Business People and Their Assumptions

I was really struck this week by the article here from Matt Taibbi which I blogged about a few days ago.  I also sent it out to some of my favorite correspondents in the business world- I always like to see how the Wall Street Journal crowd reacts to bomb-throwers like Taibbi.

From one correpondent (we'll call him J) I got the following.  First, an exerpt from Taibbi:

FREE MONEY. Ordinary people have to borrow their money at market rates. Lloyd Blankfein and Jamie Dimon get billions of dollars for free, from the Federal Reserve. They borrow at zero and lend the same money back to the government at two or three percent, a valuable public service otherwise known as "standing in the middle and taking a gigantic cut when the government decides to lend money to itself."

Or the banks borrow billions at zero and lend mortgages to us at four percent, or credit cards at twenty or twenty-five percent. This is essentially an official government license to be rich, handed out at the expense of prudent ordinary citizens, who now no longer receive much interest on their CDs or other saved income. It is virtually impossible to not make money in banking when you have unlimited access to free money, especially when the government keeps buying its own cash back from you at market rates.

Next, the response from my correspondent:

Economics 101 tells you this can’t be true. If it were that easy to earn huge profits in the banking industry, we would see globs of new entrants and profits across the industry would come down. Barriers to entry aren’t that high.

And finally, the rant from yours truly:

Barriers to entry aren't that high????? Are you serious? Of course barriers to entry for major banks are high! There's a huge advantage to being an existing monstrously large bank. You seem to miss the whole point of this argument because you have a bedrock assumption that Finance is an Efficient Market because...... well why exactly? The whole point is that the industry is NOT efficient because we've developed into a Crony Capitalist system in which the currently powerful people set rules to make sure that they stay powerful.

Look at the banking industry- they're making record profits. Are there new entrants into the industry? Has any company replaced Lehman or Bear Stearns? Do you have a theory as to why it might be that the answer is no? Are you trying to argue that banking industry profits aren't as large as they seem? I'd really like you to clarify this- I'm staggered.

OK, J gets to respond:

The excerpt says that Blankfein and Dimon can borrow from the Fed for next to nothing and then turn around and lend it to ordinary people at high rates, pocketing obscene profits from the rate difference. Several points: (1) I never said it’s easy to become a “major bank,” so I’m not sure where you got that. Banks don’t have to be huge to get low rate loans from the Fed and then make loans to ordinary people. (2) Banks are aggressively competing with each other to get my business, and if profits from this “free money” scheme were as readily plentiful as you and the Taibbi think, then fundamental, widely accepted economic theory would say the interest rate disparity would come down, even if it were a quasi-Efficient Market. (3) The biggest profit margins for the major banks don’t come from the consumer lending anyway, but rather from investment banking. Goldman Sachs (Blankfein) isn’t even in the consumer lending business as far as I know, and JPMorgan (Dimon) has LOST money on its mortgage and credit card business while raking it in on the investment banking (http://www.reuters.com/article/2010/01/15/us-jpmorgan-idUSTRE60E1UO20100115). Look at the profit of the largest consumer lending bank, Bank of America, and you can see how highly variable it is (http://ycharts.com/companies/BAC/profit_margin).

So I maintain my position that this Free Money argument is flawed. The problem is with investment banking, not consumer banking.

Naturally I spotted the flaw in his argument:

Of course the problem is with the investment banking side.  But the solution has been to take the money from the consumer banking side, using easy money to recapitalize the banks that lost all that money on the investment banking side.

Again you talk about economic theory, claiming that it proves it just can't be that banks can make money so easily, as consumer interest rates would come down.  But again, the whole point of Taibbi's post is that those rates have not come down because of the crony capitalist nature of the whole enterprise, in which government intentionally guarantees profits to banks in order to make up for the huge losses of 2008 and keep them afloat.  In other words, the huge bank profits are a feature of federal policy, not a bug. 

On another part of the topic (J's comments in red, mine in maroon),

The alternative to bailing out a few banks was a massive meltdown and collapse far greater than we actually experienced, leading to devastating unemployment. Dodd-Frank will help ensure that the situation does not repeat itself, and that irresponsible companies will not be saved. Anyone who thinks there’s still an implicit government guarantee is deluding himself.

I agree that government had to do something. I think there's even a good argument for bailing out the banks rather than nationalizing them. But you have to admit that the solution chosen didn't force the banks to accept the pain that their businesses practices should have led to. And I hope Dodd-Frank works too, but of course the banks are fighting everything in it- that's why Taibbi is so pissed, because the same guys who caused the crisis are trying to stop the solution to the next crisis- that's why he (and I) are so mad at bankers- not so much that they brought down the economy, but more that they now see themselves as being persecuted- they should be groveling and begging forgiveness. And I think you're the one deluding yourself about the government guarantee- what makes you think a subsequent government will allow a "Too Big to Fail" institution to go belly up? You just said we were right to bail them out before- why wouldn't we do it again?

There are two reasons the situation will not repeat itself. First, Dodd-Frank is increasing capitalization requirements and the “cost” of becoming a Too-Big-To-Fail (TBTF) institution. Second, I believe public sentiment is far less likely to support bailouts in the future. I have no problem with increased regulation to ensure there are fewer TBTFs or that there are protections against the risk of system-wide meltdown. But don’t make the mistake that any regulation is good regulation. I see examples in the mutual fund industry (money market funds in particular) that are purported to protect against another financial crisis, but that actually miss the mark and instead impose unnecessary burdens on the industry without improving consumer protection. If enacted, they would definitely INCREASE costs to consumers and probably INCREASE risk to the markets. To the extent specific regulations proposed for banking are similarly unhelpful, I hope the industry will resist them.

This is the theme I keep hearing from Finance guys: essentially that the cure (government regulation) is worse than the disease.  I address that issue a bit with my next correspondent below.

From another correspondent in the financial industry (I'll call him N) I got this:

One of the major issues facing our society right now is crony capitalism - which is the marriage of government and business. Business would prefer not to compete - they don't want to play fair and will use government influence and rules to tilt the playing field in their direction if they can. What we're seeing on wall street, and in the car industry and in the green tech industry, and in the farm industry is the use of government to put profits into corporations. 

You and I have different solutions to the problem. From what I understand, you believe in stricter regulation to prevent business abuses. I think that the problem is in fact the influence of government and their involvement in industry that is the cause of the problem. If the humans in government are making decisions that influence profits, then the humans running the businesses will try to influence the government, through lobbying and other less savory means. My solution is to get government out of the influence business (out of the picking winners business, out of the saving companies business) and let a robust free market control business.

It is only businesses that are forced to compete for customers that will do what is right for their customers. If they do wrong, they should fail. So I was against all of the bailouts, and I'm against more regulation because that just makes the problem worse.

Look at the industries where government is heavily involved (finance, healthcare, anything to do with the environment) - this is where things are screwed up. The healthy growing innovating industries are the ones where there is less government involvement.

A little back and forth now.  From me:

I agree that my position of increased government regulation is imperfect and open to problems with unintended consequences, stupid regulators, and all the rest. Here I paraphrase Churchill and respond that government regulation is ineffecient, prone to abuse, and loaded with unintended consequences. The only thing worse than govenrment regulation of the financial industry is: Any Other Solution you can name.

I love the moral lesson of letting the big banks all come crashing down, with lots of big stockholders losing their shirts. The problem is that it would have brought the rest of the economy down with it. In the 1930s unemployment was 25%+. And the actual people involved, the ones doing these reckless deals, would still be fine, since they've been banking money during the good times. And since the whole industry did it, most of them would get jobs again anyway, since there isn't anyone else to hire who isn't tainted. So the trouble with letting Creative Destruction do its work is that in these large financial firms the incentives for individuals aren't set up properly. I don't see how to set them up properly without government intervention- do you?

Right now the Financial System seems rigged to benefit the big players. Goldman Sachs can screw over a whole swath of investors, but these people have nowhere else to go when they want a certain kind of deal done, right? I don't see that taking government further out of the industry will do anything but make this problem worse. It's too easy to rip off people right now- we take out enforcement and it will get harder? The theory sounds good, but I don't think you can garner much evidence that capitalism actually works this way- the financial markets aren't that efficient.

Anyway, I agree Crony Capitalism is a huge problem. What's interesting is that the Tea Party and the Occupy Wall Street crowds are both angry about the government-business n exis and how it harms prosperity for all of us (especially the middle class). But the TP focuses the rage on government, while OWS focuses it on business. Maybe we should get out of this duality and look at the whole system.

His response:

How come most industries don't suffer this problem? Why doesn't Apple screw their customers? The executives have banked millions, and yet they continue to do what's right for their customers, despite this fact. BTW, I have no illusions that Apple execs any less greedy than bankers.

It's not just Apple, nor is it just technology. I can point to industry after industry where the companies serve the needs of their customers and are constantly improving their products - without any government regulation.

