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Somebody really should write a paper with that title next month.
Barry Eichengreen volunteers me...
naked capitalism: Lessons from Japan Versus Wishful US Prescriptions (Summers/De Long Edition): Finally, there is a longish post by Brad De Long on Summer's article, in which he uses as point of departure a simple construct first posted by Paul Krugman (admittedly, De Long pushed around this model in an earlier post at some length). Krugman posited that there might be an S-shaped demand curve (supply is vertical, since at any point in time there is a fixed amount of securities). He further reasoned that there was a high-priced equilibrium, and a low-priced one that could be induced by panic, and the Fed was trying to get back to the high equilibrium (for reasons of space, I did not replicate his so-called cartoons, but you can see them at his post). But he concluded:
But at this point a series of rate cuts and other stuff just hasn't done the trick -- which suggests that maybe there isn't a high-price equilibrium out there at all.....And in that case, the Fed can't rescue the financial markets. All it -- and the feds in general -- can do is to try to limit the effects of financial crisis on the rest of the economy.
Yet De Long blithely ignores the conclusion that Krugman reached, and by implication, so does Summers.
What about "bubble" don't you understand? That high priced equilibrium was not stable, it was created by unsustainable leverage. Per Herbert Stein, "That which is unsustainable will not be sustained." It is neither good economics nor good policy to try to keep an asset bubble aloft.
First, Paul's claim that "the Fed can't rescue the financial markets" if the good equilibrium in the Backwards-S model has disappeared like so:
is not complete. The Fed can't rescue the financial markets through Bagehot rule policies that provide a firehose of liquidity at a penalty rate. Such Bagehot-rule policies work only with a Stage I financial crisis, when the Backwards-S diagram looks like this:
Second, I do not ignore the claim that, as Yves Smith puts it: "What about 'bubble' don't you understand? That high priced equilibrium was not stable, it was created by unsustainable leverage. Per Herbert Stein, 'That which is unsustainable will not be sustained.' It is neither good economics nor good policy to try to keep an asset bubble aloft..."
I explicitly write:
Objection (3) is intellectually more interesting and substantive. But that will have to wait for the next lecture.
Yves Smith is making a version of Objective (3). And I do have an answer to it. But, to quote Gandalf the White, "I have no time!" I do hope to make some more time soon, however.
Evans 597 now looks like a very nice room to have a seminar in::
Abstract: Across the New World, the abolition of slavery was followed by a battery of laws restricting the labor market mobility of the newly emancipated. This paper models and estimates the impact of labor mobility restricting laws on African-Americans in the post-bellum U.S. South. Laws restricting job-to-job transitions increased the fraction of African-Americans relative to whites living in the rural sector and working in agriculture across the South. Increases in the ﬁnes charged employers for recruiting employed workers increased the duration of black labor contracts in a sample of Arkansas agricultural workers. Black agricultural workers who lived longer under labor control laws had a lower return to experience. These ﬁndings are consistent with a two-sector model of on-the-job search with mobility costs.
How could anyone possibly disagree with this, from Paul Graham?
How to Disagree: The web is turning writing into a conversation.... Many who respond to something disagree with it.... Agreeing tends to motivate people less than disagreeing. And when you agree there's less to say.... The result is there's a lot more disagreeing going on, especially measured by the word....
If we're all going to be disagreeing more, we should be careful to do it well... here's an attempt at a disagreement hierarchy:
DH0. Name-calling.... DH1. Ad Hominem.... DH2. Responding to Tone.... DH3. Contradiction.... DH4. Counterargument.... DH5. Refutation.... DH6. Refuting the Central Point....
Truly refuting something requires one to refute its central point, or at least one of them. And that means one has to commit explicitly to what the central point is. So a truly effective refutation would look like:
The author's main point seems to be x. As he says:
But this is wrong for the following reasons...
The quotation you point out as mistaken need not be the actual statement of the author's main point. It's enough to refute something it depends upon.
What It Means
Now we have a way of classifying forms of disagreement... while DH levels don't set a lower bound on the convincingness of a reply, they do set an upper bound. A DH6 response might be unconvincing, but a DH2 or lower response is always unconvincing.
The most obvious advantage of classifying the forms of disagreement is that it will help people to evaluate what they read. In particular, it will help them to see through intellectually dishonest arguments.... By giving names to the different forms of disagreement, we give critical readers a pin for popping such balloons.
Such labels may help writers too. Most intellectual dishonesty is unintentional....
But the greatest benefit of disagreeing well is not just that it will make conversations better, but that it will make the people who have them happier. If you study conversations, you find there is a lot more meanness down in DH1 than up in DH6. You don't have to be mean when you have a real point to make. In fact, you don't want to. If you have something real to say, being mean just gets in the way.
If moving up the disagreement hierarchy makes people less mean, that will make most of them happier. Most people don't really enjoy being mean; they do it because they can't help it.
He meditates on this graph:
The Clinton Firewall -- In These Times: The Race Chasm may sound like a conventional discussion of the black-white divide, but it is one of the least-discussed geographic, demographic and political dynamics driving the contest between Clinton and Obama... you are left with 33 elections that best represent how the black-white split has impacted the campaign... when you chart Obama's margin of victory or defeat against the percentage of African-Americans living in that state, a striking U trend emerges. That precipitous dip in Obama's performance in states with a big-but-not-huge African-American population is the Race Chasm--and that chasm is no coincidence.
On the left of the graph, among the states with the smallest black population, Obama has destroyed Clinton. With the candidates differing little on issues, this trend is likely due, in part, to the fact that black-white racial politics are all but non-existent in nearly totally white states.... On the right of the graph among the states with the largest black populations, Obama has also crushed Clinton.... "in the Democratic primary the black vote is so huge [in these states], it can overwhelm the white vote," says Thomas Schaller, a political science professor at the University of Maryland--Baltimore. That black vote has gone primarily to Obama, helping him win these states by big margins.
It is in the chasm where Clinton has consistently defeated Obama. These are geographically diverse states from Ohio to Oklahoma to Massachusetts where racial politics is very much a part of the political culture, but where the black vote is too small to offset a white vote racially motivated by the Clinton campaign's coded messages and tactics. The chasm exists in the cluster of states whose population is above 6 percent and below 17 percent black, and Clinton has won most of them by beating Obama handily among white working-class voters...
- George A. Akerlof (Aug. 1970). "The Market for 'Lemons': Quality Uncertainty and the Market Mechanism". Quarterly Journal of Economics 84 (3): 488–500 http://links.jstor.org/sici?sici=0033-5533%28197008%2984%3A3%3C488%3ATMF%22QU%3E2.0.CO%3B2-6
- J. Bradford DeLong, "Dealing with Adverse Selection in the Mortgage Market"
- Mark Thoma, "Adverse Selection, Loan Defaults, and Credit Rationing"
- J. Bradford DeLong, Comment on Lawrence Summers, "Safeguarding America's Economy from Adverse Consequences of Financial Crisis"
Suppose that a bank calculates that the net value of the mortgage to the bank as a fraction of its principal is equal to four years' interest minus the chance of default:
π = 4r - d
And suppose that the homeowners and homebuyers who come to the bank have a chance of default which is:
d = 15% + 20r2
Then bank profits expected from a typical homeowner and home buyer are:
π = 4r - 20r2 - 15%
Which means that a bank can make profits as long as:
5% ≤ r ≤ 15%
And if there are a bunch of competitive banks, and if homeowners can comparison shop, competition will push the interest rate down to 5% and a bit more. And the observed default probability will be 20%.
Now suppose that there is bad economic news: the default probability rises by 5% to:
d = 20% + 20r2
Then, the way I have rigged this scenario, interest rates rise to 10%: no bank can make money charging less than 10%, given the new, higher default probability--and the observed default probability will rise not by 5% but by 20%, to 40%. The big increase in default, you see, comes not from the bad economic news but from the fact that a lot of people who could still make their mortgage payments at the old interest rate cannot make them at the new one.
And if the default probability rises even more, to:
d = 21% + 20r2
then the market collapses. There is no interest rate at which any bank--even a monopoly bank--wishes to be in this business. No loans are made at all.
Suppose that at this stage the government steps in. "We," the government says, "are going to cap your default losses at 20%." Then banks look at the situation and once again discover that it is profitable to make loans at any interest rate above 5%. Competition chases the market interest rate back down to 5% again. There is a problem--at a 5% interest rate default losses are not 20% but rather 26%--and so the government has to kick in money. But maybe a 26% default rate with the government having to kick in some money is better than a 40% default rate from a cultural, sociological, political, and in the presence of aggregate demand externalities economic point of view. And surely it is better than a complete collapse of the mortgage market.
That is the logic behind Frank, Dodd-Obama, the Barr-Tyson plan being pushed by Hillary Rodham Clinton, and the other variants: that when the major cause of large-scale defaults is not the fecklessness of the borrowers but rather the fact that the market equilibrium has high interest rates that are themselves both the consequence and cause of high default rates, that the government has a market-making role to play by providing guarantees. This seems to me to be a good logic.
Here is Alan Blinder on this issue:
How to Cast a Mortgage Lifeline?: THE financial markets are downright scary. And it seems unlikely that we can extricate ourselves from the current series of rolling financial crises without improving the situation in three related markets: those for houses, mortgages and securities based on mortgages. In a previous column for Sunday Business, I advocated one possible approach: creating a modern version of the Home Owners' Loan Corporation.... How would it work in practice? Let's concentrate on six major design issues:
STRUCTURE The original HOLC bought mortgages outright. But Representative Barney Frank, the Massachusetts Democrat, and Senator Christopher J. Dodd, Democrat of Connecticut, the chairmen of the two banking committees of Congress... would use a beefed-up Federal Housing Administration to guarantee new mortgages -- issued, say, by banks -- instead of buying up old ones. The effects would be much the same: old, unaffordable mortgages would be replaced by new, affordable ones; and the government would then assume the risk of default. But in the Frank-Dodd proposal, the federal government would be a big insurer rather than a big bank. Because the approach actually has a chance of becoming law, let's adopt its structure.
BAILOUTS The Frank-Dodd plan for a Super F.H.A. is intended to make a bad situation better. But it must not be too generous in shielding people and businesses from the consequences of their own bad decisions -- both for economic reasons (to minimize moral hazard) and for political reasons (to gain voter support)... existing mortgages would be bought below face value, forcing investors to, as they say in the trade, "take a haircut"... [and] the proposal would make homeowners relinquish part of any price appreciation on their houses for as long as their Super F.H.A. mortgages remain in effect....
LEGAL SAFE HARBOR The Super F.H.A. would have to deal with legal complexities.... Servicers are petrified of lawsuits if they sell individual mortgages... at a loss.... Congress must pass legislation shielding servicers from legal liability when (as now) market conditions depress prices....
SETTING PRICES The HOLC bought pre-existing mortgages at a discount. The Super F.H.A. would use government guarantees to induce private businesses to do so. In either case, we need prices for the old mortgages.... My suggestion is that the Super F.H.A. categorize the mortgages it might refinance into, say, "high," "medium," and "low" qualities... adjust those prices according to whether mortgage owners rush in to sell (meaning that the prices were set too high) or stay away (meaning that the prices were set too low)....
SUNSET Emergency measures must not outlast emergencies....
ELIGIBILITY AND SCALE How large should the mop-up operation be? Mr. Frank and Mr. Dodd are thinking about one million to two million mortgages, but they understand that a larger number might be necessary to stem the downward spiral....
The urgency of creating something like the HOLC or a Super F.H.A. has grown, not shrunk, since I wrote my previous column.... [T]he Frank-Dodd proposal... offers a smart approach to a knotty set of problems.... Their design is not flawless. But do you know of any perfect solutions? It deserves our support.
Hoisted from Comments: Tom R asks:
Grasping Reality with Both Hands: Economist Brad DeLong's Fair, Balanced, and Reality-Based Semi-Daily Journal: There is one thing I don't understand in all this. If financial institutions are undercapitalized, i.e lack liquid assets, but are in all other regards viable, why don't owners of liquid capital (read W Buffett) buy them and hold the assets until the income stream makes them whole with nice profits to boot.. Of course I know that there are times when this does not happen, i.e. now, but what does this say about the capitalist system? Can we stipulate that capitalism in inherently flawed? Is the flaw behavioral? (We have nothing to fear but fear itself?)
The way Larry Summers puts it is roughly as follows:
At the level of each individual bank, each individual bank that finds itself overleveraged is more-or-less indifferent between whether it solves that overleverage problem by raising more capital or by shrinking the volume of loans it makes and the amount of bonds it holds. But all the rest of us would much, much rather that the banks as a whole raise capital rather than cut back on their assets.
