Category Archives: The dismal science

Victor Shih on the Risk of Capital Fleeing China

We’ve written about Victor Shih’s work on Chinese banks and wealthy households. He argues that the Chinese financial system and economy are at risk if enough capital moves overseas. While the release of this video is coming at a juncture when the US and Europe seem to be engaged in a beauty contest between Cinderella’s stepsisters, Chinese business have been making aggressive investments in other economies as well, such as agricultural land in Africa, so it’s worth remembering that advanced economies are far from the only targets for offshore funds.

This video gives a short, high level overview of his provocative thesis. Enjoy!

We Discuss the Manufactured US Debt Crisis at The Real News Network

Hope you enjoy this chat. I’m pretty sure I corrected saying “House” rather than “Senate” at the time but that appeared not to have made the edits. The peril of this medium is low/no tolerance for flubs.

Scott Sumner Puts Foot in Mouth and Chews

Reader Valissa has taken to providing economist jokes in comments, but the members of the discipline so often seem eager to make themselves the object of ridicule that efforts like hers sometimes seem redundant.

The latest sighting is a remark by Scott Sumner, a professor of economics at Bentley University. As

“Trade Imbalances Lead to Debt Imbalances” or Why Mercantilist Nations Shouldn’t Beef About Their “Profligate” Customers

Michael Pettis, a respected economist and commentator on China, provides an important contribution on the global imbalances theme. Many observers have pointed fingers at debtor nations like Greece, Portugal, Spain, and the US and argue that they need to start consuming less. While narrowly there is some merit to that argument, Pettis points out that the trade deficit countries (the debtors) are not the ones in the driver’s seat and it it the trade surplus countries that must take the lead in making adjustments.

Why Matt Yglesias and Felix Salmon are Wrong About A Legal Way to Circumvent the Debt Ceiling Impasse

Well, the debt limit crisis is upon us. Treasury Secretary Geithner says the US Government will not be able to meet all its obligations on August 3, unless the debt ceiling is increased by Congress. The Secretary says he is out of moves to extend this date. I don’t think that’s true. I think he can use proof platinum coin seigniorage to supply all the money needed to spend Congressional Appropriations.

Marshall Auerback: There is No Progressive Case for Deficit Cutting – The Myth of the “Virtuous” Clinton Surpluses

By Marshall Auerback, a portfolio strategist and hedge fund manager

For once, President Obama has sought to address his progressive critics, without caricaturing them as a bunch of out of touch, irresponsible radicals. At his press conference on Friday, the President made the following argument:

Soliciting Nominations for the FEMA Awards for Exceptional Financial Crisis Management

We are in the process of seeking recommendations for our inaugural FEMA Awards for Exceptional Financial Crisis Management. We must thank our reader Swedish Lex for providing the inspiration for establishing these prizes.

We are looking for nominees in each category. We have provided some illustrative candidates for specific prizes. Readers are also encouraged to suggest additional categories if they feel we have overlooked noteworthy types of crisis behavior that are worthy of recognition.

Our initial categories:

Eurozone Song

The lyrics are clever and it’s peppier than most parody/humor songs. Enjoy!

From the Guardian, hat tip reader Carol B:

Marshall Auerback: Barack Obama – The Nation’s First Tea Party President

By Marshall Auerback, a portfolio strategist and hedge fund manager. Cross posted from New Economic Perspectives

For all its talk of the importance of averting a debt default, Barack Obama.is increasingly signaling that major deficit reduction has become more than just a bargaining chip to bring Republicans aboard a debt deal. He actually believes that cutting entitlements and reducing the deficit are laudable goals, which would mark “transformational” moments in his President. Let’s face it: the man is not a progressive in any sense of the word; he’s a Tea Party President through and through.