I will grant you that the financial services industry has a broader impact on society - but the fact that we have not let banks fail is precisely the problem. In fact, the real problem is that we have not let the bond holders lose a ton of money. People who b bank stock know they are taking a lot of risk - but they have serious upside if the stock does well. Bond holders do not have a big upside. So the real role of a bond holders is to carefully assess the risk involved in the company to who they are lending. But if a bond holder knows they will be made whole no matter what happens, what is their incentive to scrutinize the people to whom they are lending money.

By the way, what regulation would have prevented the crisis of 2008?

 

 And me:

First of all, you won't hear me complaining about "greed". It's a human condition, and we're not going to change that. The best thing about capitalism is that it's a system that can channel greed to benefit the whole society. Capitalism works tremendously well in the area of consumer electronics, and more regulation is certainly not needed.

I'm glad there's some regulation there, though- I know that my I-Phone is unlikely to cause me cancer or leak battery acid on my ear because there are government safety standards they have to meet. And if some new start-up creates a superior product, I can safely purchase it because I know it won't leak battery acid either. Basic government regulation gives new start-ups a chance to break in, since I wouldn't dare risk buying such a thing if I didn't have some guarantee against catastrophe.

You see the analogy to other industries as an argument for less regulation in Finance. But my point isn't that capitalism doesn't work- I'm a capitalist too! My point is rather that pure capitalism doesn't seem to work in some industries. Do you want to stop government food safety inspections? I don't have time to educate myself about every industry so I don't get screwed by some fly-by-night company.

Finance is a great example of this. The FDIC means I don't have to worry about my bank deposits being safe. It also limits bank profits, since my bank is paying in to the FDIC. I think that's well worth the tradeoff.

You ask a very appropriate question: what regulation would have stopped the 2008 disaster? I'm sorry to say that I don't know- I'm not in Finance, and certainly don't understand the intricacies enough to be able to say. I would guess you could fashion the answer for my side better than I could (ask me about social work! I can argue both sides there!). I would certainly hope that Dodd-Frank is promulgating reforms that would have stopped the meltdown of '08. If that's not the case, then the law doesn't go far enough. Yes, yes, of course we're fixing the last crisis, not the next one, but at least we should stop the last one from recurring. Laws put in place during the 1930s were pretty successful in staving off a similar crisis up until now.

Again, I think you're hopelessly naive about the moral hazard issue. Yes, you're quite right that because of bailouts we have an industry that socializes risk and privatizes gains, and you're right that in theory we just need to let them know there's no such thing as "too big to fail" and they'll reevaluate their risk models. But in the real world it's not going to happen- Paulson tried it when he let Lehman fail, and look what happened- huge panic, the whole industry (including banks that hadn't over-invested in mortgages) was about to go belly up, and the government stepped in to bail the rest of them out- and that was the most conservative administration of our lifetime that did it. Do you really think President Romney is going to let the financial industry crash if there's a crisis in 2014? I don't. There's just no way politicians are going to allow a Depression on their watch- politicians know what happened to the Republican party in 1932- they didn't control the presidency for 20 years and lost the House for 62 years! Bailouts are happening, and it doesn't matter what you or anyone says in advance.

 

 And from him:

Do you seriously think that the reason your phone does not leak battery acid on you is due to government regulation? So if the regulation that governed this (who know what that is) was removed, this would immediately become a concern?

Which regulation is causing the car companies to develop technologies like blind spot detection and driver awareness detection?

I'd have to look for it, but I saw a study that shows that growth, progress and technology is responsible for almost all improvement in cleanness and safety - not regulation.

Why are you assuming that allowing banks to fail would be a disaster? Do you know that well over 100 banks have failed in the past few years? BTW, the orderly management of a bank failure is a good example of the right use of government. It's just the well-connected investment banks that are "too big to fail". I think the issue of the financial institutions having a massive impact on the rest of the economy is a real problem - my solution is not to increase the regulation on these institutions - they'll always find a way around it. I would limit the ownership structures instead. These problems never happened when the institutions like Lehman and Goldman were partnerships. And if you look at firms that have stayed partnerships, they have not suffered from this excessive risk taking. That's because a significant piece of each partner's wealth is tied into a firm when there is a partnership. The problems that we're facing started then the firms started to go public.

 

 And since it's my blog, I get the last word:

As to your solution for the TBTF banks, that sounds fine to me at first blush- forcing big banks to become partnerships sure sounds like regulation though, doesn't it? It's simple regulation of course, but I'm quite open to that. Don't you think the financial industry would fight your solution hard too?

I assume that allowing TBTF banks to fail would be a disaster because when it happened in 1929-1932 it was a disaster. And now they're even bigger. And because every economist and pundit in 2008 said it would be a disaster, leading to a second Great Depression, if we didn't bail out the Financial Industry. Hey, maybe you're right and they're all wrong. I wonder what you think would have happened? You've always implied that it would have been really bad, but that it was necessary to eliminate future Moral Hazard.

As I said, consumer electronics are well-served by the free market and require very minimal regulation. And of course without regulation, safety problems would come up a little more often- then the only outlet to deal with them would be lawsuits. Are you in favor of keeping it easy to file lawsuits when corporations put out products that turn out to be dangerous? I don't think that's good enough, by the way, but many conservatives want to make it harder to file suits, AND want to lower regulation. That leaves lots of incentive to cut corners in many product areas. Remember the Chinese baby formula scandal a few years ago? That couldn't happen here very easily right now.

Of course lots of safety innovation makes money too, so car and other companies do it. You're making a straw man argument here- I don't dispute that lots of great things come from capitalist innovation. But government regulation forced seat belts to be mandatory, and improved the environment by mandating catalytic converters (conservatives are still against pollution right? Even if Global Warming is a hoax, your side still believes smog is real, right?). That wouldn't have happened from the free market alone.

 

 Congratulations if you made it all the way to the bottom of my correspondence! 

Occupy Wall Street and Rolling Stone

Matt Taibbi at Rolling Stone is just about my favorite writer on the internet.  This piece is great:

And we hate the rich? Come on. Success is the national religion, and almost everyone is a believer. Americans love winners. But that's just the problem. These guys on Wall Street are not winning – they're cheating. And as much as we love the self-made success story, we hate the cheater that much more.

We cheer for people who hit their own home runs in this country– not shortcut-chasing juicers like Bonds and McGwire, Blankfein and Dimon.
That's why it's so obnoxious when people say the protesters are just sore losers who are jealous of these smart guys in suits who beat them at the game of life. This isn't disappointment at having lost. It's anger because those other guys didn't really win. And people now want the score overturned.
All weekend I was thinking about this “jealousy” question, and I just kept coming back to all the different ways the game is rigged. People aren't jealous and they don’t want privileges. They just want a level playing field, and they want Wall Street to give up its cheat codes...

He goes on to describe the many ways in which the banks have been handed free money and bailed out in a myriad of ways from their stupid decisions, while regular Americans have no such advantages.

One thing about OWS that conservatives don't seem able to grasp is that it's a leaderless movement, completely unhierarchical.  It's incredibly diverse, so while there are really cool, smart people like this:

...there are also plenty of crazy Stalinists, heroin dealers, and apparently even a stray Nazi or two.  Right now the best thing the movement is doing is building momentum and getting the issue of inequality into the national conversation.  I'm not sure if anything else will come of it, but if not that's still a pretty good accomplishment.

The comparison to the Tea Party is interesting.  There are plenty of similarities.  But one key for me is that the Crazies in the Tea Party have completely taken over the larger conservative movement.  The Republican presidential candidates are completely unwilling to cross even the most extreme Tea Party talking point.

(I love that sign, from a Tea Party rally.  It's a cheap shot I know.  Stupid protesters are all over the place at both OWS and Tea Party rallies- I concede that readily.)

I don't think that any significant Democrats, on the other hand, are likely to propose forgiving all college loans or socialized medicine.  The kooks on the Left are on the fringe, while the kooks on the Right are in charge of the GOP.

Filibuster Nonsense

James Fallows at the Atlantic has been on the warpath regarding the Republicans' constant use of the filibuster to stop any business from getting done in the Senate, in a quite unprecendented way, and of the mainstream media's inability to report this as the outrage that it is.  He calls it the "False Equivalence Watch" and I agree wholeheartedly.

But I have one quibble: Democrats could do something about this.  The tactic started being used in 2009, when we kept reading that Senate rules could be changed at the start of any new session by majority vote.  Well, the Democrats were still in control of the Senate in 2011 at the start of this term, and they didn't do anything about the filibuster.  President Obama hasn't made a rash of recess appointments in order to force the issue and get his picks into the positions in which he wants them.

As I've said before, if there is a Republican sweep in 2012, and Democrats start using the filibuster in this way to slow things down, the GOP will immediately end the filibuster.  Democrats will howl "unfair!"  And I'll have to restrain myself from driving to Washington and punching each of them in the face for their hopeless naivete. 

