Seventh of Economy, Couldn't Be Bothered to Offer Details on How" wasn't snappy enough?

Failure of the press aside, let's examine this "vision." What Giuliani offered is this: A tax exclusion of up to $15,000 for families, and $7,500 for individuals, to help pay for health care. What Giuliani is relying on is people reading those numbers -- $15,000 and $7,500 -- without noticing that they don't denote the amount of money he's offering them, but the amount of money he's not taxing them on. And when we plug it into my magical Rudy Translation Machine (constructed with the help of friendly neighborhood economist, Dean Baker), we can watch how $15,000 can easily become... zero....

Don't get me wrong, some families will save a few bucks. If you make $50,000, Giuliani's exclusion will save you $1,220. And if you make $70,000, you'll get a whopping $2,250. And the higher up the income ladder you go, the more our hypothetical family unit will save. Meanwhile, here's the kicker: According to the Kaiser Family Foundation, in 2006, premiums for family coverage amounted to, on average, $11,480. Giuliani's giveaway barely makes a dent.

So it's no surprise that Alan Cohen, head of Boston University's Health Policy Institute, looked at Giuliani's "vision" and said, "I don't think it's likely to increase coverage of people to any great extent, and I don't think it's going to get a handle on health care cost inflation in this country."...

But of course, the "plan" is not the point. It's the pretext. As NBC reported, "Giuliani laid out few specifics on an actual health care plan today in New Hampshire, and instead took shots at Democrats and Michael Moore on the topic." Lucky listeners were treated to such cutting bon mots as "Hillary, and Barack, and John Edwards are on an airplane headed to France," and "Michael Moore wants to take you to Cuba for your health care. Anyone want to sign up? I didn't think so. Maybe the Democrats will sign up."

Giuliani's plan exists to facilitate those attacks, not reform health care...

The New YorK Times reporter who waited until paragraph ten to tell us that Giuliani had no plan is Marc Santora. Remember that name.


Kevin Drum Finds Princeton Dean Anne-Marie Slaughter Being Shrill

Kevin Drum writes:

The Washington Monthly: [H]ere's what she had to say today over at TPM Cafe:

Here is my nightmare. The Cheneyites succeed in creating a situation in which Bush does decide to bomb Iran. Iran retaliates, as they openly threaten to do, with terrorist attacks against us on U.S. soil. That tilts the election. I can imagine a Karl Rove political calculation that would buttress a Cheney-Addington national security calculation, probably with Eliot Abrams' support.

Let me get this straight. Anne-Marie Slaughter, one of the most accomodating, serious, centrist, liberal foreign policy players on the planet, has just said that she thinks it's entirely possible that the Bush administration will launch a foreign war next year in order to help the Republican Party win an election.... [T]he Bush administration is now so widely viewed as unhinged and malignant that even traditionally serious™ people like Anne-Marie Slaughter think nothing of suggesting that they might well start a war with Iran for purely partisan gain. I really can't think of any past administration that would have provoked this kind of reaction from someone of AMS's stature. Journalists should take note.


John Scalzi Commands: Go See Stardust on Friday!

Scalzi writes:

Whatever: All that said, if you are a fan of Neil Gaiman's and you want to see him continue to work in Hollywood and whatnot, then you really ought not be complacent, and you really ought to see Stardust on opening weekend, and preferably on Friday. The mechanics of the movie business are structured these days so that those opening numbers matter a great deal. The movie business is not like it was 20 years ago, when Princess Bride opened up in just 600 theaters; it's not even like it was a few years ago, when movie theaters had an economic interest in playing films as long as possible. These days films need to make their money quickly, because they're going to get shoved off the screen in two or three weeks.

So yeah, if you want to do Neil Gaiman a favor, see Stardust on Friday, and bring all your friends...

The movie: http://www.stardustmovie.com/

Scalzi expands:

I can't imagine that anyone at Paramount is realistically under the impression that Stardust is going to approach even the low end of Rush Hour 3's box office bracket. But that's all right, since I don't imagine that Paramount is viewing Stardust as a legitimate #1 box office contender. Rather -- and if they're smart -- they're viewing it as counter-programming: Something to put out there so that everyone else who would rather poke out their eyes than see Rush Hour 3 will say "Hey, let's go see Stardust." Which is to say that Stardust is not competing with Rush Hour 3 for an audience; the two films are instead (and hopefully for Stardust) complementary.

In this, Stardust is actually pretty well-positioned. Rush Hour 3 gets the boys, ages 13 - 29, and the poor unfortunate women who are dragged along with them. That's its main audience. Stardust, on the other hand, cobbles together its audience from various demographics. First, science fiction/fantasy fandom, almost none of whom is interested in Rush Hour 3 (and which, as anyone who looked at Serenity's grosses can tell you, is worth exactly $10 million on opening weekend). Second, older moviegoers, who may be drawn in by the presence of Michelle Pfeiffer and Robert DeNiro and the novel and amusing movie idea. Third, older (that is, 30+) couples out on dates.