Scott Fullwiler: QE3, Treasury Style—Go Around, Not Over the Debt Ceiling Limit

By Scott Fullwiler, Associate Professor of Economics at Wartburg College. Cross posted from New Economic Perspectives

Cullen Roche’s excellent post at Pragmatic Capitalism explains—via comments from frequent MMT commentator Beowulf (see here) and several previous posts by fellow MMT blogger Joe Firestone (see the links at the end of Cullen’s post and also here and here)—that the debt ceiling debate could be ended right now given that the US Constitution bestows upon the US Treasury the authority to mint coins (particularly platinum ones). Further, this simple change would lift the veil on how current monetary operations work and thereby demonstrate clearly that a currency-issuing government under flexible exchange rates cannot be forced into default against its will and is not beholden to “vigilante” bond markets. As Beowulf explains in a later comment, “The anomaly it addresses is that the US Govt has a debt limit yet an agency of the US Govt (the Federal Reserve) does not have a debt limit. Clearly this is a structural defect.”

The following is a description of how the process would work and the implications for monetary operations:

Did Sheila Bair Save the US From Complete Financial Meltdown?

When a moderate (meaning anachronistic) Republican proves to be a more tough minded regulator than Democrats, it serves as yet another proof of how far the county has moved to the right. Bair, in a long “exit interview” with Joe Nocera, says a number of things that would have been regarded as commonsensical and obvious in the 1980s, yet have a whiff of radicalism about them in our era of finance uber alles. For instance: Bear should have been allowed to fail, TBTF banks are a menace (well, she doesn’t say that, but makes it clear she regards them as repugnant), bank bondholders should take their lumps.

Bair was alert to the dangers of subprime, having recognized how dangerous it could be in the early 2000s (when a smaller version of the market blew up, taking homeowners along with it), and was not a believer of the Paulson/Bernanke party line that subprime would be “contained”. She long championed mortgage mods as better for lenders, borrowers, and the economy, and has fought an uphill battle with the Administration on that front. With the IndyMac failure, which put the subprime lender/servicer in the FDIC’s lap, she pushed hard to develop a template for how to do them, which then was ignored by the Administration (they did HAMP instead, an embarrassment which she refused from the outset to endorse).

The piece serves as an indictment of the banking industry toadies in the officialdom, namely the Treasury, Fed, and OCC. One priceless quote:

The Phantom Bond Market Vigilantes

Assuming current fiscal policies remain in force, our economic model suggests that interest rates will rise considerably over the next decade, with the yield on the 10-year Treasury note reaching nearly 9% by 2021. – Private interest rates will rise as federal borrowing competes for saving that might otherwise finance private investment. – In addition, […]

The Sorrow and the Pity of Economists (Like DeLong) Not Learning from Their Mistakes

I hate to seem to be beating up on Brad DeLong. Seriously.

As I’ve said before, he is one of the few economists willing to admit error and not try later to minimize or recant his admission (unlike, say, Greenspan). And he seems genuinely perplexed and remorseful. This puts his heads and shoulders above a lot of his colleagues, at least the sort whose opinion carries weight in policy circles.

Even with DeLong making an earnest effort to figure out why he went wrong, his latest musings, via a Bloomberg op-ed, “Sorrow and Pity of Another Liquidity Trap,” show how hard it is for economist to unlearn what they think they know. And as the great philosopher Will Rogers warned us, “It’s not what you know that gets you in trouble. It’s what you know that ain’t so.”

So it’s important to regard DeLong as an unusually candid mainstream economist, and treat his exposition as reasonably representative if you could somehow get his peers to take a hard, jaundiced look at how wrong they have been of late.

DeLong’s mea culpa is about how he and his colleagues refused to take the idea that the US could fall into a liquidity trap seriously. As an aside, this is already a troubling admission, since many observers, including yours truly, though the Fed was in danger of creating precisely that sort of problem if if dropped the Fed funds rate below 2%. It would leave itself no wriggle room if the crisis continued and it had to lower rates further into the territory where further reductions would not motivate changes in behavior. That’s assuming we were in a “normal” environment. But the big abnormality is that we are in what Richard Koo calls a balance sheet recession. And as we will discuss below, Keynes (and Minsky) had a very keen appreciation of the resulting behavior changes, but those ideas were abandoned by Keynesians (it is key to remember that Keynesianism contains significant distortions and omissions from Keynes’ thinking.

But notice how he starts his piece: