links for 2010-01-27
A Good Sign: Barney Frank Is Nice to Obama

Ten Economics Pieces Worth Reading: January 27, 2010

1) Martin Wolf: Volcker’s axe is not enough to cut banks to size:

[T]he biggest issue is whether Mr Volcker’s ideas are in themselves good. Are these new proposals desirable, workable and relevant? On the first of these, my answer would be: yes. It is desirable that institutions are prevented from exploiting explicit and implicit guarantees in order to make speculative investments of little economic benefit.... Again, it would clearly be much better if it were possible to wind up financial institutions without excessive disruption, because they are not too large or because they are not too interconnected with the rest of the financial system. Then, are these ideas workable? Here doubts begin to arise. Would it really be possible to draw and, more importantly, police a line between legitimate activities of banks and activities “unrelated to serving their customers”?...

Finally, there is the biggest question of all – that of the relevance of these ideas. There is no doubt that deposit-taking institutions are special. They perform irreplaceable services for the public and the economy. But, as experience has now taught us, the vast parts of the financial system that evolved, particularly in the US, partly in order to get round capital requirements designed to make banks safer, are of vital importance, too. As Paul Tucker, deputy governor of the Bank of England, noted in an important recent speech, “shadow banking” also had to be rescued. Any institution that promises to redeem its liabilities on demand, while investing in longer-term or riskier assets, has bank-like characteristics and is vulnerable to a run.... It is, alas, not the case that the US government can credibly promise to make banks safer, while leaving this vast forest of shadow institutions to the market....

Moreover, the question of relevance arises in other ways, too. In this crisis, at least, banks’ investments in hedge funds, private equity and even proprietary trading were simply not the core of what went wrong. Again, while it is easy to rail against big banks, the failure of a small, highly interconnected institution, Lehman, proved vastly important. Indeed, it triggered the rescue of the entire global system. I admire Mr Volcker and strongly support his desire to develop a financial sector that supports the wider economy.... I agree that part of the solution is indeed structural. But these proposals are, in important respects, unworkable, undesirable and irrelevant.... The president may indeed be desperate. But much more work is needed.

2) Paul N. Van de Water and James R. Horney: Using Reconciliation Process to Enact Health Reform Would Be Fully Consistent With Past Practice:

Democratic congressional leaders must soon decide whether to use the reconciliation process to help pass health reform legislation.... Some critics have charged that using reconciliation to enact a major change in policy, such as health reform, would... represent a gross misuse of the process... this charge is incorrect: Congress has employed reconciliation many times to make major policy shifts... welfare reform enacted in 1996, massive tax cuts in 2001 and 2003, and creation or expansion of several health coverage.... Using reconciliation to help enact health reform would be consistent with past congressional practice.... The sharp break with past practice took place in 2001, when Congress used reconciliation to enact a large tax cut that greatly increased federal deficits and debt. Prior to 2001, every major reconciliation bill enacted into law reduced the deficit. In 2003 Congress used reconciliation to pass another round of deficit-increasing tax cuts.... In 2007, the House and Senate adopted rules preventing Congress from using reconciliation to increase deficits and debt as was done in 2001 and 2003. Since rising health costs are the single largest reason for projected long-run deficits, it is appropriate that health reform be considered through the reconciliation process.

3) Ryan Avent: The "spending freeze" in context:

[W]hile the administration is busy not denting the long-run budget deficit, it's also not addressing short-term economic weakness.... Real GDP is expected to increase by 2.1% in 2010 and 2.4% in 2011. That's extremely sluggish growth coming out of a deep recession. Core consumer price inflation is forecast to be 1.1% in 2010 and 0.9% in 2011. And CBO has unemployment at 10.1% in 2010, 9.5% in 2011....