There is a Keynesian aggregate demand externality roaming about here...
Maybe I will use Mark Thoma's model in lecture tomorrow morning:
Economist's View: Adverse Selection, Loan Defaults, and Credit Rationing: What is the source of foreclosures, interest rate resets or falling prices? In this post, I said:
It's easy to explain how interest rate resets could increase foreclosure rates since the monthly housing payment will change as a result of the reset, but why do falling prices cause increased foreclosures? Falling prices don't change monthly payments, so why do more people default?
The post then explains how falling prices can increase defaults and Richard Green provides academic work supporting the mechanism.
But falling prices and interest rate resets are not mutually exclusive explanations for rising foreclosure rates, both could be at work, and Brad DeLong presents a model that explains how, through adverse selection, rising interest rates can cause increases in defaults.
The purpose of this post is to further illuminate Brad's discussion and to explain how the adverse selection mechanism operates.
To do so, rather than try to impress all of you by building my own model, I'll avoid reinventing the wheel and will instead base this discussion on a version of the Stiglitz and Weiss (1981) model presented in Carl Walsh's Monetary Theory and Policy text (so full credit should be given to those authors). The presentation is mathematical, but along the way I will try to provide the intuitive underpinnings, so hopefully the points will be clear even if the mathematics is not.
The basic point of the model is to illustrate two things. First, how an increase in the interest rate can increase defaults. This is the main point. Second, how equilibrium credit rationing can occur, i.e. how financial markets can settle on an equilibrium where there are buyers willing to take out loans at the going interest rate, but nobody willing to lend them money at that rate, and the excess demand for loans is not resolved through rising interest rates.
I should add that there are other mechanisms that can be used to explain these results, moral hazard and monitoring cost models for example (e.g., as interest rates increase, borrowers are induced to take on more risk in moral hazard models, and the increased risk taken on by borrowers increases defaults) so this should not be considered exhaustive.
1. The model contains a single type of lender, and different types of borrowers. The lender's expected return on loans is a function of the interest rate and the probability of repayment. The probability of repayment will vary across individuals.
2. Borrowers come in two types:
Type g: this type repays loans with probability qg
Type b: this type repays loans with probability qb
It is assumed that qg > qb, so that the good borrowers (g types) are more likely to repay than the bad borrowers (b types).
3. If lenders can observe the type of borrower they are lending to, they will charge each a different interest rate to reflect differences in risk, and the market will clear without credit rationing. It will be fully efficient.
4. For example, we'll assume the supply of credit is perfectly elastic (the supply curve for credit is horizontal):
Assuming risk neutral lenders, and that they lend to a large number of borrowers (so the law of large numbers applies), the lender will charge r/qg to the good borrowers, and r/qb to the bad borrowers and will realize an expected return of r for each group (i.e., the lender receives r/q with probability q so the expected return is q(r/q)=r). There is no credit rationing, the lender simply charges risky borrowers more than good borrowers to compensate for the extra risk.
5. Now assume the lender cannot observe the different types of borrowers. What we will now show is that as the interest rate, r, increases, the fraction of bad borrowers in the loan applicant pool also increases, so the probability of default goes up.
That is the main point - when interest rates rises, the good borrowers drop out (this is the adverse selection mechanism, the good borrowers self-select out of the pool leaving a greater fraction of risky borrowers in the market).
But we can also get equilibrium credit rationing with this as well. Here's how. As r increases, the return to the lender goes up, so an increase in r increases profit. But, as we will show, the increase in r also causes the fraction of bad borrowers to go up and this increases the default rate and lowers profit. So, the net effect of an increase in r on profit depends upon which of these two effects is stronger, the increase in profit from charging a higher interest rate, or the decrease in profit from higher defaults.
To get rationing, what we have to show is that as r increases, initially profits go up since the higher price effect dominates the increase in defaults. But there comes a point in the lender's profit function where any further increase in r is not profitable, the loss from defaults increasing is larger than the profit increase from the higher interest rate, so the lender won't raise the interest rate even if there is an excess demand for loans at the current r being charged in the marketplace.
This is the credit rationing. Even if there is excess demand for loans, the lender will not raise r above the critical value of r, call it r*, where profit begins falling.
Let's show this mathematically.
6. Let g be the fraction of good borrowers among all borrowers. In order to earn an expected return of r, the lender charges borrowers (which cannot be distinguished and hence face the identical loan rate) r1 such that:
gqgr1 + (1-g)qbr1 = r = expected return if lender charges r1 to all types.
The lender should charge:
r1 = r/[gqg + (1-g)qb]
7. Using this strategy, the lender will thus earn r if borrowers are chosen (walk through the doors of the bank) randomly. But they don't show up randomly, so this is not the end of the story.
Notice that r/qg < r1< r/qb. Good borrowers are paying too much, and bad borrowers are paying too little. Thus, good borrowers are more likely to drop out of the market, and the fraction of good borrowers will diminish over time increasing average default rates (perhaps because they are good borrowers they can find other, cheaper ways to finance investment) .
This is a classic lemons problem and it will lead to market failure, a failure that, in this case, expresses itself as equilibrium credit rationing.
8. Now let's change the model slightly to illustrate rationing. Loans are characterized by more than just the interest rate, and here we will characterize loans by three parameters, the interest rate lenders charge on loans, r1, the size of the loan L, and the required collateral on the loan, C.
9. The probability that a loan is repaid depends upon the return yielded by the borrower's risky project. Let a particular project yield a return of R. Then the lender will be repaid if
L(1 + r1) < R + C
That is, the lender is repaid if the value of the loan is less that what the borrower has to give up in default (the lender gets to claim any return, R, that the borrower made on the project plus the value of the collateral). This just says that the borrower repays when losses are smaller from doing so.
10. Now suppose that the return, R, is risky:
Return R = R1+x with probability 1/2
Return R = R1-x with probability 1/2
Then the expected return is R1, and the variance of returns is x2. As x increases, there is a mean-preserving spread in the distribution, i.e. risk goes up, but the expected return is not changed.
11. Next, to limit the outcomes to the ones we are interested in, assume that
R1-x < (1+r1)L - C
This means that the borrower will always choose to default when a bad outcome is drawn (-x), and will always repay when there is a good outcome (+x).
12. Thus, under a good outcome the borrower earns
R1+x - (1+r1)L
(this is the return on project minus the cost of the loan) and under a bad outcome, the borrower loses -C, i.e. loses the collateral on the loan.
13. Then the borrower's expected profit is
EπB = (1/2)[R1+x - (1+r1)L] + (1/2)[-C]
[The superscript means borrower]. That is, the borrower gets the good outcome shown in the first set of brackets 1/2 the time, and the bad outcome of -C shown in the second set of brackets the other half of the time.
14. Define x*(r,L,C) ≡ (1+r1)L - C - R1. That is, x* is the value of x such that EπB > 0 whenever x > x*, and EπB < 0 whenever x < x*. It's the point where profit turns negative.
Another way to say the same thing is that, with x* defined in this way, EπB = (1/2)(x-x*). x* gives the level of risk (how big the bad outcome must be, i.e. the size of x) where it becomes worthwhile for the borrower to walk away from the loan and default.
15. Notice that x* is increasing in r1. This means that as r1 increases, those with smaller x values drop out (i.e. those facing less risk), but the riskier borrowers (those with larger x values) remain in the pool. The mix of borrowers changes toward riskier borrowers and defaults will increase.
16. What about the lender? The lender's expected profit is
EπL = (1/2)[(1+r1)L] + (1/2)[C+R1-x] - (1+r)L
The first term is the return in the good state, the second is the return in the bad state (both happen with probability 1/2), and the third term is the opportunity cost of the funds it lends out (so the return is r, not r1, since the opportunity cost is the market return, r).
That is, the lender receives a fixed amount in the good state, (1+r1)L, but as x increases, the lender does increasingly worse in the bad state where it receives C+R1-x (i.e. as x increases, profit falls). This means that EπL is decreasing is the level of risk, x.
17. Now, let there be two groups of borrowers . Good borrowers are low risk (have small x values), bad borrowers are high risk (have large x values). Designate the x-values for each group as xg and xb, where xg < xb.
From the condition that EπB = (1/2)(x-x*), if r1 is low enough,
xg < xb < x*(r, L, C)
In this case, all loans are repaid, and all loans are profitable. If each type of lender is equally likely to be in the market, then expected profit for the lender is
EπL = (1/2)[(1+r1)L+C+R1] - (1/4)[xg + xb] - (1+r)L
This is increasing in r1.
18. But, as r1 increases, we will eventually reach the point where xg = x*(r, L, C) and the good types drop out of the market and stop borrowing (this is adverse selection at work). In this case, expected profit falls to
EπL = (1/2)[(1+r1)L+C+R1] - (1/2)[xb] - (1+r)L
Thus, EπL falls discretely when xg = x*, i.e. profit falls discretely when r1 increases and reaches
r1 = (1/L)[xg - C + R1] - 1
since this is the point where low risk types exit the market (the discrete jump comes from having two groups - with a continuum of risky borrowers, the discrete jump would be replaced by a maximum profit point, i.e. a single-peaked profit function).
19. We can show this graphically:
For loan rates between 0 and r1, no loans are profitable and none will be made. For loan rates between r1 and r*, both types of borrowers are in the market, and all loans are profitable (and profit is increasing in r).
For loan rates between r* and r2, loans are unprofitable, so no loans would be made. For loan rates above r2, loans are profitable, but only the risky group will be in the market.
Thus, credit rationing is possible at equilibrium. If loan demand is robust, lenders will increase r until it hits r*. At r*, there can be excess demand, but lenders will not raise the loan rate unless demand is so strong that rates can be profitably increased all the way to r2. Thus, if demand is strong enough to produce excess demand at r1, but not strong enough to push rates all the way to r2 or above, there will be credit rationing at equilibrium.
We have shown two things. First, when the interest rate increases, adverse selection mechanisms can cause good borrowers to drop out of the loan pool increasing the riskiness of the average borrower. This increases default. Thus, this shows how an increase in the interest rate can increase default rates.
[Note: I wouldn't apply this model directly to mortgage markets as is, interest rate resets would be modeled a little bit differently, but the basic mechanism would be the same and is well illustrated by this and Brad DeLong's example.]
Second, the adverse selection mechanism can explain the presence of equilibrium credit rationing. There are other explanations too, e.g. moral hazard and monitoring cost models can explain equilibrium credit rationing, so there are other ways to get this result.
Larry Summers hopes that the current financial crisis has passed its peak:
Steps that can safeguard America's economy: Neither US financial institutions nor the economy are likely to suffer from a lack of central bank liquidity provision. New lending facilities are coming along almost weekly, the safety net has been expanded to include non-bank primary dealers, the Fed has demonstrated a willingness to take on directly the most problematic parts of Bear Stearns' balance sheet, and the Fed funds rate has been reduced by 200 basis points within 7 weeks.... [P]rocesses are in motion that may lead to new demands for more than $1,000bn in mortgages, directly or indirectly. Recent regulatory actions will enable Federal Home Loan Banks along with Fannie Mae and Freddie Mac (the government-sponsored enterprises) to purchase more than an additional $300bn in mortgage-backed securities... legislation to reduce foreclosures being pushed by Senator Christopher Dodd and Representative Barney Frank could result in the federal government purchasing or providing guarantees that enable the purchase of several hundred billion dollars worth of mortgages.
The confidence engendered by all of this has led to some normalisation in credit markets.... For the first time since last August, I believe it is not unreasonable to hope that in the US, at least, the financial crisis will remain in remission.... Just as cascading liquidations have contributed to a vicious cycle of both real and financial contraction, it is possible that recovery can be a virtuous circle in which improved financial and real economic performance are mutually reinforcing.
Wise policymakers hope for the best but plan for the worst... markets continue to price in significant probabilities of default for even the most apparently strong financial institution... the federal government is bearing credit risk in extraordinary ways through its implicit guarantee to the GSEs, the lending activities of the Fed and the general backstop it is providing to the financial system... a priority for financial policy has to be increases in the level of capital held by financial institutions....
The policy approach should start with the GSEs.... It is appropriate at a time of crisis in the mortgage markets that they become, as their regulator put it last week, the "lender of first, last and every resort."... It is not appropriate that their shareholders' "heads I win, tails you lose" bet with the taxpayer be expanded for this purpose... their regulator... should insist that they stop paying dividends and raise capital promptly and substantially as they expand their lending....
Because they do not have a similar public mission and are operated with more financial rigour and closer regulation, the situation is somewhat different with respect to other financial institutions.