If there is somehow a Democratic sweep in 2012, I dearly hope the Democrats will end the filibuster, but I doubt they will.  They just don't have the courage of their convictions.  We liberals deserve our minority fate if we aren't willing to fight.

A Quick Point about Tax Changes

I just need to make one point that is sort of obvious, but seems lost among many Republican tax plans:

When you say that you have a plan that lowers taxes on "job creators" but is also "revenue neutral", that means (by definition) that you favor raising taxes on lower or middle income earners.  Right?

Foreign Policy Thoughts

Recent good news on the foreign policy front includes the end of Qaddafi and the looming pullout of US troops from Iraq. Andrew Sullivan captures this nicely:

I think of the actual record of this president. He has drastically tightened the noose around Assad and Khamenei and avoided the war the neocons so desperately want with Tehran. And he has ended the war in Iraq as he promised to, and concluded a war with a victory many of us doubted at the get-go, without another quagmire, and with considerable allied and Arab support.

The good news is that my predictions of doom in Libya have been proven wrong.  Thrilled to be mistaken!  Among his foreign policy and national security accomplishments, President Obama has now seen:

• A successful conclusion to the Libya intervention, with zero American casualties
• A pullout from Iraq as agreed to three years ago
• The death of Osama Bin Laden and other Al Qaeda figures
• No major terror attacks in the US

Of course, the Republicans are never happy with anything if Obama's name is attached.  Watching Mitt Romney dodge and weave as he tries to tell everyone how disastrous this foreign policy goes is kind of fun viewing. 

However, I have big criticism in one area, from the Left: targeted killings by drone are way up, and the US has used remote missiles to kill American citizens on foreign soil without any due process.  Now the Right isn't going to condemn this- they're fine with killing more people to protect America.  In fact I'm not squeamish about using military power to protect us, but I don't like the implications of this: If it's OK for an American president to order an American citizen in Yemen killed based solely on his say-so, with no due process whatsoever, what's to stop him from ordering any of us killed anywhere?  I know that sounds paranoid, but really what's to stop him legally?  I read here from Glenn Greenwald that a US drone strike killed not only Al-Awlaki, but a subsequent strike killed his 16 year old son.

So I guess Obama isn't squeamish about killing people.  He's not squeamish about deporting Illegal Aliens either; the administration has deported more than any administration ever has.  Maybe he takes these positions to demonstrate that he's not the crazed Leftist that Republicans say he is.  More likely he believes in doing it.  And there's nobody but a few aging hippies to protest it.

Gilad Shalit

Welcome home to Gilad Shalit, the Israeli soldeir kidnapped by Hamas and held for 5 years in captivity in Gaza before being released this week in exchange for 1000 Palestinian prisoners, many of them convicted murderers.

There's been lots of debate about whether Israel should have done the deal.  It's a steep price to pay, and of course encourages future kidnappings of more Israeli soldeirs and civilians.  It's certainly clear (as it has been before) that Israel "negotiates with terrorists", and it even came into the recent Republican debate, as candidates were asked about hypothetical deals for American prisoners.

But I have to wonder: does release of these murderers, even so many, really imperil Israel's security?  I've read that the true leaders were not among the released (Bargouthi being the most well-known).  But it seems to me that there is no shortage of young men and women in Gaza willing to die if only they can take some Jews with them into paradise.  I don't think a shortage of volunteers is what limits terrorism by Palestinians- it's opportunity and means.  It could be that letting out a bunch of grunts won't have much effect on the operational capability of Hamas or Fatah.

Just speculation from here- I don't pretend to be knowledgeable about these types of security matters, but those are my thoughts anyway.

GOP Debate Thoughts (well, really Mitt Romney thoughts)

Tuned in to part of the debate last night, and saw more highlights this morning.  Here are some thoughts:

• Mitt Romney is the only one in there who sounds like he knows what he's talking about.  Everyone else on stage sounds either crazy or stupid or both.
• One of the reasons Romney doesn't sound crazy is that even when he's saying crazy stuff he's so obviously pandering that sane people are convinced that he's lying about his views.  I think the crazies see this too, however, which is why they don't trust the guy.
• There's a good chance the Republican nominee will win in 2012.  This is true no matter who is nominated- if the economy goes into a double dip, then Obama loses no matter what.  So although I won't be voting for any of these people (I'm not voting for a pro-life, low taxes, end-the-welfare-state candidate), I will be rooting for the one who will be the least destructive to the country, and I guess that's Romney.
• The problem for him is this: yes he's pandering when he supports Paul Ryan's economic plan- he must know that the numbers don't add up and it will lead to higher deficits- but when he's in office he may well be straitjacketed by his campaigning and the rage of his base.  Look what happened to GHW Bush when he got sane and broke his "read my lips- no new taxes" pledge- he was voted out of office and forever hated by the zealots even though that tax compromise led to the Clinton-era surplus.  A President Romney's first priority will be to get re-elected.  I'm not sure how he finds that path.  If he follows the Republican platform as it's laid out now, the economy will be disastrously affected.  If he gets technocratic and realist, he loses the crazies in his base.
• I'm considering the possibility that I'm just wrong about the economy.  Maybe Keynesian economics is dead, and austerity and balanced budgets will work after all.  Maybe President Romney will usher in a new Morning in America.  If he wins, I'll be hoping so, but I won't be very optimistic.

Austerity vs. Stimulus- the US vs. the UK

My thoughts recently were kicked off by this NYT editorial:

Austerity was a deliberate ideological choice by Prime Minister David Cameron’s ruling coalition of Conservatives and Liberal Democrats, elected 17 months ago. It has failed and can be expected to keep failing. But neither party is yet prepared to acknowledge that reality and change course. Britain’s economy has barely grown since the budget cuts began taking effect late last year. The most recent quarterly figures showed the economy flat-lining, with growth at 0.1 percent.
New figures released this week reported Britain’s highest jobless numbers in more than 15 years. Independent analysts expect unemployment — now 8.1 percent — to keep rising in the months ahead. The government has kept its promise to slash public-sector jobs — more than 100,000 have been lost in recent months. But its deficit-reduction policies have failed to revive the business confidence that was supposed to spur private-sector hiring.
Drastic public spending cuts were the wrong deficit-reduction strategy for the weakened British economy a year ago. And they are the wrong strategy for the faltering American economy today. Britain’s unhappy experience is further evidence that radical reductions in federal spending will do little but stifle economic recovery.

I sent this to a conservative sparring partner of mine, and he responded with two comments (which I've paraphrased):

1. Applying the logic of the pro-stimulus forces in the US, one might say that things would be much worse in the UK if not for austerity.  Maybe cutting government saved two million jobs and they'd be in a Depression if they hadn't gone that route.
2. The UK and the US are both growing anemically.  Why would the Times look at one and say that policy has failed, while looking at the other and say their policy has succeeded?

As to the first comment, yes austerity is intended to create/save jobs just like stimulus is. I think that advocates of either policy need to present a model as to how this happens, and then find historical or current day examples that support the model. The view from 50,000 feet is important, yes, but you have to describe a plausible causal explanation. The causal explanation for austerity was that it would restore confidence and investment- this clearly hasn't happened. The formula for stimulus is that it would spur growth by stimulating demand.  I think there's more historical evidence for this over time, though it hasn't been tried at enough scale this time around.

My understanding is that the UK's situation got notably worse after they switched to austerity measures. In the US it seems that the economy was growing when there was (very moderate) stimulus (I say very moderate because states cut back at the same time that the feds stimulated, so the overall effect was small), and is now stuck in the mud with stimulus completed.

The thing about austerity specifically and Hayekian economics in general as I understand it is not that government action of the right kind in a down economy works wonders, but rather that the business cycle is fated to play out naturally and government is just counterproductive or at least unproductive. So in that case, austerity isn't a way to "kick start" the economy, but rather a way to stop interfering and let the business cycle bring it all back eventually through creative destruction. But in our current depressed economy it's pretty clear nothing is coming back on its own for a long time. 

 

Now I still respect the point- maybe it's true that government just can't help- but the theory doesn't say that these policies will goose the economy and speed up the recovery. As I understand it, conservative economic measures being proposed now are not intended to spur recovery, just make the eventual recovery that happens on its own more sustainable. If so, it's pretty clear that austerity specifically and conservative policies more generally are being oversold quite a bit right now.  I don't think it's too likely that ending some regulations is going to do much in the short term for a demand problem in the economy, and I don't think any serious conservative economist would say that either.

As to the second comment, it's a good point- the US isn't going great either. But things are worse in the UK than they are in the US.  This seems like an apples to apples comparison:

2011 Q2 growth in the UK was 0.2%, while in the US growth in the same quarter was 1.30%. Now on the one hand both countries are doing pretty badly. On the other hand, US growth was 6.5 times better than the UK's. Now I admit that is only one data point (though it's the first one I came across and compared googling, so I didn't cherry pick), and of course there are so many factors in all this (the UK might be much more affected by the European crises than we are, the UK has socialized medicine and a larger welfare state, etc. etc.) but it's something.