In a conference call that just concluded, Deputy Director of Office of Management and Budget Rob Nabors responded to a question on how the freeze might conflict with efforts to return the economy to full employment. Mr Nabors noted that in 2010, the adminstration was focused on putting Americans back to work. Then in 2011, when the economy is on a more stable footing, the president will turn his attention to working toward a sustainable budget situation. This is utter foolishness. Fiscal 2011 begins in October of this year. At that point, according to CBO, unemployment will be above 9.5%. At the beginning of fiscal 2012, according to CBO, unemployment will still be at or near 9%. This is an important point; one of the primary factors causing current high deficits is the revenue-reducing effect of a weak economy combined with the automatic increase in spending on social programmes associated with the weak economy. It's very difficult to balance a budget while the economy is weak, because every contractionary policy move further reduces economic activity, thereby trimming revenues and putting upward pressure on automatic stabiliser spending.

The one source of solace here is that the freeze proposal is too lame to produce serious budget cuts. But that means it's basically a waste of time and political energy, at best. No amount of spinning from the administration is going to cover that fact.

4) Greg Ip: Not liberal or conservative, just incoherent:

[T]e IMF warns against “premature and incoherent exit” from government support for the economy. “Incoherent” nicely describes the policy debate in Washington....

Start with the Fed. On the right, they’re angry about quantitative easing which they say is monetising deficits. On the left, they’re angry about lax regulation of banks. Both are furious at bail-outs... both think the Fed created a bubble with its low interest rates. So the Fed, presumably, should shrink its balance sheet, end its asset purchases and liquidity programmes, order banks to raise underwriting standards and raise rates to nip the next bubble in the bud. And this is going to bring unemployment down?...

[T]he intensity of attacks could shape its behaviour, and not for the better. The confirmation circus is surely the last nail in the coffin of any additional quantitative easing.... Buy more mortgage-backed securities now, and everyone will see payback to Mr Reid. Perversely, to avoid perceptions of political pliability, the Fed may err on the side of less stimulative monetary policy. Meanwhile, to atone for past sins bank regulators are breathing down lenders’ necks and even Mr Bernanke admits “uncertainty attending... regulatory capital standards” is suppressing the supply of credit.... The administration has two vacancies to fill on the Fed’s seven-member board of governors—more if some of the current governors retire.... A weakened board means a louder voice for the Fed's hawkish reserve bank presidents.

On fiscal policy, voters seem equally upset about deficits and high unemployment as if the first has caused the second when the reverse is true. Republicans have certainly fanned this perception by insisting the stimulus did nothing.... Obama feeds the confusion. Last fall he warned that adding to the national debt could lead to a double-dip recession.... This week, even as Congress prepares additional stimulus, Mr Obama has begun ringing the fiscal austerity gong, backing a deficit commission (albeit too late to make a difference) and offering a discretionary spending freeze.

Done right, stimulus now and deficit reduction later is good policy. Yet such delicate sequencing is tough enough in rational times, never mind this post-Massachusetts world.... The risk of a policy error, always high, may be rising.

5) Duncan Black: Where Was Plan B?:

I get that administration officials were not as pessimistic as I was about the economy. I don't claim to right and prescient about everything. They could have been right!

What bugs me is that they should have had a plan 'B' in place. And they didn't.

6) GRAPH OF THE DAY: CBO Unemployment Rate Projections:

7) BEST NON-ECONOMICS THING I HAVE READ TODAY: Steve Mirsky: Greenhouse Bananas: Non-Science Smear Campaigns: Scientific American:

Here’s my conclusion: the only strong evidence we have that Oklahoma Senator James M. Inhofe isn’t a clown is that his car isn’t small enough...

8) SECOND STUPIDEST THING I HAVE READ TODAY: Faux News on Fifteenth Street--otherwise called the Washington Post--attacks the idea that elected representatives should have anything to do with who runs the Federal Reserve: Should Bernanke Stay at the Fed?:

The issue now is much bigger than whether Mr. Bernanke gets another term. By threatening his tenure for no apparent reason other than political panic and pandering, his new opponents have turned this confirmation process into a test of central bank independence, which is an indispensable element of modern economic management. If a stampede of spooked senators were to trample Mr. Bernanke’s confirmation, the message to markets would be that the value of the U.S. dollar is hostage to short-term politics. That would deliver a huge, possibly lasting, blow to the economy.