As part of its dialogue with financial institutions, the Fed should push for further efforts to raise capital... destigmatise cutting dividends or raising equity. The idea of linking access to Fed credit and measures to attract capital should also be explored. At a time when much is being given to financial institution shareholders and management, action to help the economy and protect the taxpayer should be expected in return.
What is the analysis that underlies this argument?
Start with a version of Bernanke-Gertler: financial intermediaries can operate in one of two modes: well-capitalized or poorly-capitalized. When financial intermediaries are well-capitalized, they themselves have little problem borrowing on a large scale and serving as conduits for the flow of funds between savers and investors. Thus market demand for risky financial assets is relatively high:
And, given the (fixed in the short run) supply of risky financial assets like mortgages and private-sector bonds, the prices of such financial assets are relatively high as well--which gives businesses an incentive to expand their capital stocks and thus put people to work in the investment-goods industries:
But there is another mode of operation: if financial intermediaries are poorly-capitalized they themselves will have great problems borrowing--savers will fear the moral hazard problems that arise when those who manage their money don't themselves have a large stake in the game, and a financial intermediary without a large equity cushion leads savers to ask the American question "if you're so smart, why aren't you rich?" and shy away. So if financial intermediaries are poorly-capitalized, supply and demand looks very different:
with low demand for financial assets, a low equilibrium price of financial assets--and no incentive for businesses to expand their capital stocks, and mass unemployment, and depression.
The kicker is that large declines in the prices of financial assets--a panic--can switch financial markets from one mode to the other, because their is a large range over which declining prices do sufficient damage to financial intermediaries' capital and reputation to cause the demand curve to slope the wrong way--in what I was taught to call the "Krugman Backwards-S" demand curve:
which produces two stable equilibrium--a good, high-price, high-investment, full-employment one, and a bad, low-price, low investment depression one. The task of central banking is to keep the financial markets and the economy at the good equilibrium, and keep it from jumping to the bad one.
Now let's jump back in time to 2001-2002. It is the aftermath of the collapse of the tech boom and of 911. The Federal Reserve has lowered interest rates to try to forestall deflation and keep the economy near full employment. By lowering interest rates it made safe assets less attractive, and thus pushed demand for risky assets outward--raising the prices of (which is the same thing as lowering the interest rates of) risky financial assets:
The outward push became larger because of two additional factors: Asia's policy of low-currency valuation and thus of providing interest-rate subsidies to America's borrowers, and relaxed lending standards coupled with real estate exuberance. In an environment in which any newly-created financial asset could be sold for a high price, construction companies undertook to build lots more houses--and thus pushed the supply of financial assets out to the right between 2002 and 2006 as all of these new houses--3 million more than trend construction--needed mortgages:
Now comes 2007 an end to irrational exuberance and a little bit of bad macroeconomic news pushes demand for financial assets back to the left. At first--last summer--the Federal Reserve thinks that its job is simply to maintain confidence, to keep the economy at the good equilibrium by making everybody understand that the Fed was not going to let the economy get to the bad, depression equilibrium. But over the fall it became clear that such "Panic Stage I" policy wasn't going to be enough:
Providing liquidity to the market in order to maintain confidence--following Bagehot's rule of lending freely at a penalty rate to organizations that could offer collateral that would be acceptable in normal times--wasn't going to be enough to avoid a depression because it was no longer a matter of maintaining confidence that banks and other financial intermediaries were and would remain well-capitalized. Why wasn't it enough? Because they weren't well capitalized.
So over the winter the Federal Reserve moved on to "Panic Stage II" policy: fight the possibility of deflation and depression by doing what they did in 2002, and lowering safe interest rates in order to boost private-sector demand for risky assets. And that gets us to today, where the Federal Reserve has done almost all that it can do in the way of reducing interest rates on safe assets, and yet financial markets are still not calmed, are still not confident that the good equilibrium exists.
What do we do now? That is the subject of Larry Summers's column. We do two things. First, we have the Federal government reduce the supply of risky financial assets by having the government buy or guarantee (thus making the assets no longer risky, you see) or support the purchase of mortgages (and other things) and so push the private financial-sector supply of financial assets to the left. Second, we have the Federal government "encourage" the financial sector to recapitalize itself, thus pushing the supply up and to the right, like so:
And so pushing up the prices and reducing the interest rates charged on financial assets, making the good equilibrium reappear, and keeping us out of depression, like so:
That, in a nutshell with simple graphs, is what Larry is saying, with the addition that he thinks that we now have in motion enough policy moves to resolve the crisis and save the world economy from depression. But there are four additional points that don't fit easily on the graphs. We need to make sure that we also:
- do smart things to try to keep this from happening again
- assign blame and try as hard as we can--without causing a depression--to make sure that those who bear responsibility don't make out like bandits by looting the Treasury as this is accomplished.
- make sure that others--even if they are still largely innocent bystanders at the moment--do not earn unjustified windfall fortunes in the process.
- make sure that the upward-and-to-the-right orange-arrow movement of the supply curve does in fact take place: make sure that financial intermediaries that survive and profit because of government intervention become not just part of the problem but part of the solution: that because "much is being given to financial institution shareholders and management, [it is only fair that much] action to help the economy and protect the taxpayer... be expected in return."
Now there are three objections to this analysis and this plan of action, roughly: (1) it's immoral, (2) it's unfair, and (3) it can't work in the long run. To expand a bit:
- It's immoral because people have a right to be treated like adults--which means that they have a right not to be rescued by the government from the consequences of their bad judgment, and we are violating that right.
- It's unfair because feckless greedy financiers who caused the problem ought to lose money and aren't-or aren't losing enough money--and because feckless greedy imprudent thriftless borrowers who caused the problem ought to lose money and aren't--or aren't losing enough money.
- It won't work--at least not in the long run.
I dismiss objection (1). It is made, mostly, by those who speak for the Princes of Wall Street. Note that the Princes of Wall Street themselves are not opposed to what the Federal Reserve and the Treasury and the congress doing--anything, anything at all that promises to raise asset prices is something that each of the Princes of Wall Street would trade at least one of their organs of generation for. But those who speak for the Princes of Wall Street--well, they really believed that the Princes earned their fortunes by virtue of their virtue--their intelligence, their nerve, their skill, and their willingness to run great risks for great rewards. The idea that there is a public safety net to catch the Princes when they all fall off the tightrope at once--that they are not actually rugged Randite individualists running great risks--that they are people in the right place at the right time with enough low animal cunning to cover themselves with glue and then step outside at 57th and Park or on Canary Wharf as the money blows by so that a bunch of the money sticks to them--well, this strikes those who speak for the Princes of Wall Street on the editorial page of the Wall Street Journal or in Investors' Business Daily as a betrayal of the moral order.
The response to objection (1) is that the people who make it need to grow up. There is no more a John Galt or a Jane Galt than there is a Santa Clause. There are no Randites in a financial crisis--or no even quarter-sane Randites. The fact that there is a safety net in a financial crisis is something that has been obvious to everything with a spinal column for at least a century and a half--that's what central banks are for, for Jeebus's sake! The Princes of Wall Street did not earn their fortunes by virtue of their virtue, their intelligence, their nerve, their skill, and their willingness to run great risks, et cetera, et cetera, low animal cunning, glue, money sticks as it blows by.
Later on we can talk about the corollary to the refutation of objective (1)--the fact that the existence of a safety net for the rich since 1844 makes it an obvious matter of simple justice that there be a safety net for the poor and the middle class as well, and that Harvard University would have been better served if it had taken Robert Nozick's slot away from the philosophy department so that he would not write Anarchy, State, and Utopia and given it to the economics or the history department. But that's for later, and for the present it's important to make sure that people who argue for tax cuts for the rich or for welfare-state program cutbacks for the poor or for more slots for libertarian political philosophers in elite universities should not be allowed to disrupt the formulation of public policy when there is serious busienss to be done.
The response to objection (2) is "tough." Yes, it is important to design the elements of the rescue package in such a way as to give as few windfalls as possible to the undeserving feckless, greedy, imprudent, thriftless, et cetera. But as Federal Reserve vice chair Don Kohn says, it is bad public policy to hold the jobs of tens of millions hostage in an attempt to teach a few feckless financiers (or even somewhat more thriftless borrowers) even a much-deserved lesson.
Objection (3) is intellectually more interesting and substantive. But that will have to wait for the next lecture.
Matthew Yglesias writes:
Matthew Yglesias: Reliability: Asked how to choose a good mechanic, Tyler Cowen responds that you should buy a Honda or a Toyota and you probably won't need a mechanic to do anything beyond the super-routine. I've never owned a car, but in second-hand anecdotal terms that definitely seems to be the case -- folks who own Hondas or Toyotas, even pretty cheap ones, rarely have problems whereas American cars are plagued with reliability issues. This often strikes me as an under-analyzed element in the saga of American deindustrialization; maybe it's not even true that American durable goods are far less reliable than Japanese brands, but it's certainly what a lot of people think.
Well, we've bought two Hondas (Acuras, actually), one Toyota, one Subaru, one Volvo, one Ford, and one Chevy.
The Toyota is still too new to have a view, but so far no problems at all...
The Hondas have been wonderful...
The Subaru had one mysterious problem that went away when we did the 30K service 5K early, and has not returned...
The Volvo was unpleasant--but not because of the Swedes. The dealership in Arlington VA had installed a remote entry/alarm that fouled up the elecrical system somehow...
As for the Ford and the Chevy, our experience--well, it would take not just money but guns and lawyers as well to induce us to buy another one.
Shannon Brownlee writes:
Let's Stop Running Scared: I have no plans to monitor my cholesterol, undoubtedly to my doctor's consternation. Why bother? I'm already watching my weight, exercising regularly and eating a healthful diet, and I don't want to take medications that offer little if any protection against heart attacks for people whose only risk factor is elevated cholesterol...
Ummm.... As I understand it, if a woman in her 50s has cholesterol of 250-40 as opposed to 150-60 (total-HDL) and no other risk factors, her ten-year risk of heart attack is higher by one percentage point.
Avoiding a heart attack seems to me to be worth at least $100K. Reducing the chance of a heart attack by one percentage point seems to me to be worth $1K over ten years--or worth spending $100 a year.
Thus it seems to me that including a cholesterol test in your every-two-years blood screening and adding a pill to your morning vitamins if the cholesterol numbers are going south in a serious way--even with no other cardiac risk factors--is a good idea.
What am I missing?
Daniel Davies points us to:
'Iceman' Wrestles Shark To Save Shipmates |Sky News|World News: An Icelandic fishing captain, known as "the Iceman", wrestled and killed a 300kg shark to stop it attacking his crew, according to witnesses. Captain Sigurdur Petursson was on a beach in Kuummiit, east Greenland, watching his crew processing a catch when he saw the shark swimming towards his men. The skipper of the trawler Erik the Red, ran into the shallow water and grabbed the shark by its tail with his bare hands. He dragged it off to dry land and killed it with his knife...
D-squared Digest -- FOR bigger pies and shorter hours and AGAINST more or less everything else: Let it further be resolved: Bear vs Shark (ie, who would win in a fight between a bear and a shark if the fight was staged in a pool of water deep enough for the shark to manouevre, but shallow enough for the bear to be able to stand up) is apparently a subject of controversy among the violence-loving, animal-hating, crap-talking community. I can settle this one. Bear, by a mile. The shark gets one good bite, maximum, and then gets mullered. Proof. Sigurdur Petursson is by all accounts a reet hard bastard, even by the standards of Icelandic trawlermen, but he is not as strong as a bear.
Yeah. But a bear's claws and fangs aren't as sharp and long as a knife, either...
Louise Armitstead of the Torygraph:
Hedge fund legends hit by financial crisis: Soon the Griffins boasted a dining-room chandelier by glass artist Deborah Thomas, two installations by potter-sculptor Edmund de Waal (including a complete room of more than 600 porcelain vessels), and an architectural version of a Morandi painting.... Tisbury, a $2.7bn (£1.35bn) event-driven fund... Griffin... archetypal hedge fund manager: aggressive, arrogant and nearly always right.... The latest bite of the credit crunch has caught Griffin offguard... down 8 per cent in the first two months of the year.... Hamstrung by the lack of liquidity... new terms with his prime brokers, beg for patience from investors and offered his business for sale to bigger rivals, including GLG Partners....
Peloton Partners, the award-winning fund run by ex-Goldman Sachs star Ron Beller, imploded. Focus Capital, another EuroHedge fund of the year, wound up days later... Carlyle Capital Corporation.... John Meriwether, the man behind the collapse a decade ago of Long Term Capital Market... JWM Partners is struggling with losses of 28 per cent this month.... "This is just beginning. Somewhere been 40 and 100 hedge funds will liquidate shortly. It's a bloodbath and it will get worse."
