European financial crisis

The Economist mocks the converts to fiscal responsibility.

Rogoff on the financial crisis

I like this piece by Ken Rogoff. I think he is correct to emphasize that recessions generated by financial crises are different, and slower to resolve. I think he is also correct to emphasize the importance of expectations and to criticize those who focus overmuch on short term stimulation.

I would not encourage inflation as Rogoff does, even as a last resort. While Rogoff is certainly correct about what it would do I don't think our institutions are up to it and it could be just another way to defer necessary entitlement reform.

Three more on the debt ceiling "solution"

Thoughts from Tyler Cowen at Marginal Revolution, Larry Summers in a Financial Times op-ed, and the Economist's Buttonwood columnist.

All three have wise things to say. Larry seems to forget that tax increases are the negative of spending and so is in the odd position of simultaneously calling for both fiscal expansion and fiscal restraint. I think what he really wants is net fiscal stimulus plus redistribution. Why not just say that? It's not like he is shy.

I also think both Larry and Buttonwood neglect the potentially important role of the deal in extending the duration of policy uncertainty.

More on the debt ceiling

Two bits this morning:

1. A fine piece by Will Wilkinson at the Economist.

2. I felt very vindicated in my own assessment yesterday when one of my colleagues at dinner last night, who has different politics than I do, was complaining about the lack of serious (or, indeed, any) entitlement reform in the debt ceiling deal.

Addendum:

3. Another fine summary from Kids Prefer Cheese.

4. And via MR, some reality on the defense cuts.

In sum, a great big heap of nothing. Pathetic.

Debt ceiling follies ... the grand finale

There is total chaos in the interwebs about the deal today.

Here are Matt and Nick from the other day. I think their remarks are pretty much still on target.

Here is maybe the worst David Warsh column ever, in which he compares the tea party with Senator Joseph McCarthy. The tea party is just the messenger, and the message is that our institutions are failing at dealing with the principal-agent problem between the public and the state. That failure is bipartisan, both Bush II and Obama (and their associated congress-critters) have been spending like 12-steppers going off the wagon. It is ongoing abject failure to behave responsibly by politicians, combined with poorly designed institutions that allow them to do so, that result in things like the tea party, state balanced budget requirements, Proposition 13 in California and so on. Denouncing those responses just demonstrates lack of understanding of the underlying problem.

Also, was I the only one who was quite confident that the debt ceiling would be lifted? Things that can't happen, don't. This is one of them. Note that this is a variant of Herb Stein's dictum that things that can't go on forever, won't.

The WSJ declares the (apparent) deal a great victory for the tea party while Ezra Klein goes into additional detail. My own take is that it is a win for, essentially, no one. The current cuts appear to be largely reductions relative to scheduled increases, not actual cuts. Among the actual cuts are extended UI benefits, which is not where I would have looked first given the current unemployment rate.

Moreover, there are no definite future cuts of the sort that are difficult to reverse, and thus more likely to actually happen, like raising the age of Medicare eligibility, or getting rid of the first dollar side of the Medicare Part D "donut hole", or reducing social security indexing to reflect the upward bias in the CPI, or zeroing out agricultural price supports or the export-import bank or the Drug Enforcement Agency or HUD or removing all but a token number of US troops from South Korea, which has long since attained the economic wherewithal to take care of its own defensive needs.

More importantly, the broad thrust of the deal is to kick the fiscal responsibility can forward for another 18 months, until after what promises to be a truly nauseating election year. That does nothing to reduce the medium-term uncertainty about tax rates and (many) other policies that is partly responsible for holding back growth.

I give Obama and Congress a "D" for "dud".

Debt ceiling

Megan McArdle has a very nice summary of the likely effects of not raising the debt ceiling (an unlikely outcome in my view - I predict another short term delay in the deadline) and of dithering about raising the deadline and demonstrating institutional and personal failure at the highest levels while doing so.

It seems to me that it is not really that hard to do the two things one wants to do: not cut current spending too much but cut future spending a lot in a way that has some credibility, which is to say in a way that is hard to reverse.

Phil Swagel on the financial crisis

Phil's comments are disguised as on-target movie reviews of Too Big to Fail and Inside Job. He makes the good point, well worth repeating, that one should not assume malevolence when ignorance and incompetence will do as an explanation.

Via: Greg Mankiw

Full disclosure: Phil is the husband of a friend and former colleague of mine, though I think I've only ever met him once.

Theorists tackle the financial crisis

David Warsh provides a readable and interesting summary of the goings-on at the 22nd Jerusalem Summer School in Economic Theory.

Reading this piece it struck me how much deeper Warsh's grasp of economics is than certain NYT economics columnists who come in for relatively frequent criticism on this blog. And, unlike certain other NYT economics columnists, Warsh seems to be able to make his points effectively without personal attacks. Seems like a misallocation of resources to me. Someone call the central planner.

Ezra Klein on Inside Job

I'm not usually the biggest fan of Ezra Klein, but this post on the movie Inside Job seems right on target to me.

Reasons to get a payday loan

The enterprising folks at payday.pro suggest getting a payday loan for that upcoming bachelor party you've been invited to. After all:

Let’s be realistic here – it is NEVER a good thing to attend a bachelor party and not have any money to spend. Not only will you be singled out as the “cheap” guy amongst your friends, but the ladies at the bachelor party will not pay any attention to you. What fun is that?

This prompts, of course, some scolding from the nannies at the New York Times.

Hat tip: Ken Troske

NPR interview with Anna Schwartz

I hope I live to 94 and that, if I do, I am as sharp as Anna Schwartz.

The interview is too short but interesting. She is tough on Bernanke and on Greenspan. I found the comments about how the Fed should have handled the bailouts pretty insightful.

Hat tip: Ken Troske

Ubernerd

Reader, friend and housing economist Austin Kelly picks up on my mention of bloggers doing original research and points me to these collected posts by the (sadly, late) Doris "Tanta" Dungey at the Calculated Risk blog.

History and financial crises

Harvard historian Niall Ferguson on financial crises in the NYT.

My favorite bit:

"The reality is that crises are more often caused by bad regulation than by deregulation." [Italics in original]

That's the thermostat model of regulation he is making light of, and with good reason.

More on AIG

A heartfelt letter of resignation from an AIG executive in the NYT.

Hat tip: Greg Mankiw

AIG bonuses

I agree with both Tyler Cowen at Marginal Revolution, that this is receiving way too much attention and with David Boaz at CATO that the special tax recently passed by the house represents a very sad example of both creeping tyranny and lack of political leadership. There is also plenty of shame to spread around to the media outlets, like Fox News, and various bloggers, who have been stoking the fire and to the truly despicable people that have been tracking down AIG employees and making death threats.

Some thoughts on varous aspects of the discussion:

1. Person-specific taxes, which is essentialy what these taxes are, are a really, really bad idea. Can you think of a better way to stifle dissent?

2. The bonus tax obviously conflicts with the plain language of the constitution in two ways. It represents an ex post facto law and it is the very opposite of equal protection under the law.

3. If AIG is contracturally obligated to pay the bonuses (and if it was not it seems like this whole thing would have blown over long ago) then it should do so. Indeed, it is even in the interest of AIG's taxpayer owners that it do so because otherwise they will eventually get stuck paying the bonuses anyway, along with interest and legal fees, after the employees who did not receive bonuses they were legally entitled to sue the firm.

4. The real culprits here, it seems to me, are the government officials who did not sort this out when setting up the bailout of AIG and who then tried to cover up their error. It is not AIG's responsibility to help the government do a good job of setting up the bailout. In a sense, the bonus tax is the government's attempt to obtain a unilateral "do over" of the original bailout.

5. This whole thing reminds me of the occasional bursts of outrage about Congressional salary increases. As with those, the amount of money at stake with the AIG bonuses is deeply trivial in the context of a government that has spent well over one trillion dollars in the last eight weeks. In the end the populist frenzy about the bonuses functions to distract attention from larger and more serious issues involving the stimulus package and general response to the financial crisis.

6. There are important general issues in regard to the principal agent problem between shareholders of large public companies and the compensation that their top employees receive. Those issues are not solved by taxing AIG bonus recipients nor is the serious discussion regarding how best to address these broader issues furthered in any way.

Nationalized Citibank

Hat tip: the agitator

The stimulus package goes home

How to get your family out of a financial crisis.

Hat tip: instapundit

Subsidized job training for former investment bankers

Common sense and, apparently, the idea that it is good to redistribute down rather than up the income scale, are truly out the window, at least for the duration of the recession. The NYT reports that NYC is spending money on retraining programs for former investment bankers. News flash to Mayor Bloomberg: they can afford to pay for community college with their severance checks and their assets.

Just take those tax dollars and flush!

Hat tip: Ken Troske

The stimulus package as child's play

I think this proposal is almost certainly superior to the bill that will actually be passed.

I suppose that's not surprising given where the author did his graduate work.

Update: ungated link here.

Robert McNamara, call your office.

Shades of the best and brightest, from David Brooks at the NYT.

Hat tip: marginal revolution