Links 6/20/09

Moody’s Joins S.& P. in Warning on California Debt DealBook. Always late to the party.

The Plaza Stirs NY Times. "Few developments rode the wave of high prices in the Manhattan residential real estate the way the 181 condominium apartments at the Plaza Hotel did, and few have chilled as much in the downturn"

China ministry ”regrets” U.S. tire trade finding Reuters.  You saw Yves’ coverage of Andy Xie’s article on malinvestment in commodities as the Chinese spur domestic demand.  Here’s where Chinese Protectionism is a rising threat as they start to concentrate on their own demand.

Romer Roundtable: The lessons of 1937 The Economist. This is a good cross-section of views expressed in response to Christina Romer’s excellent piece in the economist on how not to repeat a 1937 double dip recession. I made my case seven months ago.

Poland: not so strong after all? FT Alphaville

Iran’s supreme leader backs poll result  FT. Expect a Tienanmen Square style crackdown if things get out of control.

Porsche global sales slump by 28% BBC News. It is looking ever more likely that Porsche will be bought by VW and Wedeking will be fired, thanks to his burdening the company with billions in debt.

EU ‘risks lagging US on regulation’ FT.  Really?

What is needed for a lasting recovery Olivier Blanchard, FT.  Blanchard is the chief economist at the IMF.

Too big to fail FAIL Paul Krugman

El aumento del paro tendr un impacto "duradero" en la economa espaola Finanzas. Diego, this one’s for you! The rise in unemployment in Spain could have a deflationary impact for a long time according to the French. Why the French are making pronouncements on the Spanish, I don’t know.

Antidote du Jour (this deer bunny one is very cute – and very Yves):


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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. frances snoot

    "In a couple of years, we can signal all clear and then raise taxes on the middle class in order to reduce the deficit again, much as we did in 1993."

    Mr. Harrison: how can you possibly applaud the policies set forth by Ms. Rommer and Mr. Summers?

    The gamble that Team Obama made was to put taxpayer money into criminal banking institutions in order to pay off illicit gambling bets, trillions of dollars have been lost. No one was prosecuted, not even Mr. Bernanke who was acccused of obfuscating justice with Mr. Paulson in the Merrill Bank of America merger.

    Now, the banks are still insolvent! The derivative blowout cannot be paid off. It is outrageous is scope and quantity. It is astronomical.

    The government has been protecting the biggest banks from failing by making losses public after privatizing the gains. Team Obama is now standing by these banks in the face of national insolvency.

    What middle class will pay these bills in three years? If the middle class (what is left of it ) could pay for the deficit, then why was Geinthner sniveling over in China last month?

    Here is what GEAB has to say will happen this summer:!-Global-systemic-crisis-in-summer-2009-The-cumulative-impact-of-three-rogue-waves_a3359.html

    Your links begin with a sobering look at California's default possiblities, then you remind your readers of an unfortunate piece you wrote concerning the looting of our country, terming it,
    "a nefarious line of argument" to disagree with Washington's reckless and criminal activities.

    Your collegue, Mr. Simon's, had a prescient view of what would become the country due to the deficit bailout policies for big banks:

    I am not differentiating here between bailouts or stimulus because if we do go into sovereign default this summer or early fall, which IMHO is highly likely, then the allocations will be forgotten in the general milieu.

  2. bobo bobo

    Frances Snoot: Mr. Harrison: how can you possibly applaud the policies set forth by Ms. Rommer and Mr. Summers?


    I totally agree. After Lehman failed, Edward Harrison lost his willpower and joined the cult of Summers.

    The reason there is going to be a long period of stagnation varying between recession and low growth is because of Summers, Geithner, and Bernanke's policies of bailing out the banks. They are imposing massive costs on the real economy to bail out bank bondholders and counterparties. They are recapitalizing banks by effectively stealing from the public, by letting banks pay depositors super low interest rates to customers and charge super high interest rates to borrowers. Their failed policies of propping up zombie banks with cheap loans from the Fed and depositors, and limited oversight from regulators, is encouraging the big banks to speculate and risk imposing even more losses on the public.

