links for 2010-01-23
Your One Stop Shop for Understanding the Implications of Bernanke Brinksmanship...

Ten Economics Pieces Worth Reading: January 23, 2010

1) Christina Romer et al. (2010): ARRA: Second Quarterly Report:

[T]he ARRA had a substantial positive impact on real GDP growth in the second, third, and fourth quarters of 2009. The CEA estimates suggest that the Act contributed between 2 and 3 percentage points to real GDP growth in the second quarter; between 3 and 4 percentage points in the third quarter; and between 11⁄2 and 3 percentage points in the fourth quarter. The estimates imply that as a result, it has raised the level of GDP at the end of 2009 by about 2 percent, relative to what otherwise would have been. The Act has also increased employment in each quarter relative to what otherwise would have occurred. As of the fourth quarter of 2009, the CEA estimates that the ARRA has raised employment relative to the baseline by between 11⁄2 and 2 million. The CEA estimates for both the effects on GDP and employment are similar to those of respected private forecasters and government agencies...

2) Economics of Contempt: A Few More Assorted Thoughts on Financial Reform:

The single best thing we could do for financial reform: Triple the budgets of all financial regulatory agencies. Immediately.... Obama has proposed banning banks' prop trading desks and internal hedge funds. I'm fine with that, as long as it's done properly... there's really no compelling reason why the banks need to have prop trading desks or internal hedge funds.

But you can't simply prohibit banks from buying and selling securities for their own account, because that's precisely what market-makers do.... Some people will claim that it's impossible to distinguish between market-making trades and propietary trades, but that argument is completely baseless. The banks themselves already distinguish between their market-making trades and their proprietary trades, as there's a whole different set of rules for proprietary versus market-making trades....

In any event... there's zero chance the proposals Obama announced today will ever be law. This was a fairly transparent political stunt — the White House needed to do something to take the media's focus off of health care 24/7, so they flew in Volcker and announced some proposals that sound good to the media. The two Senate staffers I talk to regularly both said their offices were basically ignoring Obama's proposals, because even if the White House fights for them (which they won't), Chris Dodd has no intention of inserting them into his committee's bill. I like how some people think Obama's proposals represent a fundamental turning point on financial reform, because....well, clearly this is their first rodeo. (Hence the uber-quixotic language they use to describe financial reform.)

3) Paul Krugman: Glass-Steagall, Part Deux:

I don’t think that too-big-to-fail is at the heart of our financial problems. Nor do I think a sharp separation between narrow banking depository institutions and other financial players is a silver bullet: unless the shadow banking system is really reined in, financial institutions will create things that look like deposits, act like deposits, but don’t have an FDIC guarantee; yet in crisis, there will be strong incentives to bail them out anyway.

4) James Hamilton: Inflation fears:

Inflation is not something you should be afraid of for 2010. But what we need is a convincing commitment from the government to both near-term stimulus and longer-term fiscal responsibility in order to be assured that it's not a concern over the next decade.

And that's not what I'm seeing from the U.S. Congress.

5) Barry Ritholtz sends us to Danny Blanchflower on the Economics of Lunacy, and comments:

Fiscal and monetary intervention has prevented a great depression, but the new political consensus on public spending cuts could send us ‘back over the cliff’ says the man who predicted the recession. David Blanchflower, known as Danny, was one of the very few economists to anticipate the severity of the credit crunch. As a member of the Bank of England’s monetary policy committee he consistently called for rate cuts in defiance of his peers. Video:

Source: "‘The economics of lunacy’: Blanchflower warns against austerity": Daniel Grote | 14:17:26 | 15 January 2010

6) PEG: Why Tumblr is kicking Posterous’s a--:

Tumblr and Posterous are the two most prominent “tumblogging” sites... that make blogging more straightforward by making it easier to post media.... But now Tumblr has been an Alexa Top 100 site for a while and is still growing strong.... Yet Posterous has everything to win: it’s a Y Combinator company with top-tier investors like Chris Sacca and Mitch Kapor. Its founders are experienced software engineers with computer science degrees from Stanford. How come it’s eating dust from a small startup started by a high school dropout? The answer is... Tumblr is a New York company and Posterous is a Silicon Valley company.... Posterous is an engineered product, while Tumblr is a designed product. Posterous is extremely well engineered. There’s nothing wrong with it. Every single thing about it is well thought out. But it’s not just that it’s less pretty (though it is). It’s just not designed as well as Tumblr is....