 

It is so difficult to get past one's biases in these matters.  The way I'm trying to get past mine is to set parameters at the outset regarding what constitues evidence of effectiveness, and then follow that evidence through, come what may.  We'll get a great chance for that if there is a Republican sweep in 2012 and they implement austerity as they say they will.  I think that will lead to a double dip recession in short order.  If the GOP does win and does implement the policies they're running on, and it works?  I'll have to rethink my positions.

 

In the current environment, however, I'm trying to do the same thought experiment by comparing different responses to the crises in different countries and seeing what happens.  Ever since the UK announced austerity, I've been watching them in contrast to the US to see whether that works better than the somewhat-more-stimulus approach of the Obama administration.  We'll keep watching.

 

Terrorism Lurks?

This Iranian plot to kill the Saudi ambassador in the US sounds scary (Iran's denials notwithstanding).... and then I read Glenn Greenwald here.

He points out that the US has shown no evidence that this plot goes anywhere up in the Iranian government, and suggests that what we have is another situation in which the FBI sets up and entraps some hapless loser who has no means to carry out any attack, and then trumpets how it has saved us all yet again from another 9/11.

It does sound a little odd to hire a Mexican drug cartel to do the deed, doesn't it?  I would think Iran has a big enough national security establishment to employ a few of its own assassins.

Greenwald also sarcastically points out the double standard of our nation, appalled that Iran would plan a killing on our soil while we launch drone attacks anywhere we want, no matter what the government of the host country thinks, without thinking twice about the legality of such a move.

Food for thought anyway.  I don't know whether this plan was legitimately dangerous or not.  But if I've learned nothing else, I know that governments (even our own) are quite willing to lie and mislead.  We shouldn't accept things at face value.

UPDATE 10/13/2011: I see very little on the news that picks up on Greenwald's theme.  The more I think about it, the more I lean toward this view: Iran is being set up.  Hey, they kind of deserve it I guess, they're certainly not my favorite theocracy, but it's s setup nevertheless.

Occupy Wall Street

OK, fans, I know you're all dying to read what I think about Occupy Wall Street, so here it is.

The rage that I share with the protesters can be summed up this way:

Once there was a healthy economy.  Then a few things happened, in this order:

1. The financial system was deregulated to a great degree, and what regulation there was was poorly enforced. 
2. Wall Street bankers used these rules to take enormous risks using irresponsible amounts of leverage, while everyone in the industry assured us they knew what they were doing.
3. The result was a huge real estate bubble that allowed the banks to make enormous profits, far greater than the industry had ever made before.
4. In spite of these profits, the general economy didn't benefit much at all.  There was virtually no wage or job growth for the middle class during the aughts.
5. When the bubble burst, the taxpayers were forced to step in and bail out the industry.  This was necessary to save us from another Great Depression, but was structured in a way that returned banks to profitability almost immediately.  They are already back to record profits, while the general economy continues to suffer.
6. The banking industry is now firmly opposed to any regulation of any kind, and has withdrawn support from the Democratic party for suggesting it.  The industry seems to have no particular plan to avoid a repeat of 2008, since they don't want anything to change.  This apparently means that their plan is to go back to the good old days, and when the next disaster happens, we get to bail them out again.  It's "heads I win, tails you lose".

So yeah, some of us are kind of angry with Bankers.  OWS is expressing that rage.  I'm hoping it builds into a movement that throws a scare into them and moves regulation of the banking industry along with progressive tax policy in the right (or left) direction.  It's easy enough to find nut cases in the crowd (as it certainly was with the Tea Party rallies), but here's hoping it develops into something constructive.

Party Loyalty

This article from National Journal has been making the rounds.  Money quote:

GOP legislators from moderate swing areas, including districts that President Obama carried in 2008, are infuriating environmentalists by joining with their conservative colleagues on votes to obliterate an array of federal regulations. That lockstep loyalty sharply departs from the way swing-district Republicans behaved in 1995, the last time the GOP unseated a Democratic House majority. It also represents a high-stakes bet that anxiety about the economy and disillusionment with Obama have defanged an issue that hurt Republicans previously in such places.
...In February, the House voted to block pending EPA regulations limiting emissions of carbon dioxide and other gases linked to global climate change; even the GOP members from districts that backed Obama in 2008 voted 59-2 for the bill. (Those were the only dissenting Republican votes.) In April, every voting House Republican (including all 61 from Obama districts) opted to overturn EPA’s scientific finding that climate change posed a public-health threat.
...In coalescing behind these measures, House Republicans from Democratic-leaning areas are behaving very differently from their mirror image: As many as 20 House Democrats, mostly from Republican-leaning areas, have usually broken with their party to support the antiregulatory proposals.

This gets me thinking about the bigger issue: Republicans from these swing districts, in spite of the presumed dangers, keep voting lock-step with their party.  Even Scott Brown and the Maine Senatorial Republicans, for all their moderation in comparison to the rest of the party, vote with Republicans on all the big stuff.  Democrats from similar districts seem to be constantly voting with the other side in an attempt to show their moderation and/or independence from the national party.

My take?  Good for Republicans.  Congressmen and Senators should be voting their consciences.  I wish moderate Democrats would stop pandering to the Right and vote what they believe.  If Ben Nelson believes in a balanced budget amendment, he ought to keep voting that way and switch parties. I hope that conservative Republicans in swing districts get wiped out in 2012 of course, but if that happens they still did the right thing- we should have a clear choice when we vote for our politicians.

Elizabeth Warren for Senate

The more I learn about Elizabeth Warren for Senate, the more I like her.  This is a woman who understands the problems on Wall Street, and believes in reining in the abuses.  And she talks about the deficit and taxes with compassion, intelligence, and a little anger.  She has a compelling personal history.

It's going to be tough.  That's because Scott Brown is a good candidate.  He's not as crazy as many people the GOP is putting out there.  As Republicans go, he's as moderate as they come.  And he's articulate and has a "regular guy" persona that voters like.

But make no mistake: he's one more vote to filubuster almost everything that the Crazies want to filibuster.  He's one more vote for Mitch McConnell as Majority Leader of the Senate.  He's against any reform of financial industry regulations.  He's going to vote to keep taxes low and the welfare state unsustainably underfunded.  We've got a chance to get rid of him now.

Reflections on Atonement and Israel

In my Shul at Kol Nidre service, my Rabbi gave a lengthy sermon about sins, the Jewish people, and Israel that got me quite engaged, and not in a good way.  His sermon went something like this:

President Obama, in a recent speech, made the point that all of us in this reflective time of the year need to think about our sins and what we can do to contribute to the Peace Process.  So I was thinking about the "sins" of the Jewish People:
The "sin" of being different.  The "sin" of refusing to assimilate and be like everybody else.  The "sin" of being successful.  The "sin" of creating the wondrous state of Israel.

The Rabbi went on to describe the many great things Israel has done, the many ways in which Palestinians and Arabs have harmed the peace process, the Palestinian Authority's statements that Jews will not be welcome in a future Palestinian state even while Muslims are a key part of the Jewish state, etc.

It was an angry and defiant sermon, reflecting the bitterness of his perception that Israel is being unfairly targeted at the UN and that the Obama administration is insufficiently supportive of her positions.

As I've said before, I yield to nobody in my love and support for Israel.  I've spent time there, and I've sent money there.  But this angry response to the President continues to rankle me.  Under President Obama, the US has continued to support Israel militarily and through intelligence operations just as much as ever.  The US is set to veto the Palestinian bid for statehood, and is using all its diplomatic pull to try to stop the issue from coming to a vote.  Yes, Obama has put more pressure on Israel to stop expanding settlements in the West Bank- but I would argue that that still qualifies as a "pro Israel" position, and of course many Israelis (on the Left) completely agree and have urged the President to keep making the case.  My Rabbi and many others in the American Jewish community put too much emphasis on supporting Likud's positions as equaling support for Israel.  Obama hasn't done a great job in the Middle East- it's certainly not a signature issue for him- but to say that he doesn't support Israel is a slander.

But all that is parenthetical to my main reaction to the sermon, which is this: Yom Kippur is a time of self-reflection, a time to look inward and to question whether our own actions have lived up to the standards we set for ourselves.  It's not a time to put "sin" in scare quotes and angrily denounce the transgressions of others.  Our clergy can use every other Shabbat and holiday of the year to denounce Palestinians and take pride in the singular and spectacular accomplishment that is Israel.  On the Day of Atonement, we shouldn't be thinking about how we've been wronged. 

So in that spirit, I forgive my Rabbi this lapse, if for no other reason then because I know it comes from the part of him that loves Israel like I do.  And I beg forgiveness if I've misunderstood and slandered him by publishing this post.  As for Israel, I vow to support its existence and continued prosperity, even if that means criticizing its policies.