Then throw in, in decreasing order of importance, family audiences (it's PG-13 but that's close enough for government work), Edwardian-era-loving gays and/or Anglophiles, the comic book and/or Matthew Vaughn fans not at Rush Hour 3, moviegoers who actually read reviews to decide what they're going to see, and single, cat-loving women hoping for just one more Princess Bride experience before they die.

Also in Stardust's plus column: the only other movie getting a wide release beside it and Rush Hour 3: Daddy Day Camp. Which means that except for the occasional family that lets an especially dim six-year-old drive the movie choices, Stardust has the whole non-Rush Hour 3 audience to itself. The only holdover film likely to have a serious impact on Stardust's numbers is The Bourne Ultimatum....

My expectation is that the film's opening domestic numbers are going to tally somewhere between $15 and $25 million... anything over $25 million will be having Gaiman and Vaughn sent really nice fruit baskets and a note asking when they can have a script in for Stardust 2: The Quickening.... I think the real action for Stardust is likely to be the home video and television markets, where I expect the producers of the film are probably hoping for a Princess Bride-like longevity. Note, if you will, that The Princess Bride performed only modestly in theaters when it came out 20 years ago, and found most of its fame (and financial success) on home video...


Meanwhile, author Neil Gaiman freaks out in a calm, measured way:

Neil Gaiman - Neil Gaiman's Journal: What to do with your friends on Friday. Also Chocolate Eggs.: I read this article with a certain amount of concern:

http://www.comingsoon.net/blog/2007/08/preview_and_box_office_analysi_11.php

as it explains that Stardust is a wonderful, amazing, brilliant film and that everyone will go and see Rush Hour 3 because the marketing for Stardust hasn't been any good. I hope they're wrong. I really hope that the plethora of good reviews, and the word of mouth, will make up for any deficiencies in the marketing.

(If you're in two minds about Stardust, about whether or not to see it or even when to see it, please go and see it this weekend. Friday night if you can. Take friends. If necessary, take them at gunpoint. They will love the movie so much they will forgive you afterwards. And if they don't forgive you, you can dispose of them quietly -- you're the one with the gun, after all -- and you will have a wonderful time for the rest of your life with the new friends you made at the Stardust screening.)

The reviews of Stardust continue to be lovely:

http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2007/08/06/entertainment/e145649D66.DTL

for example, is the Associated Press review. And they love Michelle Pfeiffer, who

is deliciously evil as a witch who wants to cut out Yvaine's heart and eat it to gain eternal youth and beauty for herself and her sisters. (Well, mainly for herself.) She shows great comic timing and isn't afraid to play with her glamorous image, or look grotesque when her character, Lamia, is at her most decayed and desperate.

It comments on the should you take kids question:

"Stardust" also calls to mind last year's "Pan's Labyrinth" .... in that it superficially appears to be suitable for the whole family, and it's really not. It's never as terrifying as "Pan's Labyrinth" but it does get dark; in a broader sense, though, kids just might not get a lot of the nuance. Their parents are truly the target audience here.

http://mikecap.squarespace.com/journal/2007/8/7/stardust-2007.html

Weeks and weeks into this Summer of Disappointing Movies, we have finally unearthed a decent gem of a film. This is the one you take a date to; especially if your significant other wears an ankh or has a Death (the D.C. comic character) tattoo somewhere or owns all the Sandman graphic novels. Paramount Pictures has graciously brought the fairy tale back to the screen, with a quality not seen since The Princess Bride. Forget Narnia, Terabithia, and Hogwart's - it's all about Stormhold and the fallen star.

http://www.badmouth.net/stardust-2007/

Stardust comes well after the burst of summer blockbusters, but looking back, it will be seen as one of the 2007’s best and most fully satisfying adventures.

http://www.denverpost.com/entertainment/ci_6557055 has me trying to explain the difference between novel writing and movie making to journalist Colin Covert.

"Writing a novel is a voyage of discovery," said Neil Gaiman, who has written piles of them (including "American Gods," "Anansi Boys," and "Neverwhere") and sold millions.

But turning a novel into a film is like "running a very sharp-edged maze leading through a minefield, with people shooting at you, in a freezing downpour, having no sense of where the exit might be, pursued by hounds, while blindfolded."