I’m not here to bash Posterous, I think it’s a tremendous product and I wish them the best of luck.... But if you’re in a market where what matters is design edge, that’s not enough. There needs to be great design, by which I don’t mean looks (though they’re important), but how it works for the end user.... Tumblr and Posterous are just picture-perfect examples of two very important trends. The first is that New York has truly come of age as a startup hub, with its own “style”, its own way of doing things, its own mindset, which can sometimes — not always, but sometimes — kick Silicon Valley’s a--. The second is that for consumer web apps today, design matters more than technology. Much has been written about how the cloud, accessible web frameworks, etc. have dramatically lowered the cost of getting a startup to market, and that’s certainly true, but it also means that since everyone is on EC2 and Ruby on Rails, technology is no longer what differentiates most consumer web apps. What does is design. UI/UX design. Social design. Business model design as well...

7) GRAPH OF THE DAY: From the Economist Free Exchange: Good news is out there:

From a Vox write-up of new research by Maxim Pinkovskiy and Xavier Sala-i-Martin. They also note that the world income distribution used to be bi-modal—the haves and the have-nots. Now it approximates a normal distribution:

Good news is out there | The Economist


The politicalization of the WSJ has moved to a new and more risky phase. The paper is now in danger of being a money loser... for those traders who read its content. It used to be that articles on the Market or specific companies or various finance stories were objective and reliable and free from bias. Sure, you could always count on money losing, bat-shit crazy nonsense in the editorial pages, but that was a special area of sequestered partisans, who due to their insanity cared not a whit about how much capital their lunatic ravings lost their readers. (The list is long and varied, but the Boskin “Obama Crash” on March 6th is a good place to start; then read anything Don Luskin writes — he is a reliable contrary indicator).

I assumed the drunks on the OpEd page did not care about what they did to your portfolio if you drank their Kool-Aid. But they were easy to avoid... the business pages were... run with a steel-eyed objectivity that professionals could rely upon. That is no longer the case.... I keep seeing headlines that are blatantly political, articles that looked to be edited by a ham-fisted politburo apparatchiks, other signs that the usual outstanding journalism at the WSJ is under assault....

A specific article that led to this sad conclusion? The most egregious example (of many) I noticed was this front page headline: New Bank Rules Sink Stocks.  This is the sort of silly headline I expect from lesser media outlets, not the Journal. Without getting too philosophical, we know that day-to-day action is mostly nonsense. Selecting a causal factor from the cacophony of news releases, earnings, price data is all but impossible.  There is a whole lot of noise, and very little signal. Assigning a definitive causative factor is at best a guessing game, at worst an exercise in futility.

9) STUPIDEST THING I HAVE READ TODAY: Economics of Contempt quotes John Taylor:

"[N]ot one counterparty, derivative counterparty to Lehman, filed for bankruptcy after the Lehman case. The major creditors who did not fail. So it's hard to find a direct knock on effects from that in the data."

What?! First of all, Lehman's biggest derivatives counterparties — the other dealers — were virtually all bailed out by their governments. Second of all, there were lots of hedge funds that failed because of their open derivatives positions with Lehman, and especially with Lehman Brothers International (Europe). The fact that John Taylor didn't know about these hedge fund liquidations at the time doesn't mean they never occurred. They occurred. Oh believe me, they occurred.

10) HOISTED FROM THE ARCHIVES: DeLong (August 25, 2009): Bernanke's Reappointment:

David Wessel: "Obama to Reappoint Fed Chairman Ben Bernanke - President Barack Obama will announce Tuesday that he is nominating Ben Bernanke for a second four-year term as chairman of the Federal Reserve, White House Chief of Staff Rahm Emanuel said..."

Two reactions:

  1. I think Bernanke is one of the best in the world for this job--I cannot think of anyone clearly better. He has made only one big mistake--buckling under to pressure from all those yelling at him for enabling moral hazard and not finding a way to takeover Lehman Brothers, and he is not going to make the same mistake again...

  2. I am surprised that he is being reappointed. I would have thought that the combination of people angry because he has given too much public money to the banks and people angry because he didn't stop the recession would together make him damaged and that Obama would want to bring in a fresh face--never mind that Bernanke had no way to try to lessen the recession save by policy steps that inevitably involve giving money to the banks. It shows, I think, a seriousness about getting the policies right--or as close to right as we can--that I like to see in a president...