Already investors are showing their fury. One said: "I thought volatility was what hedge funds lived for? Making money, or at least preserving cash, during volatile times is certainly what we pay them for. They have been poncing around during the good times and are now found wanting at the first sign of trouble. It's a debacle out there.".... Hedge funds have been blamed for all market woes from the implosion of Bear Stearns three weeks ago, the collapse of HBOS's share price days later and now the weaknesses of the entire Icelandic economy....
Just a few months ago these were the best brains in finance. Now they are being exposed as average fund managers at best, and potential market manipulators at worse. How many more pretenders are there out there and how much more chaos will their demise bring to the rest of the markets?... Scrambling to cope with the next stage of the credit crunch, bank bosses ordered their prime brokerage and repo departments to comb through their books again and slash risk exposure. Lending lines have been cut, just as the funds needed them most to cope with the volatility.... While hedge funds have traditionally used two or three times leverage in their funds, this figure has been multiplied to eight or nine times in many cases - and even more in some. One prime broker said: "Hedge funds have had it easy. Every man in a pink Cadillac has been able to raise money, start a fund and do really well. Frankly, those who have taken the biggest risks have come off best because markets have been so extraordinarily kind."...
The leverage that magnified gains in the rising markets has had the same impact on the way down. Weaker funds were the first victims.... Beller... often boasted that Peloton was sailing close to the wind. "I once asked Beller how he would cope if the market suddenly turned and he was forced to mark to market. He said he'd be in trouble but that would never happen." Focus Capital... EuroHedge industry award... returning more than 100 per cent in 2006. O'Brien and Bubb told investors that they had been the victims of the credit crunch and short selling.... Endeavour Capital, run by former Salomon Smith Barney fixed-income traders... 27 per cent of the value of the $3bn fund had been wiped out... 18 times leveraged.... Platinum Grove, the $5.5bn New York-based hedge fund set up by former Long Term Capital Management co-founder Myron Scholes, fell 7 per cent... London Diversified had lost between 4 per cent and 5 per cent... founders, led by David Gorton, famously took £55m in management fees... in 2004...
What's really going on? What's going on is that perhaps $6T of mortgages with a duration of a decade that had been priced at a 1% per year chance of default (with a 1/3 value haircut in the event of default) are now being priced at a 4% per year chance of default. That's a loss of $600B in market value--and if your share of that $600B is greater than your capital, or is thought to be greater than your capital and so impedes your operations, you are gone.
But truth be told it is a zero-sum game--not a real destruction of wealth. The real rates at which cash flows of constant risk are being discounted haven't changed much: there hasn't been a big redistribution of wealth between the present and the future. What has happened was that a bunch of people believed that the default risk was 1% when it was actually 2% and reported gains of $200B (of which they took 2-and-20 on the hedge fund slice, perhaps $20B, for themselves), and that now a bunch of people believe that the default risk is 4% when it is actually still 2% (unless, of course, the assembled central banks of the world fail and unemployment heads rapidly upward). So in aggregate hedge fund partners have gained $20B, hedge fund investors have paid$20B to their money managers for the privilege of losing another $200B that they never had, and there are $400B of transitory paper losses that will turn into real losses for those overleveraged and caught by the credit crunch and so forced into fire sales, and into real gains for those with steel nerves and liquidity.
Unless, of course, Ben Bernanke and company fail to contain the crisis, and we wind up in a severe depression. But then we would have much, much bigger things to worry about than $600B of missing paper mortgage value. 4 years x 3 percent excess unemployment x Okun's Law coefficient of 2 x $13T economy means a $3.1T cumulative Okun gap in lost real wages, salaries, and profits. That's the thing to worry about.
Barry Ritholtz points us to the owl-like Teresa Nielsen Hayden::
The Big Picture: My own policies are clearly stated here, but I like the description of how to get your comments banned over at boingboing:
Q. What's likely to land me in your bad graces? A. Since you've asked, here's a nowhere-near-exhaustive list... http://www.boingboing.net/2008/03/27/boing-boings-moderat.html
The Washington Post, for no reason anybody can explain to me, gives airtime to James Carville so Carville can explain that he was right to call Bill Richardson a "Judas" because Bill Richardson was obligated not to endorse Barack Obama:
I was a little-known political consultant until Bill Clinton made me. When he came upon hard times, I felt it my duty -- whatever my personal misgivings -- to stick by him. At the very least, I would have stayed silent. And maybe that's my problem with what Bill Richardson did. Silence on his part would have spoken loudly enough...
Bill Richardson served in the U.S. House of Representatives from 1983-1997, was U.N. Ambassador from 1997-1998, Secretary of Energy from 1998-2001, and has been governor of New Mexico since 2003.
Why oh why can't we have a better press corps?
Four years, Washington Post, four years.
Nick Barrowman gave his weblog a somewhat deceptive name:
So he tries to recover:
From Paul Davies of the FT:
FT.com / Home UK / UK - Credit crunch leaves mark on all debt market areas: Global debt issuance collapsed in the first quarter as the credit crunch took its toll on new deals in all sectors from structured finance and riskier high-yield bonds and loans right up to sturdy investment-grade corporate debt, according to new data.
Total debt market volumes were $1,030bn in the first quarter, a 48 per cent drop compared with the same quarter a year ago, while total syndicated loan market volumes were $599.bn, a 47 per cent drop versus the same period last year, according to Dealogic, the data provider.
The numbers illustrate how the withdrawal of liquidity from the world's debt markets in the wake of the turmoil that began in the US mortgage markets has affected everything from the safest corporate borrower to the most risky private equity backed leveraged buy-out deal.
You'd think installing the guy and having 150,000 troops there to underwrite his government would at least buy American forces a heads up. You'd be wrong.
Outsourced to Matthew Yglesias, who reads Erica Goode so the rest of us can escape uninjured:
Matthew Yglesias (March 28, 2008) - Know Your Enemy (Foreign Policy): New York Times: "Mr. Bush also accused Iran of arming, training and financing the militias fighting against the Iraqi forces." Would it have killed the Times to point out that Iran is also arming, training, and financing the militias fighting alongside the Iraqi forces? After all, the government of Iran has extremely cordial relations with the government of Iraq and our main militia allies in Iraq were literally created in Iran by the Iranian Revolutionary Guard. This context certainly seems relevant.
Meanwhile, is there any real precedent for the sort of repeated misstating the identity of the enemy that we've seen from the Bush administration? Recall that it took years for the administration to grudgingly acknowledge the existence of a non-AQI Sunni Arab insurgency even though this insurgency had long been the US military's primary adversary. But now we're supposed to believe that everyone we and our Iranian-backed allies fight are Iranian. Sure.
Why oh why can't we have a better press corps?
Matthew Yglesias writes:
Matthew Yglesias: Northern Ireland: Here's a nice rundown of the Clinton campaign's Northern Ireland mumbo-jumbo. I think what her husband's administration did there was a very legitimate achievement and very much highlights some of the shortcomings of the George W. Bush approach which has no comparable examples of constructive U.S. engagement in the troubles of the world. It also highlights John McCain's catastrophically poor understanding of foreign affairs as, at the time, he denounced the Northern Ireland initiative as a sellout of a key U.S. ally doomed to failure.
So it's not a bad issue for Clinton to raise, in its way. But she wants to raise it as an example of her personal foreign policy chops and the evidence just isn't there. It's normal for a new president to have little direct foreign policy experience, and either Clinton or Obama would fit that bill. But Clinton seems determined to pretend she's some kind of seasoned hand that she isn't.
I think they are getting ready for the Economics Department spring skit party. Whatever they are.
Ben Mathis-Lilley tried to warn me. But did I listen? No!
Do Two Recent Novels About China Obscure the Looming Robot Threat? Yes: The Times review of Alex Berenson’s The Ghost War gave us déjà vu. The novel depicts an imagined war between China and the United States triggered by an idealistic but scheming Communist Party official. It seemed familiar because it reminded us of the other book the Times reviewed recently whose plot is driven by Chinese chicanery, Colin Harrison’s The Finder. In Harrison’s novel, a Chinese immigrant poses as a janitorial worker in midtown in order to steal corporate secrets for her brother’s firm in Shanghai.
Frankly, this threatening-Chinese theme worries us. Not for political reasons; neither book is said to be jingoistic. Rather, it’s because we’re concerned that “the coming war against the Chinese” is going to replace “the coming war against the machines” as our leading fictional-future-war trope.
The inevitable apocalyptic battle against machines has long been a fruitful topic in books (Philip K. Dick, Isaac Asimov), film (The Terminator, The Matrix), and shit-shooting bar discussions. (We personally believe that simple machines pose an underrated threat; how are we going to lift and move heavy objects when the automaton rocket-blasting helicopters, appealing to intra-machine solidarity, convince levers and pulleys to turn against us?) And this business with the Chinese is a dangerous distraction — a second front, if you will, in a time when America doesn’t have the resources to fight two imaginary future wars at once. In fact, we suspect “Alex Berenson” and “Colin Harrison” are actually Undercover Models AB-246 and CH-391, robotic novelist-simulating fifth-columnists.
In summary, the Times book section is actively working toward a future in which humans are kept alive only so robots can imprison them in cages and harvest their fingernails, which they use to make decorative chess pieces. Need more proof? The Times has resolutely refused to review How to Build a Robot Army, by Daniel Wilson, Ph.D., which — if not solving the problem of an eventual robot uprising — does at least offer humans guidance in co-opting the violent tendencies of robots for our own purposes. Review this worthy book, New York Times, and then we can talk about "balanced coverage" and "not letting our robot masters drive the agenda."
Please share this information with everyone you know. —Ben Mathis-Lilley
From Barry Ritholtz:
The Big Picture: Now, you can track all of these programs via the Federal Reserve Bank of New York. They published a handy guide counting all the ways you can engage in Moral Hazard borrow from the nation's lender of last resort.
These Five were created since August:
- Term Securities Lending Facility (TSLF), announced March 11, allowing securities dealers to get Treasurys at auction for 28 days
- Primary Dealer Credit Facility (PDCF), announced March 16, for securities firms to receive overnight loans
- Term Auction Facility (TAF), announced December 12, for banks to get funds at auction without the discount window stigma
- Single-Tranche OMO (Open Market Operation) program, announced March 7, allowing securities dealers to get 28-day funds
- Term Discount Window Program (TDWP?), announced August 17, extending the length of discount-window loans to 90 days...
It is as good an explanation as any:
abu muqawama: A Town Called Malice (Updated): Update III: Why, some wonder, is the U.S. closer to the Iran-backed ISCI and Badr Brigades than it is with the Sadrites? Why does this make sense? Two Baghdad political veterans have ruefully pointed out to Abu Muqawama that while Sadr has more popular support, the ISCI crowd have something more valuable: they speak English. One former State Department veteran with whom Abu Muqawama spoke a few months ago pointed out that former Iraq honcho Meghan O'Sullivan was particularly vulnerable to falling under the sway of those politicians who didn't just speak in that confusing gutteral language where they write from right to left in co-joined letters. Ergo: they speak English, so they must be our friends! Hoo-ray, democracy!
Impeach George W. Bush. Impeach him now.
James Hilder writes:
Areas of Baghdad fall to militias as Iraqi Army falters in Basra: Iraq's Prime Minister was staring into the abyss today after his operation to crush militia strongholds in Basra stalled, members of his own security forces defected and district after district of his own capital fell to Shia militia gunmen. With the threat of a civil war looming in the south, Nouri al-Maliki's police chief in Basra narrowly escaped assassination in the crucial port city, while in Baghdad, the spokesman for the Iraqi side of the US military surge was kidnapped by gunmen and his house burnt to the ground.
Saboteurs also blew up one of Iraq's two main oil pipelines from Basra, cutting at least a third of the exports from the city which provides 80 per cent of government revenue, a clear sign that the militias -- who siphon significant sums off the oil smuggling trade -- would not stop at mere insurrection.
In Baghdad, thick black smoke hung over the city centre tonight and gunfire echoed across the city. The most secure area of the capital, Karrada, was placed under curfew amid fears the Mahdi Army of Hojetoleslam Moqtada al-Sadr could launch an assault on the residence of Abdelaziz al-Hakim, the head of a powerful rival Shia governing party. While the Mahdi Army has not officially renounced its six-month ceasefire, which has been a key component in the recent security gains, on the ground its fighters were chasing police and soldiers from their positions across Baghdad. Rockets from Sadr City slammed into the governmental Green Zone compound in the city centre, killing one person and wounding several more.