    I hope the next recession breaks the power of Summers, Geithner, Bernanke, and their disciples like Mr. Harrison. So someone like Teddy Roosevelt can get elected to break up the banks. And only allow speculative activities inside entities small enough to let them fail in bankruptcy. If bankers want to innovate, they can do it risking their own money. If they are generating real value, they will be able to raise money and stay in business. If not, the discipline of the marketplace will shut them down. We don't subsidize bookies and gamblers. No reason to treat bankers any differently.

  3. Carlosjii

    Louise Yamada: the structural bear has several years to go to complete the repair process.

    Louise Yamada: It is almost uncanny the degree to which 2002-08 has tracked 1932-38. Investors probably face years of frustration if they think a new, sustained bull market has begun. Structural bear markets typically last 13 to 16 years. Given the declines that have been suffered so far — topped only by 1929-32 — the structural bear has several years to go to complete the repair process.

    Until proven otherwise, it could be a bear-market rally but we'll take what we can get. The 2002 low has been exceeded. That could be a very serious event. We don’t know whether it turns out to be a bear trap or if we have new lows ahead. I have no great compunction to be heavily invested. I think you have to be very agile and maintain trailing stop losses on any position.

    I don’t think we can proclaim we are out of the woods yet. It’s the rallies and retreats that create consolidations, which eventually form bases for a new bull. For now, hone your trading skills. Best case, we are in an era of a trading range.

  4. Diego


    thank you for the link! Some of the data and conclusions of the French are wrong (didn't they look at the growth in industrial production and productivity over the last decade? By reading them, you'd say only tourism and construction has been growing here. And why don't they mention some of the 2 million foreign unemployed in Spain may cross the border to France? After all, that's the obvious consequence of Spanish high unemployment for them).

    When under Franco, the only way for a Spanish journalist to criticize the Spanish foreign policy was to find another European country with the same policy and write as if it didn't apply to Spain. I think the French government-owned INSEE may be under the same syndrome.

  5. Harlem Dad


    First, I want to thank you for doing such a great job filling in for Yves. Not an easy job. Well done.

    Second, I have a question. I understand the position that, given the situation we are in, it doesn't make sense to become a deficit hawk too soon. As much as I find it distasteful, I get it that raising taxes on the Middle Class is the way to go.

    My question is, what Middle Class are you talking about?

    Elizabeth Warren speaks of the Collapse of the Middle Class quite eloquently here:

    It's the Middle Class that are swamped with credit card and mortgage debt right now. It's the Middle Class that are losing their jobs, their homes, their IRAs, 401(k)s and their Pensions.

    Lloyd Blankfein and his Army of Oligarchic Crybabies are doing fine. Yet they are the ones being bailed out by us.

    On whom will you raise taxes? 25 percent of $100,000 yields more Bailout Bucks for Blankfein than does 50 percent of $30,000.

    There is so much that I don't know. Despite the tone of bitterness in my question, it is genuine.

    Upon whom will taxes be raised to pay Wall Street's mistakes?

    Tim in Sugar Hill

  6. Tortoise

    I find it interesting how people who claim to be so pro-market are unwilling to allow market solutions to our arguably biggest economic problem, the high cost of health care. The problem has many facets. One of them, however, is that "we" (meaning AMA and its allies) control the rate of training of new doctors. I am surprised why this problem is not discussed more. The liberal economist Dean Baker discusses this important topic:

    Health Care Protectionists Cannot Even Envision Trade

    "Imagine a front page Washington Post article that talked about how the United States had a shortage of small cars. The article would talk about the limited capacity of the various small car assembly plants in Michigan, Ohio and elsewhere in the country. It would then discuss the amount of lead time needed to build new plants. It would also talk about the need to raise small car prices because it is so much more profitable to build big cars.