David Rees: Shorter Michael Ignatieff

David Rees writes:

Shorter Michael Ignatieff: It was right for me to support the Iraq war when I was an academic, because academics live in outer space on Planet Zinfandel, and play with ideas all day. But now, as a politician in a country that opposed the war, I'll admit I screwed up, because politicians must deign to harness the wild mares of whimsy to the ox-cart of cold, calculated reality.

There is more. It is, Ezra Klein says, the greatest essay ever published on anything. There is more. A lot more:

I wrote a "cyber-essay" on the Huffington Post a couple years ago about Ignatieff. (Oh, sorry, you didn't know I blog on the Huffington Post? Yeah, not to brag or nothing, but I totally do. Also, my friend has a flickr.) My cyber-essay concerned itself with a masterpiece of foreign-policy fan fiction: Ignatieff's 2005 NY Times Magazine essay justifying the Iraq war.... Ignatieff said the reason the American public wanted to invade Iraq was to spread "The Ultimate Task of Thomas Jefferson's Dream." (I am not making a joke. This is for real.) And, he implied, anyone who opposed the invasion of Iraq did so because they hated Thomas Jefferson-- and they didn't believe in the Ultimate Tasks of Dreams!

So far, so GREAT, right?

Ignatieff's latest essay is what Latin people call a "mea culpa," which is Greek for "Attention publishers: I am ready to write a book about the huge colossal mistake I made." I imagine the book will be about a man struggling to do the right thing-- a man who thinks with his heart and dares, with a dream in each fist, to reach for the stars. It's about a journey: a journey from idealistic, starry-eyed academic to wizened, war-weary politician.... I was excited when I first saw this new essay: At last, Ignatieff was going to come clean about his super-duper-double-dipper errors. I expected a no-holds barred, personal excoriation. In fact, I assumed the first, last, and only sentence of the essay would be: "Please, for the love of God, don't ever listen to me again."

HOWEVER. . .

The first nine-tenths of Ignatieff's essay, far from being an honest self-examination, is a collection of vague aphorisms and bong-poster koans. It hums with the comforting murmur of lobotomy. I refuse to believe this section was actually written by a member of the Canadian government, because that would mean Canada is even more "fuxxor3d" than America. (A little hacker-speak, that. There will be more; I finally bought the B3rlitz tapes.)... [A]lthough his judgments were objectively wrong, [he thinks] they were contextually appropriate. Sweet! You've been totally 0wn3d by Michael Ignatieff! And so have all those dead Iraqis....

Politicians cannot afford to cocoon themselves in the inner world of their own imaginings. . . ."

Why do I hear Geddy Lee singing this phrase over a 6/13 time signature? All that's missing is the phrase "telescopic zodiac / whispering secrets into my cerebellum" and you've got a killer Rush lyric!...

"A sense of reality is not just a sense of the world as it is, but as it might be. Like great artists, great politicians see possibilities others cannot and then seek to turn them into realities. . ."

Winston Churchill is Leonardo daVinci. George W. Bush is Thomas Kinkade. Michael Ignatieff basically helped us buy a half-trillion dollars' worth of Thomas Kinkade paintings. Thanks.

"To bring the new into being, a politician needs a sense of timing, of when to leap and when to remain still. . . ."

Come, now: If you're gonna steal from Kenny Rogers, you at least gotta grow the beard....

Seriously, let's repeat this quote: "Few of us hear the horses coming." We are really getting into Cormac McCarthy territory here:

"They saw the WMDs over the hill, staggering under the weight of their own nonexistence like some funereal assemblage of bent-backed phantoms. Ignatieff crouched in the mulberry copse, glassed his target, cursed the Chomskian dust that risked his weapons ruin, then raised The Ultimate Task of Thomas Jeffersons Dream and sent its buckshot tearing into Iraq-- tatterdemalion, sanction-wracked-- and the rocks behind were splatter-stained with a crimson decoupage like some chromatic inversion of all that is holy and lawful. I kindly reckon we just shot the shit out of Iraq, Ignatieff said. And Friedman said, Lets move in to get a better look at her. And they tried hailing a cab with an anecdotaholic driver but they couldnt find one because they were stranded in a featureless semantic apocalypse, meaning-raped and apostropheless like some joy-smudged, italicized parody of Cormac McCarthy. And on the crest of the hill they heard Kanan Makiya weeping soundlessly like the very enabler of evil itself."...

"(Bush) had led a charmed life, and in charmed lives warning bells do not sound. . . . People with good judgment listen to warning bells within. . . ."

Ding-dong! There's my warning bell within! What are you saying, warning bell? Ding-dong! Don't keep reading this essay! Your HMO won't cover the neurological damage! Ding-aling-dong!

"A prudent leader will save democracies from the worst, but prudent leaders will not inspire a democracy to give its best. . . ."

This reminds me of something I had stitched on the back of my denim jacket once: "An eagle with a broken wing may fly high enough to avoid the quicksand, but it cannot soar above possibility's treetops at the dawn of a new day." Boy, did everyone in town hate that denim jacket!...

Now, let's move on to the other part of the essay! Are you still with me? Let's DO THIS! I still have some water in my canteen; I'll share it with you. No, don't be silly, there's plenty of light left-- sunset's at least an hour away. . .

Next is the part of Ignatieff's essay that I initially thought would be the whole essay: The part where Ignatieff admits he made a boo-boo.

"We might test judgment by asking, on the issue of Iraq, who best anticipated how events turned out. But many of those who correctly anticipated catastrophe did so not by exercising judgment but by indulging in ideology. They opposed the invasion because they believed the president was only after the oil or because they believed America is always and in every situation wrong."

"Always and in every situation wrong?" Come on, we all like it when America wins at the Olympics, right? I bet even Ward Churchill had a crush on Mary Lou Retton, back in the day. Good thing they didn't make a baby together, though! Wow! That would have been an intense baby-- unlimited negative energy vs. unlimited positive energy and all that! For real, though: You anti-war people have got to admit, Ignatieff has you nailed. You dumb-asses who were right about everything for the wrong reasons, instead of wrong about everything for the right reasons. You lose.

"The people who truly showed good judgment on Iraq predicted the consequences that actually ensued but also rightly evaluated the motives that led to the action. They did not necessarily possess more knowledge than the rest of us. They labored, as everyone did, with the same faulty intelligence and lack of knowledge of Iraq's fissured sectarian history. What they didn't do was take wishes for reality. They didn't suppose, as President Bush did, that because they believed in the integrity of their own motives everyone else in the region would believe in it, too. They didn't suppose that a free state could arise on the foundations of 35 years of police terror. They didn't suppose that America had the power to shape political outcomes in a faraway country of which most Americans knew little. They didn't believe that because America defended human rights and freedom in Bosnia and Kosovo it had to be doing so in Iraq. They avoided all these mistakes."

Yeah, you're right, they did. Do you know why? Because they're not retarded.

"I made some of these mistakes and then a few of my own. The lesson I draw for the future is to be less influenced by the passions of people I admire -- Iraqi exiles, for example -- and to be less swayed by my emotions. . . ."

And here, finally, is where my skull cracked open, my heart combusted, and a murder of crows flew out of my ass. Michael Ignatieff is drawing lessons for the future. Michael Ignatieff has a future in public policy. Sure, it's CANADIAN public policy, so it doesn't really count, but still-- it's like the guy can't be stopped. You know why? Because he's at that level where you literally can't make a big enough mistake to be fired, shunned, or indicted. I'd like to visit that level someday. First thing I'd do is get rip-roarin' drunk and rob a bank using Richard Perle's face as a weapon. (JOKE!)

Then again, I guess it's for the best-- because if people like Michael Ignatieff were ignored, how would we know what to think about the world?

Oh, wait: We could ask the bus drivers.

But now that I think about it, why ask bus drivers when we could ask RACE CAR DRIVERS? Race car drivers are smarter than bus drivers, right? After all, they make more money, are held in higher esteem, and have sexier wives!

RACE CAR DRIVERS ARE #1!

THE END.


Cheese-Eating Surrender Monkeys Strike Back!

Matthew Yglesias writes:

Matthew Yglesias: Facts? In the Lede? Shocking!: Via Brian Beutler, the AFP tries a revolutionary experiment in writing their story in such a way as to make readers better informed about the issue at hand rather than more familiar with the president's propaganda. Here's the lede:

US President George W. Bush charged Monday that Iran has openly declared that it seeks nuclear weapons -- an inaccurate accusation at a time of sharp tensions between Washington and Tehran.

Oh, my! Imagine the world we might live in if this were the standard way to open a newspaper story about the president making a false or misleading claim.

Kudos for Agence France Press!


An Economist Reads Jane Austenania

Tyler Cowen's screws seem considerably looser than usual this morning:

Marginal Revolution: Confessions of a Jane Austen Addict: That's the title of Laurie Viera Rigler's new and fun book.  The basic premise is that a pouty L.A. girl "wakes up" in the body of a character in a Jane Austen novel; here is the book's website.  She also finds herself courted by an ardent suitor, Edgeworth, who wants an answer to his marriage proposal and soon.  My wonderings were skewed as usual:

  1. Would I, at first, have to act sick and crazy so as to cover up what are in fact more systematic lapses from accepted codes of social behavior?
  2. If I am a rational Bayesian, what percentage of "transported people" should I expect to find in my new world?  (It is indicative that our heroine thinks she is very special and isn't much concerned with this question.)  Would such people be natural allies or enemies?
  3. If I met another transported person, could I figure this fact out?  How long would it take and what are the best hints to drop?  Should I just mention "the Boston Red Sox" and see what happens?
  4. Living in such a world, how useful is it to know how the novel ends?  (This is a theme in the story.)  Could such knowledge compensate for not understanding the non-articulated rules of this world very well?  What rate of interest should I pay on borrowed money, given the presence of speculative opportunities?
  5. Being a rational Bayesian, how should I revise upwards my estimates that the world is ruled by an evil Demi-Urge, and what does this imply for the optimal degree of ethical behavior? It is a sad commentary on our educational system that Courtney, the heroine of the novel, never ponders such a question.
  6. At what percentage of "transported people" would we expect to see an impact on real GDP, and would this impact be positive or negative?

Readers, what other questions should I be asking?

Of course, the biggest question of all, IMHO, is not asked. It is:

Just how confident can I be that I should buy British long-term Treasuries on June 15, 1815?


Assimilation

George Borjas writes:

The Borjas Blog: Should We Encourage The Assimilation of Immigrants?: From an economic perspective, it is actually not so clear whether it is beneficial to encourage assimilation. As I argued in Heaven's Door:

On the one hand, the process of assimilation helps narrow the economic gap between immigrants and natives, reducing the drain on many social services. The rapid assimilation of disadvantaged immigrants would also lower the chances that this population, clustered in poor ethnic ghettoes, becomes a new underclass, the potential source of a great deal of social conflict. On the other hand, the economic gains from immigration are largest when the skills of immigrants most complement those of natives. The quicker that immigrants become like American workers, the faster that those gains vanish...

Needless to say, assimilation is not purely, or even mainly, an economic phenomenon. Delaying the process of cultural assimilation also has significant—and potentially much more serious—social and political consequences. One need not travel far to see the intrinsic dangers that a country faces when it has numerically large, culturally distinct, and linguistically separate minorities.

My impression is that many European countries take a much more active role than the United States in promoting immigrant assimilation--such as "encouraging" immigrants to settle in particular parts of the receiving country. A comparison with the European assimilation experience, however, would seem to suggest that we are not doing so bad; that a little benign neglect may have been very beneficial in this context. On their own, many immigrants saw the economic benefits from assimilation and acted accordingly. The possibility that "immigrant advocates" will play an important role in forming assimilation policy is a red flag to me. Although it's hard to know for sure, this could easily be another example of a wrong-headed Bush immigration initiative.

Whenever I read things like this, I cannot help but think that they are completely turned around. All over the world ministers of culture are frightened because their citizens who have not moved to the United States are "assimilating" to American culture and values--and they are. People who are in America assimilate even faster--albeit not as rapidly as we would, ideally, wish.

For the most mind-exploding example of this I have seen, consider that National Review has a hack named Mark Krikorian who self-identifies as one of the white guys threatened by the looming Hispanic Pizza Menace carried by the swarthy people crossing our southern border. If assimilation were any slower, somebody with the last name "Krikorian" would see himself as a camel jockey with more in common with the people who put chorizo on their pizza than with us waspy types.


How Credit Got So Easy

Greg Ip and Jon Hilsenrath have a very nice article on page A1 of the Wall Street Journal. I do think they underplay the most important factors: (i) they don't mention the surge in the profit share that made businesses less dependent on flows from the credit markets for their capital-expansion funds, and (ii) they don't give enough weight to the extraordinary surge in capital inflows coming from foreign central banks. These did most to drive easy credit over the past five years, and they don't receive sufficient stress in the article. And it's not a global savings glut: it's a global investment shortfall. And it's not that there is anything new about it being "easy for investors to buy complex securities they didn't fully understand"--the Bardi and the Peruzzi did so when they loaned to Edward III so that he could launch the Hundred Years War back in the fourteenth century. And many subprime borrowers have gotten a good deal: cheap rent for five years. (And many have not--have been effectively defrauded.)

But all in all, a very nice article:

How Credit Got So Easy And Why It's Tightening - WSJ.com: An extraordinary credit boom that created many first-time homeowners and financed a wave of corporate takeovers seems to be waning. Home buyers with poor credit are having trouble borrowing. Institutional investors from Milwaukee to Düsseldorf to Sydney are reporting losses. Banks are stuck with corporate debt that investors won't buy. Stocks are on a roller coaster, with financial powerhouses like Bear Stearns Cos. and Blackstone Group coming under intense pressure.

The origins of the boom... trace to changes in the banking system provoked by the collapse of the savings-and-loan industry in the 1980s, the reaction of governments to the Asian financial crisis of the late 1990s, and the Federal Reserve's response to the 2000-01 bursting of the tech-stock bubble.... Low interest rates engineered by central banks and reinforced by a tidal wave of overseas savings fueled home prices and leveraged buyouts. Pension funds and endowments, unhappy with skimpy returns, shoved cash at hedge funds and private-equity firms, which borrowed heavily to make big bets. The investments of choice were opaque financial instruments that shifted default risk from lenders to global investors. The question now: When the dust settles, will the world be better off?...

[C]redit problems once seen as isolated to a few subprime-mortgage lenders are beginning to propagate across markets and borders in unpredicted ways and degrees. A system designed to distribute and absorb risk might, instead, have bred it, by making it so easy for investors to buy complex securities they didn't fully understand....

When a technology stock and investment plunge and the Sept. 11 terrorist attacks pushed the economy into recession in 2001, the Fed slashed interest rates. But even by mid-2003, job creation and business investment were still anemic, and the inflation rate was slipping toward 1%. The Fed began to study Japan's unhappy bout with deflation....

Fed officials who were there at the time generally maintain their policy was right, even in hindsight.... Edward Gramlich, a Fed governor in Washington from 1997 to 2005, says he failed to realize at the time that low rates were making it so easy for lenders to market subprime mortgages with low introductory rates. The Fed and other regulators could have prevented some of the resulting pain with more rigorous supervision of mortgage lenders besides banks, he says. "We didn't have that, and we're paying for it now."

In June 2004, the Fed began to raise the short-term target rate, eventually taking it to 5.25%, where it has been for the past year. Such a boost usually leads to a rise, as well, in long-term rates.... This time, it didn't. Mr. Greenspan expressed concern that investors were willing to accept low returns for taking on risk. "What they perceive as newly abundant liquidity can readily disappear," he said in August 2005, six months before retiring. "History has not dealt kindly with the aftermath of protracted periods of low risk premiums."... Something besides Fed policy was at work. Both Mr. Greenspan and his successor, Ben Bernanke, point to an unanticipated surge in capital pouring into the U.S. from overseas....

As recessions and depressed currencies held down imports and goosed exports in other Asian countries, the countries ran trade surpluses that replenished foreign-exchange reserves. Determined never to be so tied to the onerous conditions of the International Monetary Fund, they have kept those policies in place. Thai reserves... stand at $73 billion.... China's foreign-exchange reserves above $1 trillion.... China put much of its cash -- part of what Mr. Bernanke has called a "global saving glut" -- into U.S. Treasurys, helping hold down long-term U.S. interest rates. Chinese government entities also recently poured $3 billion into U.S. private-equity firm Blackstone....

Lou Barnes, co-owner of a small Colorado mortgage bank called Boulder West Inc., has been in the mortgage business since the late 1970s. For most of that time, a borrower had to fully document his income. Lenders offered the first no-documentation loans in the mid-1990s, but for no more than 70% of the value of the house being purchased. A few years back, he says, that began to change as Wall Street investment banks and wholesalers demanded ever more mortgages from even the least creditworthy -- or "subprime" -- customers.... Until the late 1990s, the subprime market was dominated by home-equity lines used by borrowers to consolidate debt and by loans on mobile homes. But when the Fed held rates down after 2001, lenders could offer borrowers with sketchy credit histories adjustable-rate mortgages with introductory rates that seemed affordable. Mr. Barnes says customers were asking about "2/28" subprime loans. These offered a low starter rate for two years, then adjusted for the remaining 28 to a rate that was often three percentage points higher than a prime customer normally paid. Customers, he says, seldom appreciated how high that rate could be once the Fed returned rates to normal levels.

Demand from consumers, on one side, and Wall Street and its customers on the other side prompted lenders to make more and more subprime loans. Originations rose to $600 billion or more in both 2005 and 2006 from $160 billion in 2001, according to Inside Mortgage Finance, an industry publication. At first, delinquencies were surprisingly low. As a result, the credit ratings for bonds backed by the mortgages assumed a modest default rate. Standards for getting a mortgage fell. About 45% of all subprime loans in 2006 went to borrowers who didn't fully document their income, making it easier for them to overstate their creditworthiness. The delinquency rate was a mirage: It was low mainly because home prices were rising so much that borrowers who fell behind could easily refinance. When home prices stopped rising in 2006, and fell in some regions, that game ended. Borrowers with subprime loans made in 2006 fell behind on monthly payments much more quickly than mortgages made a year or two earlier....

Bankers began marketing debt deals for companies that, unlike Yellow Pages, didn't have comfortable cash flow. There was Chrysler, burning cash rather than producing it. And there was First Data Corp., whose post-takeover cash flow would barely cover interest payments and capital spending, according to Standard & Poor's LCD, a unit of S&P which tracks the high-yield market. Last month, investors began to balk. Now many banks find themselves having committed to lend about $200 billion that they had intended to turn over to investors, but can't....

Low interest rates made many investors willing to buy exotic securities in an effort to boost returns. Wall Street had just the vehicle: securitization, or turning loans that once sat quietly on banks' books into securities that can be sold in global markets.... In the late 1990s, Wall Street went a step further, packaging bigger pools of securities into collateralized debt obligations, or CDOs, and carving them into "tranches," each with a different level of risk and return. Riskier tranches suffered the first losses if some underlying loans defaulted. Other tranches offered lower returns because riskier tranches would take the first hits if the business went sour. Because of the way they were structured, some CDO tranches got triple-A ratings from Moody's Investors Service and Standard & Poor's even though they contained subprime loans. That lured traditionally conservative investors such as commercial banks, insurance companies and pension funds.

The upside was evident: Many borrowers got loans they wouldn't otherwise have had. The taxpayer-backed deposit fund was less likely to bear the cost of sloppy lending practices. Banks shifted risks to investors more willing to bear them -- leaving the banks able to make more loans. Investors could pick either more-risky or less-risky slices. And Wall Street middlemen made handsome profits. Now the downside, too, is painfully evident. Final investors were so many steps removed from the original loans that it became hard for them to know the true value and risk of securities they bought. Some were satisfied with a triple-A rating on a CDO -- seemingly as safe as a U.S. Treasury bond but with more yield. Yet as defaults ate through the cushion of lower-rated tranches with unexpected speed, rating agencies were forced to rethink their models -- and lower the ratings on many of these investments.

Some structures were so opaque that markets couldn't value them. But ratings cuts sometimes forced an acknowledgment that securities owned weren't worth as much as thought. In May, Swiss bank UBS AG shut down a hedge fund after a $124 million loss. In June, two Bear Stearns hedge funds saw as much as $1.6 billion of investor capital wiped out by bad mortgage bets and pulled credit lines....

Fed officials believe that even if their policies led to housing and debt bubbles, the strength of the overall economy shows that the policy was, on balance, the right one. Of course, that assumes the current problems don't culminate in a recession...

Subprime borrowers who put no money down and so have no equity and live in non-recourse states have done rather well over the past five years: they have gotten really cheap rent for several years, and now can decide whether to renegotiate or move.

Many subprime borrowers in recourse states, or who had substantial equity, are in trouble as the teaser rates expire--but in foreseeable trouble, it's not as though long-term dollar interest rates have spiked (although they may yet)--unless the terms of their contracts were fraudulently misrepresented to them.


links for 2007-08-08


The Woosung-Shanghai Railway of 1876

From D.C. Boulger, China, Chapter XXIII, The Reign of Kwangsu:

China Text:: The viceroy of the Two Kiang gave his assent to the construction of a short line between Shanghai and the port of Woosung. The great difficulty had always been to make a start; and now that a satisfactory commencement had been made the foreigners were disposed in their eagerness to overlook all obstacles, and to imagine the Flowery Land traversed in all directions by railways. But these expectations were soon shown to be premature. Half of the railway was open for use in the summer of 1876, and during some weeks the excitement among the Chinese themselves was as marked as among the Europeans. The hopes based upon this satisfactory event were destined to be soon dispelled by the animosity of the officials. They announced their intention to resort to every means in their power to prevent the completion of the undertaking. The situation revealed such dangers of mob violence that Sir Thomas Wade felt compelled to request the company to discontinue its operations, and after some discussion it was arranged that the Chinese should buy the line. After a stipulated period the line was placed under Chinese management, when, instead of devoting themselves to the interests of the railway, and to the extension of its power of utility, they willfully and persistently neglected it, with the express design of destroying it. At this conjuncture the viceroy allowed the Governor of Fuhkien to remove the rails and plant to Formosa. The fate of the Woosung railway destroyed the hopes created by its construction, and postponed to a later day the great event of the introduction of railways into China...

David Pong (1973), "Confucian Patriotism and the Destruction of the Woosung Railway," Modern Asian Studies 7:4 http://links.jstor.org/sici?sici=0026-749X%281973%297%3A4%3C647%3ACPATDO%3E2.0.CO%3B2-W:

[T]he final decision to have this short 9 1/4 mile 30-inch gauge railway destroyed was made by Shen Pao-chen (1820-79), a modernizer... [who] had just completed an eight year term as the director-general of the Foochow Navy Yard.... In 1877... Governor-General of Liang-Kiang and Commissioner of Trade for the Southern Ports, he ranked with Li Hongzhang and Tso Tsungtang as the leading champions of 'self-strengthening'....

[...]

[S]oon after 20 October [1877], when the Chinese took possession of the line, Shen... ordered that the rails be torn up... was quoted as having said also that,

although the railway is a necessary development for China, I cannot allow those who come after me to be able to say, "[it] was built when Shen Pao-chen was Governor-General of Liang-King."...

[...]

[S]ince in the settlement regarding the railway, China had already paid it... why did Shen decide to dismantle it?... [O]wing to the location and nature of the railway, the mere change of ownership was not sufficient for th eremoval of the many threats to China's integrity and the Confucian social order.... [T]he railway would remain a potential threat to the advantages gained by the small-draught steamships fo the China Merchants' Steam Navigation Company. Given the character of Chinese local government, the continued existence of a railway between Shanghai and Woosung was liable to abuses, such as duties evasion or the illicit use of the line by foreigners to transport goods. It was mainly due to these considerations that the Chinese deemed it desirable to have the railway removed...

[...]

In a letter to Kuo Sungtao, Li Hongzhang ascribed the destruction of the railway to the narrowness of Shen's vision and his desire to acquire fame among anti-foreign elements...


Woytinsky!

Frivolous academic purchase of the month: W.S. and E.S. Woytinsky (1953), World Population and Production: Trends and Outlook and World Commerce and Government: Trends and Outlook (New York: Twentieth Century Fund).

Maury Obsteld next door says: "Ah! Woytinsky! You going to scan it all in and put it on your weblog?" World Commerce and Government--the smaller of the two volumes--clocks in at 907 pages.

It seemed that I was old enough and it was cheap enough that I deserved my own copy of Woytinsky...

There is one thing that is very sad. The very last page of World Commerce and Government shows that this was a library copy: it was stamped due back into the library by Jan 13, 1956; Jan 19, 1956; Jun 11, 1956; Oct 1, 1959; Jun 11, 1973; Jul 29, 1983; Jun 01, 1992; Sep 1, 1992; Sep 1, 1995. Which library? Harvard's Littauer Library of Public Administration. This is the copy of World Commerce and Government that I checked out the summer after my first year of graduate school, and returned at the end of July 1983. Littauer Library has gotten rid of it, and I now have it.

I hope it wasn't their only copy, but I don't remember seeing two...


Ezra Klein on Giuliani, the Press, and the Laffer Curve

Ezra Klein is fed up with Rudy Giuliani's Laffer-baiting and with the "uncritical stenography" of his journalistic enablers: Chris Cilizza, Michael Shear, Steven Braun, and Mike Glover.

Ezra Klein: Giuliani and the Laffer Curve: Giuliani's pro-Laffer musings are, of course, reprehensible, if not surprising. I'd bet large sums of money that Giuliani himself doesn't believe that it's merely a "liberal Democratic assumption that if you raise taxes, you raise more money," but like with his health care plan, is just adopting positions for their utility in attacking Democrats, rather than their integrity as policy plans.

This is only a viable approach for him because he's smartly manipulating two dynamics. The first is that the press won't call him on it. Read Matt's round-up of the uncritical stenography accorded to Giuliani's comments. If every time Giuliani uttered this bit of economic absurdity, the reporter appended a comment explaining that most economists consider this a laughable bit of hackish quackery, he'd stop saying it. They don't, so he doesn't. Which enables his whole campaign strategy: In the current media environment, all policy proposals are created equal. If you have something that sounds like a plan, you're allowed into the conversation as if you have a plan. Therefore, there's really no incentive to craft your policy proposals for maximum coherence and wisdom rather than maximum political advantage.

Giuliani's second enabler is the cowardice of his fellow candidates. These comments on the Laffer curve came at a GOP presidential debate. Anyone on the stage could've smacked him down. And one of the most visible of the participants, Mitt Romney, has hired Gregory Mankiw as one of his two primary economic advisors. That would be the same Gregory Mankiw who responded to pro-Laffer curve comments by McCain with a weary "unfortunately, fealty to the most extreme supply-side views is de rigeur in some segments of the Republican party." But his candidate, who surely knows better or Mankiw isn't doing his job, said nothing to contradict Giuliani. Not a word. One wonders why Professor Mankiw is lending his credibility to an individual so willing to abet the propagation of "extreme" views.

So you tell me: Why should Giuliani be honest? What's in it for him?

See also: http://matthewyglesias.theatlantic.com/archives/2007/08/laffer_press_roundup.php. Adam Nagourney gets a C- on this one, but the curve is high.


Impeach George W. Bush. Impeach Him Now

Matthew Yglesias reports:

Matthew Yglesias: Another classic "me or your lying eyes" moment as George W. Bush decides to contradicts Afghan President Hamid Karzai on the question of Iran's role in Afghanistan. Karzai, who only lives in Afghanistan and runs its government, calls Iran "a helper." Bush, though, says he's got it wrong.