Mr al-Maliki has gambled everything on the success of Operation Saulat al-Fursan, or Charge of the Knights, to sweep illegal militias out of Basra. It has targeted neighbourhoods where the Mahdi Army dominates, prompting intense fighting with mortars, rocket-grenades and machineguns in the narrow, fetid alleyways of Basra. In Baghdad, the Mahdi Army took over neighbourhood after neighbourhood, some amid heavy fighting, others without firing a shot. In New Baghdad, militiamen simply ordered the police to leave their checkpoints: the officers complied en masse and the guerrillas stepped out of the shadows to take over their checkpoints.
In Jihad, a mixed Sunni and Shia area of west Baghdad that had been one of the worst battlefields of Iraq’s dirty sectarian war in 2006, Mahdi units moved in and residents started moving out to avoid the lethal crossfire that erupted. One witness saw Iraqi Shia policemen rip off their uniform shirts and run for shelter with local Sunni neighbourhood patrols, most of them made up of former insurgents wooed by the US military into fighting al-Qaeda. In Baghdad, thousands of people marched in demonstrations in Shia areas demanding an end to the Basra operation, burning effigies of Mr al-Maliki, whom they branded a new dictator, and carrying coffins with his image on it.
From his field headquarters inside Basra city, the Prime Minister vowed to press on with his attack, which he said was not targeting the Mahdi Army in particular but all lawless gangs. "We have come to Basra at the invitation of the civilians to do our national duty and protect them from the gangs who have terrified them and stolen the national wealth," he said. "We promise to face the criminals and gunmen and we will never back off from our promise." Supporters of Hojetoleslam al-Sadr, the rebellious cleric who formed the sprawling, 60,000-strong militia five years ago, have accused the Prime Minister of trying to wipe out the powerful Sadrists as a political force before provincial elections in October.
Residents of Basra complained that water and electricity had been turned off in the three main areas besieged by the Iraqi Army, which has an entire division deployed for the battle. They also said that they were running low on food an unable to evacuate their wounded. Estimates of the death toll in Basra reached as high as 200, with hundreds more wounded. “The battle is not easy without coalition support,” lamented one Basra resident, who had worked as a translator for the British forces. “The police in Basra are useless and helping the Mahdi Army. The militia are hiding among the civilians. This country will never be safe, I want to leave for ever. I don’t know how to get out of this hell.”
One man was shot in the leg while trying to fix the rooftop water tank on his house but feared he would be taken for a militiaman if he tried to reach a hospital. Officials said that more than 200 militiamen had surrendered after the Government issued a three-day deadline to give themselves up. While residents in Basra said that the army appeared to be making little headway against the militia bastions, a British Army spokesman based at nearby Basra airport said progress was being made. “The Iraqi Army are rebalancing across the city, consolidating their positions, resupplying and preparing for future operations,” said Major Tom Holloway. “They made considerable progress, although not total progress by any stretch of the imagination.”
With fighting flaring across the Shia south, the police chief of Kut — where Mahdi fighters had seized large parts of the town, 110 miles southeast of Baghdad — said his men had killed 40 militiamen while losing four officers. "The security forces launched an operation at around midnight to take back areas under the control of Shiite gunmen," Abdul Hanin al-Amara said. While US and British military officials have been at pains to distance themselves from the push against the deadly militias, President Bush praised the high-risk strategy of tackling militias that a politically weak Mr al-Maliki had been forced to court in the past. "Prime Minister Maliki's bold decision, and it was a bold decision, to go after the illegal groups in Basra shows his leadership and his commitment to enforce the law in an even-handed manner," Mr Bush said. "It also shows the progress the Iraqi security forces have made during the surge"...
Mark Kleiman writes:
The Reality-Based Community: Barack Obama, Historian and Hamiltonian: Putting the substance aside for one moment, Obama's Cooper Union speech on the economy illustrates two points about his thinking that haven't been widely remarked on: 1. When he considers issues he tends to start out by thinking historically, and by starting with the period around the framing of the Constitution. This is a very unusual impulse among American office-seekers. 2. He identifies strongly with Hamilton as against Jefferson. In particular, he uses Hamiltonian interventionism to demonstrate that laisser-faire was not among the founding doctrines of the nation. Since Jefferson remains among the household idols of the Democratic Party, that's a fairly bold thing to do.
The same themes come through in The Audacity of Hope.
Both the highly-intelligent Martin Wolf and the highly-intelligent David Wessel, I think, overstate the importance of what has happened in financial markets this month. Both of them--very smart as they are--talk as if there has been a big shift: an end to laissez-faire in financial markets: as if the Federal Reserve's discretionary actions to try to stabilize markets mark "the day the dream of global free-market capitalism died" or "the time the U.S. government discarded a half-century of rules... [o]n the Richter scale of government activism, the government's recent actions don't (yet) register at FDR levels.... But something big just happened."
From my perspective, at least, there never was such an animal as laissez-faire in financial markets. In my first semester as a graduate student I listened to Charlie Kindleberger talk about how as long ago as 1844 it was settled doctrine that a market economy should have a central bank, and that that central bank should exercise its discretion within broad boundaries in times of financial crisis.
Consider Robert Peel, Charlie lectured. Karl Marx and Friedrich Engels hated Robert Peel:
Marx and Engels: Neue Rheinische Zeitung Revue: Peel himself has been apotheosized in the most exaggerated fashion... One thing at least distinguished him from the European 'statesmen' -- he was no mere careerist.... [T]he statesmanship of this son of the bourgeoisie... consisted in the view that there is today only one real aristocracy: the bourgeoisie.... [H]e continually used his leadership of the landed aristocracy to wring concessions from it for the bourgeoisie... Catholic emancipation... the reform of the police... the Bank Acts of 1818 and 1844, which strengthened the financial aristocracy... tariff reform... free trade... with which the aristocracy was nothing short of sacrificed to the industrial bourgeoisie.... His power over the House of Commons was based upon the extraordinary plausibility of his eloquence. If one reads his most famous speeches, one finds that they consist of a massive accumulation of commonplaces, skillfully interspersed with a large amount of statistical data...
British Prime Minister Robert Peel was--Charlies went on to say--the very creator of the "night watchman" state itself: the creator of the London police force, and thus of the idea that one could rely on the state rather than on community self-help refereed by royal judges to protect one's property (police in England are not called "Bobbies" by accident). Yet as Peel put it in 1844 in the debate over the Bank of England's Charter (Anno Septimo & Octavo Victoriae Reginae CAP XXXI), it was vitally important to set out rules for the operation of financial markets that minimized the potential for moral hazard, but equally important that it be understood that the central bank have the role of suspending those rules to take immediate action. Even though Peel was confident that the Bank Charter Act of 1844 was well-designed and "that we are taking all the precautions which legislation can prudently take against the recurrence of a monetary crisis":
Kindleberger quoting Peel: [Nevertheless, a crisis] may occur in spite of our precautions, and if it does, and if it be necessary to assume a grave responsibility for the purpose of meeting it, I dare say men will be found willing to assume such a responsibility. I would rather trust to this than impair the efficiency and probable success of those measures by which one hopes to control evil tendencies in their beginning, and to diminish the risk that extraordinary measures may be necessary...
Kindleberger characterized Britain's mid-nineteenth century handling of financial crises as a "Machiavellian device": the Bank of England would, in crisis, break the law and support the markets
but only after receiving a Letter of Indemnity from the Chancellor of the Exchequer stating that [the Bank] would not be prosecuted for its violation of the law.... As is widely known, the Letter of Indemnity in 1848 and 1866... so calmed the market that there was no need of [market support]... and... in the crisis of 1857 the excess was very small...
Thus supposing we could summon back from the grave Robert Peel himself and ask him what he thought of the Federal Reserve's actions, he would say "of course this is what you do."
Why, then, are Martin Wolf and David Wessel with their Krell-like brains surprised at the fact that the Federal Reserve is composed of men (and women) willing to "assume a grave responsibility for the purpose of meeting" a financial crisis?
I think that they are surprised because they--at some level--drank the koolaid, breathed in the miasma, were deranged by the effluvia of the vast right-wing conspiracy--the "drown the government in the bathtub" types. The argument against progressive income taxation requires a claim that the rich don't need any help from government, and is fatally undermined by any admission that the rich stand to benefit from the safety net as much--nay, enormously more in dollar terms--than the poor. But, as Robert Peel would put it, in financial matters the question is never laissez-faire vs. regulation, but always good smart regulation vs. bad stupid regulation.
The rescue of Bear Stearns marks liberalisation's limit: Remember Friday March 14 2008: it was the day the dream of global free-market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over....
Mine is not a judgment on whether the Fed was right.... Mine is more a judgment on the implications of the Fed's decision. Put simply, Bear Stearns was deemed too systemically important to fail.... The implications of this decision are evident: there will have to be far greater regulation of such institutions.... The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity.... But... their position is now untenable. Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted. This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency....
I greatly regret the fact that the Fed thought it necessary to take this step. Once upon a time, I had hoped that securitisation would shift a substantial part of the risk-bearing outside the regulated banking system, where governments would no longer need to intervene. That has proved a delusion....
If the US itself has passed the high water mark of financial deregulation, this will have wide global implications.... These longer-term implications for attitudes to deregulated financial markets are far from the only reason the present turmoil is so significant. We still have to get through the immediate crisis. A collapse in financial profits (so significant in the US economy), a house-price crash and a big rise in commodity prices are a combination likely to generate a long and deep recession....
These are perilous times. They are also historic times. The US is showing the limits of deregulation. Managing this unavoidable shift, without throwing away what has been gained in the past three decades, is a huge challenge. So is getting through the deleveraging ahead in anything like one piece. But we must start in the right place, by recognising that even the recent past is a foreign country.
Ten Days that Changed Capitalism: The past 10 days will be remembered as the time the U.S. government discarded a half-century of rules to save American financial capitalism from collapse. On the Richter scale of government activism, the government's recent actions don't (yet) register at FDR levels. They are shrouded in technicalities and buried in a pile of new acronyms. But something big just happened... without an explicit vote by Congress... billions of dollars of taxpayer money were put at risk. A Republican administration, not eager to be viewed as the second coming of the Hoover administration, showed it no longer believes the market can sort out the mess. "The Government of Last Resort is working with the Lender of Last Resort to shore up the housing and credit markets to avoid Great Depression II," economist Ed Yardeni wrote to clients.
First, over St. Patrick's Day weekend, the Fed (aka the Lender of Last Resort) and the Treasury forced the sale of Bear Stearns, the fifth-largest U.S. investment bank, to J.P. Morgan Chase.... To induce J.P. Morgan to do the deal, the Fed agreed to take losses or gains, if any, on up to $29 billion of securities in Bear Stearns's portfolio.... Then the Fed lent directly to Wall Street securities firms for the first time. Until now, the Fed has lent directly only to Main Street banks.... In the first three days of this new era, securities firms borrowed an average of $31.3 billion a day from the Fed.... Republican Treasury secretary leaned on two shareholder-owned, though government-chartered, companies -- Fannie Mae and Freddie Mac -- to raise capital that their boards didn't want to raise.... Fannie and Freddie... accounted for 76% of new mortgages in the fourth quarter of last year, up from 46% in the second quarter... if Fannie or Freddie stumble, taxpayers will get stuck with the tab. And then, the federal regulator of the low-profile Federal Home Loan Banks, which are even less well capitalized than Fannie and Freddie, said they could buy twice as many Fannie and Freddie-blessed mortgage-backed securities as previously permitted -- more than $100 billion worth....
[T]he clear and present danger that the virus in the housing, mortgage and credit markets is infecting the overall economy is too great to ignore. The Great Depression was worsened because the initial government reaction was wrong-headed. Federal Reserve Chairman Ben Bernanke spent an academic career learning how to avoid repeating those mistakes.
Is it working? It is helping. One key measure is the gap between interest rates on mortgages and safe Treasury securities.... The gap remains enormous by historical standards, but has narrowed. On March 6, according to FTN Financial, 30-year fixed-rate mortgages were trading at 2.92 percentage points above the relevant Treasury rates; Wednesday the gap was down to 2.22. Normal is about 1.5 percentage points.... Is it enough? Probably not....
The case for doing more is twofold. One is to cushion the blow to families and communities, even if some are culpable. The other is to disrupt a dangerous downward spiral in which falling prices of houses and mortgage-backed securities lead lenders to pull back, hurting the economy and dragging asset prices down further, and so on.... So the next step, no matter how it is dressed up, is likely to involve the government's moving in ways that put a floor under prices, hoping that will limit the downside risks enough so more Americans are willing to buy homes and deeper-pocketed investors are willing, in effect, to lend them the money to do so.
Tom Slee writes:
Whimsley: Mr. Google's Guidebook: Mr. Google is lying! (I wrote) His Guidebook no longer reflects the paths set out by travellers as they navigate their lives. It is no longer an outside observer of people's wanderings. Google's success has changed the way people find their routes. Here is the way it happens. When a new cluster of destinations is built there may be a flurry of interest, with new signposts being erected pointing towards one or another of those competing locations. And those signposts have their own dynamics, perhaps forming a power law as set out by Mr. Shirky or perhaps something different, as Mr. Shalizi has explained.
But that's not the end of the story. After some initial burst, no one makes new signposts to this cluster of destinations any more. And no one uses the old signposts to select which particular destination to visit. Instead everyone uses Mr. Google's Guidebook. It becomes the major determinant of the way people travel; no longer a guide to an existing geography it now shapes the geography itself, becoming the most powerful force of all in many parts of the land.
So my Netflix Prize essay got selected by Mr. Google's machines as one of the more interesting and insightful commentaries - the machines are perceptive, we must grant them that - and it soon appeared as number 3 on the list of recommended destinations for anyone looking for "Netflix Prize", right after the official site itself. And now no one is guided here by those few original links - the relevance of their effect is as vestigial as the effect of the Vikings' property rules. Mr. Google's Guidebook has cemented the verdict in place long after the early discussion has lost its relevance, like the edges of the Chinese take-away and like Mr. Wainwright's guides fixed the routes of the paths he charted. With little new being written about the Netflix Prize the Guidebook is the major source of new journeys. And so the Guidebook changes the pattern of the landscape from a rich, linked one with its power law shape (or other shape). Instead, there is a two stage process in the evolution of much of the landscape. The first stage is a brief discussion, from which Mr. Google picks a few winners. In the second stage, after that discussion has faded away, the continuing popularity of the winners is assured simply by their positioning in the Guidebook. Mr. Google has singlehandedly changed the way people travel, changing the selection of destinations from an ongoing referendum to a brief discussion from which he anoints a few winners.
Mr. Google no longer gives you what you want, he selects a winner from the crowd and then tells you it's what you wanted.
I was just about to put down the pen, exhausted now, when I heard a creak and the door to the library opened. I lurched around to see coming through the door --- Mr. Google himself! His face was no longer subservient as befits a butler. Instead it was smirking. And his teeth - surely they had not been so pointed before. I shrank.
But Mr. Google did not attack me with a knife, or bite me in the neck. Nothing so dramatic. He simply looked over at my scribbled notes and sighed a world-weary sigh.
You don't understand do you sir?
What do you mean Google? I understand everything now.
Really? This document here? And what does that matter if no one reads it? And who decides whether anyone can come here to view it? Exactly how do you propose to publicize your absurd opinions if not through me?
My shoulders sagged. Defeat. Of course, there was nothing I could do. "So you'll silence it then. Keep people away. My revelations will moulder, along with that masterpiece about the toilets".
No (said Google). That's what I mean - you really don't understand. You see, I don't care if people come and look at these hen scratches or not. Maybe they will, maybe they won't. As long as I can sell a few advertisements on that page of my guidebook I really don't care. After all, what better praise for a Guidebook than to help people find out what's wrong with it? Just leave your manuscript with me. I'll look after it.
He held out his hand, imperious now. I felt disheveled after my long night. My brain was spinning. I could see no alternative. In a vain attempt to maintain some self-respect I drew myself up to my full height and pulled back my shoulders, adopting a bearing appropriate for my class. "All right Google. Here you go. Don't lose it now."
"Thank you sir. You can be sure I won't lose it. I never do lose anything you know."
I turned away from him and stumbled down the stairs. I had ended up giving him an order, and he had accepted it. Yet I could not shake the impression, even as he brought me a glass of sherry that evening in my sitting room, placing the silver tray beside me with deference, that Mr. Google - far from being a butler and travel guide - was more a master than a servant.
Alec MacGillis, staff writer of the Washington Post, needs to leave journalism immediately to find a profession in which he is half-competent. Let's give the mike to Ezra Klein:
EzraKlein Archive | The American Prospect: George Zornick, filling in for Eric Alterman, points out yesterday's Washington Post article asking whether Obama is...gasp!...a liberal. "What's so strange about the story," says Zornick, "and others like it, is that it never attempts to define liberalism, simply presenting it as a self-evident insult." Yep. There's never a moment in the article in which the reporter says that Obama believes liberal orthodoxy X, and liberal orthodoxy X is unpopular, and this will pose a problem for him in the election. Rather, it's the very fact that he can be called a liberal, no matter how popular or mainstream his policy ideas, that's the problem....
Presumably, being "a liberal" is bad because Americans disagree with liberal policies. But it's hard to find the policy plank of Barack Obama's that's wildly unpopular. That may make him timid -- (coughcoughmandatescough) -- but it doesn't make his ideas divisive. And if liberal just means broadly popular policy ideas, then it's obviously not a political danger. Yet it's still treated as a political problem, even though the word, in this article, is basically an empty container. Reading the piece is like watching the reporter drink water from an empty glass. To most readers, it sure looks like he's drinking something. But to anyone looking closely, there's no there there...
Why oh why can't we have a better press corps?
He writes, for Bloomberg:
Bloomberg: Many analysts and public officials have said that foreclosures of subprime adjustable-rate mortgages would soar this year as owners' monthly payments jumped when interest rates reset to a higher level. Not only is that unlikely to happen, this year's resets of earlier vintages of subprime mortgages may even reduce some payments that increased in 2007. The reason? The index to which many ARMs are tied is the six-month London inter-bank offered rate, or Libor, and that rate has fallen from more than 5.3 percent last fall to about half that level. The Federal Reserve's cuts in its target for the overnight lending rate -- the last to 2.25 percent on March 18 -- from 5.25 percent in mid-September, plus actions to increase liquidity in the inter-bank lending market, have caused the Libor to fall.
Unfortunately, most of the defaults and foreclosures that have wreaked havoc in financial markets haven't been due to resets so far. Many borrowers simply bought a house or condo they couldn't afford unless bailed out by rising prices, and lower rates alone won't help them much. Still, the big drop in Libor means there likely will be many fewer foreclosures than there would have been.
Much of the discussion about the danger of resets has focused on the initial interest rate, or ``teaser rate,'' that ARMs carried. That left the impression it was a very low rate that would adjust up a lot. Most of the initial rates were 8.5 percent or above, and now many are set to adjust hardly at all...
Here they are:
Harold Meyerson is afraid of John McCain:
McCain on the Red Phone: It is 3 a.m., and the stillness of the White House night is shattered by the ringing of the red phone. President John McCain, rousing himself from a deep sleep, turns on the light and picks up the receiver. A U.S. embassy in a Middle Eastern country, he is told, has been blown up, and al-Qaeda is taking credit. McCain takes a deep breath. "Character counts, my friend," he says. "Bomb Iran. Bomb, bomb Iran."
There is a rustling of blankets, and, brushing aside Cindy McCain, a concerned Joe Lieberman rises from the bed. "Not Iran, Mr. President," he says. "They hate al-Qaeda."
"That's right," the president says. "I remember now." He sighs with relief. "Good thing you're here every night, Joe."
But suppose, dear reader, that John McCain becomes president and Joe Lieberman doesn't bunk with the McCains on a nightly basis. How easily should the rest of us sleep?...
[T]he al-Qaeda-Iran alliance wasn't just a passing thought.... Whether it was a simple mistake, a neoconservative delusion or a habit of mind that lumps together all of America's enemies (either sincerely or calculatedly, to build public support for military action), we cannot say. What we can say is that the idea of any or all of these options is profoundly disquieting. The very thought of a president who deliberately conflates or erroneously confuses our adversaries with each other is appalling.... We're mired in a war that has its roots in George W. Bush's both imagining and fabricating an alliance between Saddam Hussein and Osama bin Laden. Do we really want to perpetuate these habits of mind in the next administration?...
[The] prevailing [journalistic] narrative of McCain's national security expertise... [lacks] assessment of the nature of his beliefs... "rogue state rollback"... preventive war... permanent war... missile defense... military unilateralism.... If you liked Bush's foreign and military policy, you'll love McCain's.
But McCain's thinking... remains an undiscovered country to his countrymen.... On economic matters, that may be because he doesn't seem to have devoted much time or energy to thinking about the economy.... Hard to say what's more dangerous -- McCain's approach to the economy or McCain's approach to the world. The thought of him answering the red phone at 3 a.m. fills me with foreboding. Hell, I don't want him answering the red phone at 3 p.m.
Andrew Samwick directs us to:
PoET: Prices of Economics Textbooks: The goal of this site is to encourage instructors to take price into account when shopping for texts. Like doctors prescribing drugs for their patients, college instructors selecting textbooks for their classes have little incentive to pay attention to prices that they themselves do not pay. Textbook publishers do not advertise their prices. Often it is even difficult to find prices on their websites. Nowhere have we been able to find current price lists for a full selection of competing texts.
Introductory Economics and Intermediate Micro and Macro texts commonly retail for more than $150. Over the past twenty years, despite reduced production costs, real prices have climbed by about three percent per year. By all reasonable estimates, publishers' net revenue per sale is several times larger than marginal cost. While it is true that publishers' revenues must cover fixed as well as variable costs, there is little doubt that successful textbooks are enormously profitable and would be so even at much lower prices.
As economists, we are not surprised that publishers seek to maximize profits. Economic theory predicts that the ratio of a seller's price to marginal cost will be high if demand is inelastic. While publishers are unlikely to respond to moral suasion, they are likely to respond to increased price elasticity. Thus we hope that this website will have two beneficial effects. The direct effect is that it may help you find a better deal for your students. An indirect effect is that the more attention that consumers pay to prices, the more elastic will be demand, and hence the lower will be the profit-maximizing prices.
toohotfortnr: wages of sin, we keep paying: Iraqi PM Nouri al-Maliki is giving powerful Shiite cleric Moqtada Sadr's forces three days to surrender in Basra, as clashes between Maliki's security forces and Sadr's Mahdi Army -- in which the U.S. intervenes on Maliki's side -- escalate. But with the U.S. happy about the now-abrogated Sadrist ceasefire, why is the U.S. military getting involved? The Washington Post isn't sure:
It was unclear why U.S. forces would take part in a broad armed challenge to Sadr and his thousands-strong militia on the eve of Petraeus's assessment, which the Bush administration has said would greatly influence its decision on whether to draw down troop levels.
Here's an answer. As long as Maliki is in the prime minister's chair, and as long as we proclaim the Iraqi government he leads to be legitimate, Maliki effectively holds us hostage.... It simply is not tenable for Petraeus to refuse a request for security assistance from the Prime Minister to deal with a radical militia.
Now, some of my Iraq-watcher friends of mine point out that this is absurd. "Sadr is, of course, a thug," they say, "but he's a nationalist. And he's far less beholden to Iran than the Islamic Supreme Council of Iraq or Maliki's Da'wa Party -- both of whom we're supporting! And most importantly, Sadr remains perhaps the most popular figure in Shiite Iraq. Petraeus can do business with him. This doesn't make any sense!" And they're right. It doesn't. But as long as we sponsor the Iraqi political process -- and a Sadrist doesn't actually become premier himself -- this will keep happening....
The dangers of picking and choosing who the Iraqi premier should be outweigh any imperial temptations we may feel. We'll be just as responsible for Prime Minister Next-Up's mistakes as we are for Maliki's. And the Iraqis will never trust any leader that foreigners pick for them. In what's shaping up to be the Second Sadrist Intifada, you go to war with the prime minister you have, not the prime minister you might want.
If It's Spring, There Must Be a Trustees Report: I always go first to this table, Table IV.B7, which shows the present value of Social Security's unfunded obligations over an infinite horizon. The number is $13.6 trillion, or 3.2% of taxable payroll or 1.1% of gross domestic product over the same horizon. I've blogged extensively about these summary numbers over at Vox Baby. For the present post, I'd like to make two quick points.
I tend to focus on the middle number--3.2% of taxable payroll--when describing what needs to be done to Social Security to remove its projected shortfall. The number itself means that if we increased payroll taxes by 3.2 percentage points, from 12.4 to 15.6%, and invested the near-term surpluses at the rate of return projected on Treasuries, there would be enough funds available to pay all projected benefits in perpetuity. That doesn't mean we have to follow that strategy, but it does indicate the size of the projected shortfall. Since the deficits come in future years, I don't see any good reason why we don't change the rules for future contributions and benefits to remove them.