    Imagine that the article never once mentioned the possibility of importing small cars. That's the front page Washington Post (a.k.a. "Fox on 15th") editorial warning readers that: "Primary-Care Doctor Shortage May Undermine Reform Efforts."

    Yes, the United States already has a shortage of primary care physicians. Any serious reform plan will make this shortage worse by cutting back our excessive reliance on specialists. However, primary care physicians can be trained (to our standards) anywhere in the world. There are millions of very smart people in the developing world who would be delighted to train to U.S. standards and work for the $170,000 year (net of malpractice insurance) that our primary care physicians. (Developing countries could train 2-3 physicians for everyone that came to the United States if we placed a modest tax [e.g. 10 percent] on the earnings of foreign-trained physicians and repatriated it to the home country.)

    If the Post were not such an ardently protectionist newspaper (don't they know about Smoot-Hawley and the Great Depression?), it would be writing about the potential to increase the number of foreign trained primary care physicians in the United States by removing legal and professional barriers. However, trade never even enters the Post's discussion. It was only interested in telling readers about problems with President Obama's health care plan." –Dean Baker

  7. Edward Harrison

    bobo bobo is right about my about face post Lehman. But, I am not a fan of Larry Summers. Here's how I see it.

    Usually, a Libertarian/Austrian approach is warranted – that means no easy money and letting banks fail. Were I in office in March, after Bear failed, I would have prepared for more failures and prepped the FDIC to start seizing insolvent institutions, such that by the time Lehman failed, the system would have been more prepared. There is nothing wrong with having let Lehman fail. That's an integral part of the capitalist system. What was a problem with Lehman is that we were unprepared for the aftermath.

    And that's where I part ways with the Austrians. Paul Samuelson said it fairly well in his recent interview at the Atlantic: "For really depressed situations, unorthodox central banking is needed."

    I would actually say it differently: "For really depressed situations, unorthodox fiscal policy is needed." That WaMu, Wachovia, and Downey were seized was entirely appropriate. Citigroup should have been seized as well.

    But, we should realize that having Lehman fail without prepping adequately put us on a path toward a deflationary spiral – a path we were not necessarily on before that. And, depression requires unorthodox methods because the spiral makes society incur a deadweight economic loss if it isn't arrested. To my mind, the real need is for government to prevent worst-case scenarios by cushioning the fall and picking up the slack while the private sector works off debt. This is the only major way in which I would disagree with the Austrian dogma.

    That said, fiscal deficits have to be repaid once the economy is on solid footing again. And the only way to do that is to raise taxes or cut spending. I have suggested cutting spending (i.e. reducing entitlement spending). Raising taxes is not the way forward.

    So, to summarize, Lehman put us into a deflationary spiral, which could only be arrested through unorthodox policy. I believe fiscal policy is most effective here. But, otherwise, I would leave things alone.

    One other point, my general inclination on regulation at this point is for us to ENFORCE the laws already on the books and not jump to a whole new set of regulation before we have had time to think them through. Had we actually enforced the regulations already on the books and used the oversight already legally mandated, none of this would have happened. It was the recklessness of the likes of Alan Greenspan which created an atmosphere of easy money. And now we are all paying the price.

  8. MarcoPolo

    Spain has been in bubble mode since 1975. It’s hard to know why. The end of the Franco regime was obviously a factor. But why was capital so suddenly available in 1976 that had never been available before? Why ever or how ever, that easy money was exacerbated by Spain’s joining the EU and adopting EU policies. I am most familiar with agricultural policies though I am sure there are other examples. Growth wasn’t limited to housing, transport, construction and tourism. Huge industries have grown up along side of that; wine, power generation, food stuffs. The more conservative banking institutions are a throwback to the before EU time. Banking has not been as fully integrated.
    To me Spain never seemed sustainable. I have always marveled at how they could spend money, both privately and publicly.
    I am at a loss to explain how the bubble formed and now that it’s gone how the economy will ever recover or grow again. Anyway, that article doesn’t help to answer those questions.