9) STUPIDEST THING I HAVE READ TODAY: Pope Leo XIII Against Democracy, Feminism, Progressive Income Taxation, and Socialism (via Matt Yglesias): Pope Leo XIII 28 December 1878:

Their habit... is always to maintain that nature has made all men equal, and that, therefore, neither honor nor respect is due to majesty.... But... inequality of rights and of power proceeds from the very Author of nature, "from whom all paternity in heaven and earth is named"... by mutual duties and rights, that the thirst for power is restrained and the rational ground of obedience made easy, firm, and noble.

Assuredly... "There is no power but from God; and those that are, are ordained of God. Therefore he that resisteth the power resisteth the ordinance of God. And they that resist purchase to themselves damnation." And again she admonishes those "subject by necessity" to be so "not only for wrath but also for conscience' sake," and to render "to all men their dues; tribute to whom tribute is due, custom to whom custom, fear to whom fear, honor to whom honor."... [E]ven in the kingdom of heaven He hath willed that the choirs of angels be distinct and some subject to others... so also has He appointed that there should be various orders in civil society, differing indignity, rights, and power... many members, some nobler than others....

[I]f at any time it happen that the power of the State is rashly and tyrannically wielded by princes, the teaching of the Catholic church does not allow an insurrection... she teaches that relief may be hastened by the merits of Christian patience and by earnest prayers to God....

Even family life itself... necessarily feels and experiences the salutary power of the Church... as Christ is the head of the Church, so is the man the head of the woman... so also should wives be subject to their husbands... the authority of our heavenly Father and Lord is imparted to parents and masters....

[T]he Church, with much greater wisdom and good sense, recognizes the inequality among men, who are born with different powers of body and mind, inequality in actual possession, also, and holds that the right of property and of ownership, which springs from nature itself, must not be touched and stands inviolate...

10) HOISTED FROM THE ARCHIVES: DeLong (2003): The Manaus Opera House:

Deep in the Brazilian Amazon is Manaus, and inside Manaus is the Manaus Opera House:

The Amazon Theater is one of the most important monuments left by the exhilarating rubber boom period. It was preserved as a national partimony in 1965, and will celebrate its centenary in 1996, in perfect condition after a thorough renovation that left it in its original colors and details. The architecture is eclectic and neo-classic with material and artists brought in from Europe. On the outside of the building, the dome is covered with 36,000 decorated ceramic tiles painted in the colors of the national flag. In the shape of a harp, the central nave can seat 640 in the auditorium and the 3 floors with box seats. Toward the back, the stage curtain projects the painting "Meeting of the Waters"; originally done in Paris by Crispim do Amaral. This curtain rises vertically so as not to damage the painting. On the ceiling are painted scenes depicting music, dance, drama, and a homage to Carlos Gomes. The central gold chandelier descends to the level of the seats for cleaning purposes and changing light bulbs. Above this chandelier, in the middle of the roof, there is a painting imitating the view of someone standing beneath the Eiffel Tower. The Noble Room was decorated by Domenico de Angelis and contains paintings suchs the one entitled 'Guarani". The floor of this room is made of wood fitted together without the use of nails or glue. The theater also contains a small museum with a rich history. Items on display include original building plans, rare porcelain, and even objects from artists who performed there.

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Built as a result of the extraordinary burst of prosperity that was the Brazilian rubber boom. But the rubber boom soon came to an end. The British Empire found that rubber would grow very well in Malaya--after all, the rubber plant's pests and parasites were thousands of miles away. Malayan rubber plantations worked by Chinese immigrants were able to undersell Brazil's rubber producers, and the Brazilian rubber boom collapsed.