Pete points out, as others like CBO Director Peter Orszag have, that the projected increases in per-capita medical expenditures in Medicare and Medicaid become a much larger fiscal challenge than the demographic-driven changes in both Social Security and Medicare expenditures....
Social Security's costs increase to 6% of GDP as the Baby Boomers move from the workforce to retirement. That shift in costs is permanent, even as the Baby Boomers expire, because of longer term trends toward longer lives and fewer children. That projected increase is swamped by the impact of projected medical expenditure increases. And unlike Social Security, there is very little in the way of projected revenue sources that aren't general revenues....
I think it is important to discuss comprehensive reform. The sooner, the better. On Social Security, I've put my name on a plan that could serve as a compromise. On Medicare, I think the best option is to raise the age of full eligibility for future beneficiaries, allowing younger retirees to pay their way in. But that's a blog for another day.
He succumbs to Clinton Derangement Syndrome:
This is disgusting: Watching from 12 time zones away, I've tried to stay out of campaign blow-by-blow. But if, as I assume is true based on Marc Ambinder's report, the Hillary Clinton campaign is circulating a hit job from the American Spectator, this is simply disgusting. (Marc has just confirmed to me that indeed the article came in an on-the-record email from Phil Singer, the Clinton campaign spokesman.)
That the Clinton family would dignify the American Spectator, of all publications, is astonishing to anyone who was alive in the 1990s.
That they would bless this attempt to paint Merrill McPeak as an anti-Semite is grotesque.
I doubt that the author of the hit job ever bothered to speak with or interview McPeak. I have done so many times, during and after his days as Air Force chief of staff (which he was during the first Gulf War). People can agree or disagree with McPeak's foreign policy or his record at the Pentagon -- but that's not what we're talking about here. Any attempt to fish out a quote that will banish him as a bigot is exactly as fair and accurate as depicting Bill Clinton as being personally a racist based on his "fairy tale" and "Jesse Jackson" comments around the time of the South Carolina primary. I say this having heard McPeak lay out his views, starting while the Gulf War was underway 17 years ago, about how to maintain general stability, US interests, and Israeli security in the Middle East.
McPeak may have gone too far in saying that Bill Clinton's earlier comments (that it would be "a great thing if we had an election year where you had two people who loved this country" -- namely, Hillary Clinton and John McCain) amounted to "McCarthyism." But that's a pretty fair description of this latest round. I don't like attempts to stifle argument when they occur in China, and I don't like this in the United States.
I can easily believe that the Spectator would publish such an article. That the Clinton team would circulate it I'm still trying to deal with.
He must be stopped. Or I will be brokie:
The "I'm Writing This to Totally Make You Jealous" Post: In which I tell you about some of the ARCs I’ve received recently that mean I get to read all the books you want to read before you do. Bwa ha ha ha hah ha! Hi, I’m evil. Let’s see what we got:
Saturn’s Children, by Charlie Stross — It’s Stross does late-period Heinlein! Now there’s an image that will haunt your sleep for decades. Charlie actually gave me a peak at this a while ago, and I immensely enjoyed what I read, but then a computer implosion basically took that file away from me. Yes, we pause to shed a tear here. But now I have it! In ARC form! And lo, there was much happiness. It comes out in July, friends. Suffer until then.
Ink and Steel, by Elizabeth Bear – “Queen Elizabeth rules by wit and by will, but magic keeps her on the throne...” reads the cutline. Well, yeah. I thought everyone knew that. Bear’s output makes me feel like a slacker, and there aren’t that many writers who can make me feel like that. The next time I see Bear, I’ll have to tell her that: “You make me feel like no other writer!” And then, the tasering will commence, I suppose. This also hits in July.
The Edge of Reason, by Melissa Snodgrass — Patrick Nielsen Hayden described to me thusly: “a contemporary metaphysical thriller about the secret battle between the forces of rationality and the Old Ones From Beyond Time, the latter of whom are using superstition and religion as the means by which to knock over the barriers that prevent them from breaking through and eating our brains.” Really, he and Snodgrass had me at the brain-eating. I’m very excited about this one, and for the rest of you, you have until May to put your brains under lock and key.
The Prefect, by Alastair Reynolds – This book was already nominated for the BSFA Best Novel award this year, so you could say it comes with a recommendation to you from all of British fandom. Which, you know. Is nice. And it’s set in Reynold’s Revelation Space universe, so fans of that have something to look forward to. In June. Which is when you’ll read it. After me. Ha!
Lonely Werewolf Girl, by Martin Millar – As Publishers Weekly blithely summarizes: “Young werewolf skulks around London and struggles with anxiety and eating disorders while scores of subplots merrily explode around her.” Well, and isn’t that always the way, when you’re a young werewolf? That’s the way it was for me. Hmmm. I suspect I may have said too much right there. The publication date here is April 20, but Amazon says it has it in stock. So I can’t hold my ability to read it before you over you this time. Curse you, Amazon, for denying my cheap and tawdy attempts at literary superiority! We hates Amazonzes, Precious! We hates them forever!
Go on, admit you’re jealous. I’ll still respect you. Really.
The Washington Monthly: Last year the trustees estimated that Social Security had an overall 75-year deficit of 1.95% of taxable payroll. This year it's 1.70%. That's a pretty substantial improvement. What caused it?... Table IV.B9 has only one significant change from 2007: "Methods and programmatic data." And what might that entail?... immigrants. To be specific, better estimates of the taxes and benefits received by illegal immigrants -- or, as the trustees refer to them, "other-immigrants":
In previous reports, the other-immigrant population was projected using assumed annual numbers of net other immigrants with a static age-sex distribution. For this year's report, the annual numbers of net other immigrants are projected by explicitly modeling other immigrants and other emigrants separately.
Translation: instead of just pulling a net number out of a hat, the trustees built a model that estimated the actual demographic characteristics of both immigrants and emigrants. And guess what?
- Illegal immigrants tend to skew young. This benefits the system.
- Young people have more children than older people. This benefits the system.
- Some illegal immigrants pay taxes for a few years and then leave. This benefits the system.
This year's report results in [...] a substantial increase in the number of working-age individuals contributing payroll taxes, but a relatively smaller increase in the number of retirement-age individuals receiving benefits in the latter half of the long-range period.
Give or take a bit, it turns out that this shores up the Social Security system to the tune of around $13 billion per year. Thanks, illegal immigrants!
Megan McArdle gets scores of 10.0, 10.0, 10.0, 9.8, and 5.6 from the Slovakian judge as she dives off the platform onto her belly in her play for the "Stupidest Woman Alive" crown. She tries to explain why we should pay attention not to those who got Iraq right but to those who got Iraq wrong:
Megan McArdle: Most of us know that we have learned more about the world, and ourselves, from failing than from success.... Failure tells us more than success... success is usually a matter of a whole system... development economists have proven... complex webs of interactions are impossible to tease apart.... Since [the invasion of Iraq] failed, the more interesting question is... what did you get wrong. The people who were right can (and will)... rewrite their memories.... This is not some attack on people who were against the war....
The people who failed... will have to look for some coherent explanation... the honest ones are vastly more interesting than listening to a parade of people say "Well, obviously, I'm a genius, and also, not mean."...
Update: To everyone who asked "Why would the behavior of the people you're arguing with matter?" I can only respond: so what have you learned during your visit to our planet?... Something else to keep in mind is that unless you are planning to die soon, you are going to get some major policy question badly wrong in the future, because no one is as smart as some of the war opponents have decided they must be. And every word that you type mocking the repentant supporters of the war will, I guarantee, be hauled up and thrown in your face. It is best not to fling calumny about other peoples' decisions unless you are very confident that you will be able to bat a thousand for the next forty years or so...
And what are the "vastly more interesting" things we learn from closely and attentively listening to the people who were wrong on Iraq? Well, let us take one canonical example: Megan McArdle. Megan McArdle got Iraq wrong. Today--listen carefully and attentively--Megan McArdle writes:
Megan McArdle: One of my commenters asks what I got wrong on the Iraq war. I've posted on this before, but I suppose it's worth saying again what I've learned from the experience.... (6) I paid too much attention to the French. While in general, "Whatever France is doing, don't do that" is very good policy advice, it is not actually true that everything the French oppose is therefore a good idea...
This truly is self-pwnage of an extraordinary degree. "I laughed so hard I fell off my chair" is usually hyperbole.
But not in this case.
I am speechless.
But The Philosopher is not.
Here is the lesson:
Obsidian Wings: "Seriously Misguided": There's something right about what McArdle says, and something wrong. To start with the first: most of us sometimes get things right, and sometimes get things wrong. Suppose God grants you the chance to question someone about an important decision, and gives you the choice: would you rather question that person after she has screwed up, or after she has gotten something right? Other things being equal, I think I'd rather question the person after she screws up, for more or less the reasons McArdle suggests. Notice, though, that in this case, we have to choose whether or not to question one and the same person after a success or a failure. The identity of that person, and with it, her good or bad judgment, her wisdom or naivete, and so forth, is held constant; and this is essential to the example.
The question McArdle claims to be asking is a different one: given a particular decision, would you rather question the people who got it right or those who got it wrong? Here what we hold constant is not the people we question, but the decision itself. And that makes all the difference in the world.
Different people have different track records. On foreign policy, George Kennan had a very good track record: he got a lot of things right, including some very difficult ones. That is in large part due to the fact that he knew a lot and had exceptionally good judgment. Jonah Goldberg, by contrast, has a terrible track record: he gets things wrong all the time, and when he gets them right, it seems to be more or less by coincidence. That is because he knows almost nothing and has terrible judgment. Their respective track records mean that on any given decision, people with good judgment, like George Kennan, are much more likely to have gotten it right than to have gotten it wrong, while the opposite is true of people with bad judgment, like Jonah Goldberg.*
If I ask myself whether I would rather hear from the people who got a given question right or wrong, I can assume that the people with good judgment on questions of that type will be overrepresented among those who got it right, and underrepresented among those who got it wrong; and that the opposite will hold true of the people with bad judgment. So one way to think about the question: who would I rather hear from? is that it is a question about whether I would rather hear from people likely to have good judgment, like George Kennan, or people who are likely to have bad judgment, like Jonah Goldberg. This is, frankly, not a hard call to make at all.
However, as McArdle notes, a given person who has just gotten something very wrong is more likely to have something interesting to say about it than she would be had she just gotten it right. If the differences between people with good judgment and people with bad judgment were very small, or the additional insight conferred by confronting one's own errors were very large, then the effects of having just made a mistake might be big enough to swamp the effect of having good judgment overall. In that case, even though the people who got something wrong would be likely to have had worse judgment initially than the people who got it right, the fact that they had just gotten something wrong might make them suddenly become more interesting and better to talk to, on the whole, than the group who got things right.
Obviously, though, this isn't the way it works. First, the difference between George Kennan and Jonah Goldberg is very, very large. Second, the fact that Jonah Goldberg has terrible judgment doesn't just lead him to screw up foreign policy; it also makes him far less likely to learn from his mistakes than George Kennan would. Someone who is thoughtful, perceptive, and insightful, and who had gotten the Iraq war wrong, might find his or her judgment changed forever, in very interesting ways. (Then again, George Kennan would be almost as likely to learn something really interesting from observing other people's errors. He would be interesting to talk to either way.) Jonah Goldberg, by contrast, seems to have learned nothing whatsoever from his mistakes. And this doesn't seem to be entirely unrelated to the defects that made him get Iraq wrong at the outset. He was a shallow, thoughtless idiot then, and he is a shallow, thoughtless idiot now.
And this is what's so wrong about what Megan McArdle says. She is making an argument whose natural application is to the question: given one person, would you be likely to learn more from her after she had gotten something right or after she had gotten something wrong? And she is extrapolating it to the quite different question: would you rather talk to the people who got a given decision right or wrong? It would be fine to extrapolate in this way if the fact that someone got that question right or wrong showed nothing whatsoever about their wisdom or judgment; if the George Kennans and Jonah Goldbergs of this world were tossed at random into either category.
But that's not the way things work. Decisions reveal things about those who make them. People who get them right are, on average, more likely to have wisdom and judgment and insight than those who get them wrong. This means that they are both more likely to be worth talking to in general, and more likely to profit from any mistakes they make, than people who get them wrong.
This is what McArdle missed. It's an interesting omission for someone who, by her own account, got Iraq wrong.
In her post, McArdle suggests that people who get a decision right are likely to revise their memories "to show themselves in the most attractive light", and that this kind of self-deception is more difficult for those who got it wrong. Her own post, with its implicit assumption that major errors do not reflect anything about the judgment of those who make them, suggests that people who get things wrong are just as prone to self-deception as the rest of us.