  9. bobo bobo

    Edward Harrison: But, we should realize that having Lehman fail without prepping adequately put us on a path toward a deflationary spiral – a path we were not necessarily on before that. And, depression requires unorthodox methods because the spiral makes society incur a deadweight economic loss if it isn't arrested.


    No, that's not right. Deflation is not the outcome of doing a controlled unwind of the big banks that are troubled. The government can keep them operating in bankruptcy chapter 11, with super senior DIP loans and super senior priorities for trades entered with them. And government backstops for little people's insurance contracts, annuities, checking accounts, savings accounts, CDs, money market funds, money market accounts, and stable value fund investments. A desire to keep the system running does nothing to justify giving money to banks. Fear of system breakdown is just a standard scare tactic used by wall street what they want. Someone like Teddy Roosevelt or Andrew Jackson wouldn't fall for that tactic. Alas, no politician seems to have the balls and brains of Teddy and Jackson.

    Fighting deflation doesn't require giving money to banksters. The Treasury/Fed can print money and give it to plenty of people other than the big banks. They could print it, and give it to bigger unemployment benefits, R&D subsidies, subsidies for domestic manufacturing, seeding "good banks" run by retired bank exeucitives with good track records for prudent lending, etc. If one's goal is to increase the money supply to prevent liquidity from drying up, there are plenty of ways to do it without subsidizing the politically powerful banks. A desire to fight inflation does nothing to justify giving money to banks.

  10. Edward Harrison

    Bobo bobo, I couldn't agree more. It's criminal. And all of this from an adminstration that claims to be change we can believe in. I expected a lot more. But when Geithner and Summers were appointed, you knew this was coming.

    Here's whatI said when they were nominated:

    And here was my April Fool's joke of their leaving:

    Clearly the April Fool's joke is never going to happen because Obama believes in what Summers and Geithner are doing.

  11. frances snoot

    Romer is not entirely guiltless, here are her words:

    "The first issue is what it would mean for the policy to work. The President gave a
    very concrete metric: he wanted a program that would raise employment relative to what
    it would be in the absence of stimulus by 3 to 4 million by the end of 2010. Some on the
    blogosphere (such as the best man at my wedding, Greg Mankiw) call this metric
    meaningless: they complain that because we never observe the outcome under the no-
    stimulus baseline, it isn’t verifiable. But it is, in fact, the intellectually sound and
    appropriate metric to use. Exactly what any macroeconomist would ask of a policy is
    what are its effects, holding constant all the other forces affecting the economy. "

    So, how is the difference between the 600,000 jobs that might be "saved" and the 3-4 million that were promised to be a meaningful metric to be explained with Ms. Macroeconomics at the helm?

    A response to the Economist article claims Ms. Romer fudged figures to get the 3-4 million total:

    "Lots of folks know, Mr DeLong, that had Mrs. Romer used the Smets-Wouters model the multiplier would have been less than 1 and only 500k jobs would be created v. 'created or saved' and a lot of people know that these jobs will only be temporary; mostly Govt (not the '90% private' that Mrs Romers says in the Obama Plan); and actually prevent private sector job creation in the 'long run' as the Govt debt necessary to fund Mrs Romer's 'created or saved' jobs will crowd out the private investment necessary to create private jobs needed to expand GDP.
    I welcome Mr DeLong's explanation as to specifically why the Feb 2009 Cogan, Cwik, Taylor & Wieland analysis is wrong and Mrs Romer's is correct. But we already know Mr DeLong will not respond…"

    According to Ms. Romer's analysis, the stimulus policy won't work, add that to the bailout from hell, oh, and the Tarp initiative which Mr. Gibbs insists gives Team Obama precedent to run roughshod over US contractual law.

    It is reassuring to know that Mr. Harrison dissed Summers and Geinthner. But please, don't recommend Romer either.

  12. Matt Stiles


    With all due respect, your schizophrenia with regards to a "deflationary spiral" is completely unwarranted. At the risk of sounding too dogmatic I must say that if you really believe in liberty and free-markets, then the biggest deflationary spiral is what is required to correct the biggest inflationary spiral that preceded it. Only those who misallocated their resources in anticipation of further inflation can be hurt in real terms by deflation. And had it occurred without interference, the means of production would now be in competent hands, void of a debt burden and ample pools of cheap labour to hire from. We would likely already be on our way to recovery.

    Perhaps you should have a read through Jörg Guido Hülsmann's booklet Deflation and Liberty. Deflation is nothing to be afraid of.

    It can be read free here:

  13. bobo bobo

    Edward Harrison: Bobo bobo, I couldn't agree more. It's criminal. And all of this from an adminstration that claims to be change we can believe in. I expected a lot more. But when Geithner and Summers were appointed, you knew this was coming.


    The only thing that lets me sleep through the night is knowing that if Summers and his ilk fuck up the economy badly enough, there's a bunch of am radio types that'll deal with them by electing a Teddy Roosevelt or by vigilante action.

    People like to say California is the leading edge of what we can expect. Puerto Rico is actually the leading edge. It's real estate and bank crisis started before the rest of the country's did. PR is already up to 14.4% unemployment, and has bonds rated BBB- (if you do actual credit analysis and ignore the guarantees I think they've got bonds that ought to be rated as junk). I think when unemployment gets somewhere between 15 and 20% in the continental US, we'll start to see protests. If unemployment gets over 20%, I expect either populist politicians or vigilantes deal with the banks.

  14. Keenan

    Tortise writes that Dean Baker writes: There are millions of very smart people in the developing world who would be delighted to train to U.S. standards and work for the $170,000 year (net of malpractice insurance) that our primary care physicians."

    Why in blazes import any more people here when we have college grads waiting tables due to this economic slump ?
    Are you saying Americans won't become primary care physicians for $170K ? Like McCain said they wouldn't pick lettuce for $50 an hour ?

  15. Todd Wood

    Like doctors, medical schools have a very powerful association. They got together years ago and, following the old-guild tradition, they put limits on the number of schools and number of doctors to insure higher salaries.

    It is no accident that we have a doctor shortage.

  16. Todd Wood

    In fact, the U.S. doctor shortage is a disaster in other countries. Doctors leave their poorer homelands where people suffer in abject poverty and come here. It is a disaster and harms many.

  17. Matt Stiles

    Todd Wood,

    Indeed. It is referred to lovingly here in Canada as "the brain drain."

    Naturally, the best solution they can come up with for the problem is to raise taxes and pay the doctors more. Our entire healthcare system is a clusterfuck of idiocy.

  18. Diego


    "(Spain's) Growth wasn’t limited to housing, transport, construction and tourism. Huge industries have grown up along side of that; wine, power generation, food stuffs."

    Wow, that was a fascinating in-depth analysis! So wine and food were behind the Spanish growth! Wow!

    May I suggest you to look up which Western European country has the largest per-capita motor vehicle production, just behind Germany and several times Italy's or the UK's (or the US', for that matter)?

    You'll see Spanish activity in almost every medium-tech and high-tech manufacturing sector. Spain is a world leader in composites for airplanes, stainless steel, windmills, high-speed rail, thermal-solar farms, high-tech ships, etc.

    The fact that Spain is the sixth largest service exporter (its world market share is around 4%, almost the same as Japan) should help you overcome your prejudices, too. The first bank in the eurozone (Santander), the first telco in the world by number of subscribers (Telefónica) and the first renewable-energy utility (Iberdrola) are all Spanish.

    This all is very much tangible and has nothing to do with housing, tourism and food stuff.

  19. Tortoise

    Re: Doctor shortage.

    I just called attention to what Dean Baker wrote. As for possible solutions, I think there are many. Medical schools are a cabal and they limit competition. Imagine if autoworkers had decided that only 5 million cars would be produced in the USA; and that NO CAR WOULD BE IMPORTED unless each car was individually tested and found to the satisfaction of a committee consisting of … American autoworkers. That is exactly what is happening with doctors. Thus, let us start by breaking the cabal.

    Also, I think we should allow doctors certified by another countries to practice in the USA. Their shingle would clearly say, "Certified by the Board of Physicians of …" Is that not freedom of choice? If nothing else, it would provide some competition. And competition is a healthy feature of an economy.

  20. skippy

    @Tortoise, I concur, The AMA and heath care juggernauts are in it for themselves and would stifle any attempts which diminish their egregious profitability. First do no harm my back side.

    This is coming from some one who has many family members in the medical profession, at high levels.

    Skippy…let them eat cake eh, the cake is the biggest lie of all, the cake is a lie!

  21. MarcoPolo

    @ Diego
    Did you read the linked article which referred to transport, construction and tourism? The comments section doesn’t lend itself to an in-depth analysis. Wine and food are an example of Spanish growth and every bit as tangible as those things you mention.
    You should overcome your own prejudices of being the only blogger to know something of Spain. You may or may not remember Spain from 50 years ago, but I do.
    The point – for those of you with more open minds – Spain’s entry into the EU was very much a 2 edged sword.

  22. Keenan

    Tortoise – Your points are well made and no ire was directed to you. No offense was intended, my apologies if any was taken. Conventional medicine and its pharma industry partners-in- monopoly have indeed fought alternative therapies which threaten their dominance of the healing arts.

  23. Diego


    the French and others usually see Spanish growth wrongly as based on tourism and homebuilding.

    The fact is it was based on export-oriented manufacturing (to simplify: cars and car parts) until at least the middle 90s, then on services and inner consumption with still a very high FDI component, and on bubbly homebuilding only for the last few years.

    You say: "Spain has been in bubble mode since 1975. (…) I am at a loss to explain how the bubble formed and now that it’s gone how the economy will ever recover or grow again."

    Well, it's easy. Through exports. Spanish car factories exporting to the rest of Europe are on 100% production. Spain is very competitive in this and other industries, even if the recent bubble shadowed this fact.

    This means Spain won't grow until, say, Germany does. Ok, but Germany is fit for some immigration wave, homebuilding and internal consumption growth. And France is even in a better position.

    "You may or may not remember Spain from 50 years ago, but I do."

    I remember Spain from 50 years ago as good as I do remember Spain from 80 years ago, that is, only from books. And this gives me a better perspective.

    The backward country you remember from 50 years ago was a direct consequence of war and isolation. While other Western European countries were rebuilding themselves thanks to the Marshall Plan and free trade, Spain had no access to any of them.

    The Cold War later turned Franco from a fascist dictator into "the saviour of Spanish civilization and a bastion against communism" (in the words of US Congressmen) in the 60s, allowing us access to global capital and markets. After Franco's death, what you call "being in bubble mode" was just continuing to catch up with Europe after 20 years of delay.

    In my hometown, we make airplanes and electronics for a living. You might say it's an effect of the mega-bubble, but both EADS and foreign manufacturers such as Ericsson have been here since the 20s. They reached a low point in the isolated, post-war bankrupt Spain you may remember, but they were thriving decades before.

    So your memories from 50 years ago might not be such a good guide, after all.

  24. MarcoPolo

    Diego, what would give you a better perspective than those books is cutting wheat with a sickle. But I won't argue with your post which is otherwise correct.

    What I would say you have missed is the importance of EU subsidies – to all of those industries we both have mentioned – in creating the bubble.

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