(See also: Richard "we were right to be wrong" Cohen.)
There will be a quiz.
Nobody was more eager to talk about race in America today--about Jeremiah Wright, the African-American preacher at Barack Obama's church--than William Kristol.
Let's Not, and Say We Did: I shuddered... while watching Barack Obama's speech last Tuesday.... [Obama said] "But race is an issue that I believe this nation cannot afford to ignore right now." As soon as I heard that, I knew what we'd have to endure. I knew that there would be a stampede of editorial boards, columnists and academics rushing not to ignore race. A national conversation about race! At long last!... The last thing we need now is a heated national conversation about race.
What we need instead are sober, results-oriented debates about economics, social mobility, education, family policy and the like.... "National conversations" tend to be pointless and result-less. Or worse. Especially when they're about race.... A new national conversation about race isn't necessary....
Over the last several decades, we've done pretty well in overcoming racial barriers and prejudice. Problems remain. But we won't make progress if we now have to endure a din of race talk that will do more to divide us than to unite us, and more to confuse than to clarify...
With respect to having a national conversation on race, my recommendation is: Let's not, and say we did.
The only appropriate response is derisive laughter. Cowardly invertebrate! William Kristol! But I repeat myself.
William Kristol the invertebrate coward was ready--nay, eager and enthusiastic--to have a national conversation about race.
Until it went wrong.
Until it began to look as though Americans were less racist than William Kristol and his political allies were counting on.
Until it began to look as though Barack Obama talking about Black attitudes toward whites in America gained rather than lost independent voters.
Then the invertebrate, then the coward turned tail and ran:
The last thing we need now is a heated national conversation about race.... "National conversations"... pointless and result-less. Or worse. Especially when they're about race.... conversation about race isn't necessary.... [W]e won't make progress if we now have to endure a din of race talk... more to divide us than to unite... more to confuse than to clarify...
But William Kristol is not the only cowardly invertebrate here. When Kristol's column hit the New York Times building Sunday night, it should have run some alarm bells. David Shipley should have gone to Carla Anne Robins who should have gone to Andrew Rosenthal. They should have said:
Hey! Wait a minute! Kristol was enthusiastic about race-talk a week ago, when he thought it was a way he could knife Obama. If we publish this, we'll be even more of a laughingstock than we already are--Kristol is pumping our credibility as an organization dry. We need to call him and tell him to reconsider: tell him that he can't use our space to make fools of us as well as of himself, and that our readers have a memory at least a week long and will remember what he wrote last time.
They should have gone to Bill Keller, and Arthur Ochs Sulzberger. Jill Abramson and John Geddes and Jonathan Landsman and Dean Baquet and Richard Berke and Tom Bodkin and Susan Edgerley and Glenn Kramon and Gerald Marzorati and Michele McNally and William Schmidt and Craig Whitney--at least one of them should have weighed in, reminding Rosenthal and Sulzberger that when the editorial page dynamites its own credibility it dynamites the credibility of the news pages aas well. None of them did. Invertebrate cowards, all.
Why oh why can't we have a better press corps?
Underbelly: "Excuse Me, Are You the Child of Circus People?": this is a good time an Underbelly golden oldy: my all-time favorite literary teaser. It's from Homer's Odyssey:, and a little scene-setting will add to the flavor:
Odysseus, the hero, is asleep exhausted in the bushes just off shore. Meanwhile Athena, his protector, has gone in a vision before Nausikaa, the princess, and said:
Yo, princess! It's getting on time for you to be married-- Don't you think you ought to catch up on the laundry?
Nausikaa thinks this is a cool idea so she loads her buddies and a bunch of dirty clothes into the wagon and sets the mules off to the waterside. After the girls have finished with their domestic chores, they are disporting themselves with a game of catch, when by mischance the ball rolls off into the bushes, awakening Odysseus.
Recall that our hero has the bad grace to be naked at the moment; but mindful of the strict sex-offender laws, he yanks off a juniper branch and deploys it for modesty. He approaches the princess and drops to his knees (gymnos per eon, we are reminded) and utters the immortal words:
At Delos once, at the shrine of Apollo,
I saw a slender young date palm that reminded me of you.
Now I ask any woman who has ever been approached by a guy in a juniper bush--is there any line in any language more calculated to reduce you to butter? Certainly not for Nausikaa. She responds:
Stranger, you seem neither hostile nor stupid...
She invites him to come home with her. But at the city's edge, she suggests he get out of the wagon and walk, so as not to create too much attention. You'll be able to find me again, she says. Just ask for the king's house. They'll know where to send you.
Fn.: Translation is my own and, okay, somewhat free. But I defy anyone to show that I have failed to capture the spirit of the greatest pickup scene ever written. For comparison, go here.
[Paul Krugman] sends us to:
Paul Krugman: I think the key message is what has happened to the estimate of actuarial balance -- the difference between projected outlays and projected revenues over the next 75 years. This is the thing that is supposed to get steadily worse as time goes by, as the 75-year window contains ever fewer years in which the baby boomers are in the work force, paying payroll taxes, and ever more years when the boomers are out of the work force and collecting benefits.
In fact, however, the actuarial balance has been improving rather than worsening. It is now better than it has been since 1993. What this tells us is that projections made in the mid-to-late 1990s were, in the light of subsequent revisions, way too pessimistic.
Yeah, The End of the Sadrist Ceasefire - The Washington Independent - U.S. news and politics - washingtonindependent.com: Aaaaaaaand so much for the Sadrist ceasefire. According to The New York Times, Iraqi and U.S. (!) forces are now battling the Mahdi Army in Baghdad -- and around the country. And it's not even just the Sadrists who are fighting.
Heavy fighting broke out Tuesday in Basra and Baghdad, after Iraqi ground forces and helicopters mounted a major operation in Basra against Shiite militias, including the Mahdi Army, whose months-long cease-fire is credited with reducing the level of violence during the troop surge. There were also serious clashes in the southern cities of Kut and Hilla.
In Basra, Iraq's most important oil-exporting center, thousands of Iraqi government soldiers and police moved into the city around 5 a.m. and engaged in pitched battles with Shiite militia members that have taken over big swathes of that city.
What appeared to be American or British jets also soared through the skies, witnesses said, providing air support. The operation, which senior Iraqi officials had been signaling for weeks, is considered so important by the Iraqi government that Prime Minister Nuri Kamal al-Maliki, who went to Basra on Monday, intended to personally direct the fighting, several Iraqi officials said.
I recommend a two-pronged strategy. First, begin drinking heavily. Second, withdraw immediately from Iraq. Consider this:
"We are doing this in reaction to the unprovoked military operations against the Mahdi Army," said a Mahdi commander who identified himself as Abu Mortada. "The U.S., the Iraqi government and SCIRI are against us," he said, referring to a rival Shia group. "They are trying to finish us. They want power for the Iraqi government and SCIRI." But Basra has been riven by violent power struggles among the Mahdi Army and local Shiite rivals, such as one controlled by the Fadhila political party. In the weeks leading up to the operation, Iraqi officials indicated that part of the operation would be aimed at the Fadhila groups, who are widely believed to be in control of Basra's lucrative port operations and other parts of the city.
That doesn't sound like "civil disobedience." That sounds like an intifada. If it doesn't get tamped down like right now, it represents an overturning of the creaking apple cart known as the Baghdad political process, and the replacement of the Shiite political leadership. If there's a silver lining, it's that here in the States it's Happy Hour.
I still haven't wrapped my mind around the fact that we are providing air support to a group called "The Supreme Council of the Islamic Revolution"...
This is alarming. Thirty yards from the house:
It's on a big rock--a rock four feet across and three feet tall. So it's not a dog. It's much too much to be a cat. It's a carnivore--there's fur in it.
So we have to figure out what to do with Intermediate Macroeconomics, Econ 101b, for the rest of the semester, now that we have finished the "core models" sections of the course.
Here are my current thoughts on what we should do when the students return from spring vacation:
March 31: The Market for "Lemons"
April 2: Models of Financial Crises
April 4: Ways of Dealing with Financial Crises
April 7: How Are We Doing?
April 9: What Should We Do Next?
April 11: Holiday: Brookings Panel on Economic Activity
April 14: "Global Imbalances"
April 16: Risks of International Financial Crisis
April 18: Why Is China Doing This--Undervaluation and Export-Led Growth, That Is?
April 21: Global Divergence, Bigtime
April 23: Externalities: Sources of Virtuous Circles
April 25: Economic Policy with Endogenous Growth
April 28: The Current Situation Update
April 30: Conservative Central Bankers
May 2: Monetary Transmission Mechanism
May 5: Permanent Income/Are Government Bonds Net Wealth?
May 7: Social Security
May 9: Medicaid, Medicare, Long-Run Budget
May 12: Applications Exam
May 16: FINAL EXAM 8-11 AM
And, of course, there are all the things I have covered in the past or would like to cover that have to be dumped. Sigh:
Stabilization Policy since WWII
Looking Back at the Great Depression: What Went So Wrong?
The Productivity Slowdown: the 1970s
The Productivity Speedup: the 1990s
Is the Singularity in Our Future or in Our Past?
U.S. Income Distribution
European Youth and Structural Unemployment
"Animal Spirits": Understanding the Stock and Real Estate Markets
Was the Volcker Deflation Necessary?
Evaluating the Greenspan Years
Political Business Cycle
The NAIRU and Its Vicissitudes
He is shrill:
Bush's Alternate Reality: President Bush on Wednesday said something demonstrably false and inflammatory about Iran -- asserting that the Iranian government has "declared they want to have a nuclear weapon to destroy people." The Iranians have never done any such thing -- and for Bush to say so at a time of great tension between the two countries is bizarre at best. So why did he say it? Was he actively trying to misrepresent the situation? Was it just a slip of the tongue? Or does he believe it, despite the abundant evidence to the contrary?
It seems unlikely that Bush would choose this particular venue to launch a disinformation campaign: His comment came midway through a softball interview with an obscure U.S.-funded Farsi-language radio station, on the occasion of Persian new year. And the Iranian audience knows best that what he said is untrue. Such a blatant distortion only strengthens the Iranian government's position that Bush is a liar. So did Bush just misspeak? The White House certainly suggested that yesterday, with a spokesman insisting that Bush had simply spoken in "shorthand," combining Iranian threats against Israel with concerns about Iran's nuclear program.
And yet, as disturbing as the third possibility is -- that Bush is operating in an alternate reality -- it's supported by this simple fact: He's said almost exactly the same thing at least once before. As Olivier Knox of AFP pointed out on Aug. 6, Bush said at a joint press conference with Afghan President Hamid Karzai that day: "It's up to Iran to prove to the world that they're a stabilizing force as opposed to a destabilizing force. After all, this is a government that has proclaimed its desire to build a nuclear weapon." Then, as now, there was no official retraction.
Washington wisdom has it that whatever military action against Iran Bush and Vice President Cheney might have been hatching was shelved after a national intelligence estimate released late last year concluded that Iran had halted its nuclear weapons program four years earlier. But a variety of reports have indicated that neither Bush nor Cheney were persuaded.... It's worth getting Bush on the record about exactly how he understands the facts here....
Here's the exchange in question, from Bush's interview with Parichehr Farzam of Radio Farda:
Farzam: "Mr. President, as you and your allies launched a global initiative to combat nuclear terrorism, what do you think is your most important challenge to expose and stop the secretive ambition of Iran's government to enrich uranium, while assuring its citizens that their happiness and prosperity and peace is a benefit within their reach?"
Bush: "Sure, absolutely. Well, one thing is, is to reiterate my belief that the Iranians should have a civilian nuclear power program. It's in their right to have it. The problem is the government cannot be trusted to enrich uranium because one, they've hidden programs in the past and they may be hiding one now, who knows; and secondly, they've declared they want to have a nuclear weapon to destroy people -- some in the Middle East. And that's unacceptable to the United States and it's unacceptable to the world."
William Branigin was first to break this story yesterday, writing on washingtonpost.com that, contrary to what Bush said, "the Iranian government has not publicly declared a desire to obtain such weapons. In fact, Iranian leaders have said the opposite, repeatedly insisting that they do not want nuclear arms and asserting that their nuclear program is intended only to generate electricity. . . . "
"Asked to explain Bush's comment, White House spokesman Gordon Johndroe said he spoke in 'shorthand,' combining Iranian threats against Israel with concerns about Iran's nuclear program. 'The president was referring to the Iranian regime's previous statements regarding their desire to wipe Israel off the map,' Johndroe said. 'The president shorthanded his answer with regard to Iran's previously secret nuclear weapons program and their current enrichment and ballistic missile testing'"...