Really great links - Greece - Interest rates and housing bubble - China - Healthcare deficit

Ambrose Evans-Pritchard - Europe has left Greece hanging in the wind - "“So they want Greece to reach the point of bankruptcy before they help us?” asked Greek opposition leader Antonis Samaras
Greece is worse off than before. It cannot decide when to invoke the mechanism. It has given up its right as an IMF member to go to the fund when it wants, leaving it prisoner to Europe's deflation dictates. "The IMF would be a lot softer than Europe," said Ken Rogoff, the fund's former chief economist."

Bill Woolsey - Credit boom 2003? - "In conclusion, nominal expenditure was too low during the period of the supposed credit boom. On other other hand, that does not necessarily imply that interest rates were not too low. It is certainly possible that excessively low short term interest rates were one of the many factors resulting in excessive increases in home prices. So the Fed's approach to monetary policy could be a contributing cause of the speculative bubble in home prices. And that speculative bubble certainly resulted in a misallocation of resources that can only now be gradually corrected by shifting labor to more productive avenues and producing new capital goods.
Worse, the end of the speculative bubble, and the losses of the financial firms that had lent into that bubble, were the key trigger for the disastrous drop in nominal expenditure in late 2008. And now, the absence of a clear commitment to returning nominal expenditure to its previous growth path is resulting in even more severe difficulties with production and employment. A policy approach of gradual decreases in short term interest rates, and further, dealing with the zero bound by promising to keep short term interest rates low for an extended period of time, not only is again not getting nominal expenditure back to its trend growth path, it might also be responsible for a future speculative bubble."

Interfluidity - China - "Remember, economic capital has nothing to do with money. Supplying capital is nothing more or less than assuming the burden of economic risks. Where do you think China’s ever-expanding capital base comes from, when it has been the world’s largest exporter of financial capital? China’s citizens assume great risk, in the form of below-world-market wages and social safety benefits, in exchange for the promise of a wealthier and more powerful nation. To some degree that capital is extracted involuntarily, but China’s government has had remarkable success at maintaining legitimacy and the consent of the governed despite the extraordinary costs citizens have borne in the service of an uncertain future. So far, citizens have seen consistent returns on their investment: the big question is how China fares in a persistent “bear market”, when it comes to seem as though much of their sacrifice has been wasted or stolen."

Scott Sumner - Healthcare math - "Let me get this straight. We’ve been told for many years by economists of all political stripes that Medicare and Medicaid were on a tragectory to bust the budget, and something would eventually have to be done. Of course in the past when Congress promised to cut Medicare, they generally reneged on their promises. But let’s give DeLong the benefit of the doubt, the commission in the bill really does have more teeth than usual. But does that make DeLong’s argument correct? I don’t see how. If Medicare was projected to bust the budget in future decades, then doesn’t it stand to reason that we already needed to cut Medicare and use the money for deficit reduction? But Obama is basically saying; “we propose to have future governments do what everyone knows has to be done at some point anyway, but instead of having the Medicare cuts used for deficit reduction, we propose they be used to increase medical spending in other areas, such as subsidies for health insurance.” Someone please explain to me how that makes this deficit neutral."

Really great links - crying ‘Fire! Fire!’ in Noah’s flood - run on the shadow financial system - anti-anti-communism - progress

Brad DeLong - "We sit here in the midst of 10% unemployment in the USA, of fiscal policy that is crippled in some countries by (legitimate) fears that more deficit spending will trigger government debt crises and crippled in others by confusion between short-term cyclical and long term structural deficits, of banking policy crippled by the public populist reaction against more bailouts for the bankers, and of monetary policy crippled by a strange and sinister mindset among central bankers that fears inflation even as rates of wage increase continue to drop—people who are, as R.G. Hawtrey said of their predecessors in the Great Depression, “crying ‘Fire! Fire!’ in Noah’s flood.”"

David Beckworth - "Deposit Insurance" for the Shadow Banking System - "Like deposit holders during the Great Depression, repo holders in this crisis wanted their money back and could get it by (1) forcing the shadow banks to take a haircut on the collateral used in repos or (2) not renewing the repos . As a result, repo markets began freezing up and threatened the shadow banking system. Since the shadow banking system is a conduit for funding the traditional banking system, financial intermediation in general became threatened (See Gorton for more details). The official response to this banking panic was for the Federal Reserve to create liquidity programs to effectively unthaw the repo market. Like deposit insurance in the 1930s, this government intervention stopped the run on the shadow banking system. Now that these liquidity facilities have been tested and shown to work, there is an expectation they will be used again if needed. And like the deposit insurance for the traditional banking system, this modern form of "deposit insurance" for the shadow banking system is bound to create moral hazard problems that will ultimately lead to more government regulation. These are interesting parallels.
 The emergence of the shadow banking system, therefore, not only has implications for the correct measure of the money supply, but also for what will be the new moral hazard and government regulation of the financial system."

Scott Sumner - "One thing I have noticed about progressives is that while they pay lip service to having rejected communism, their real passion is for anti-anti-communism. They seem more outraged that a few Hollywood screenwriters lost their jobs in anti-communist witch hunts decades ago, than they do that policies advocated by those screenwriters, such as “to each according to their needs,” led to the starvation of tens of millions of people. One thing I have noticed about conservatives is that while they pay lip service to opposing racism, their real passion is for anti-anti-racism. They seem more outraged about a white firefighter who was passed over for a promotion then they do for all of the tragic history of African Americans (and Native Americans.)
Just so that I won’t be misunderstood, I want to be clear about one thing. I do not believe that most modern progressives secretly favor communism, nor do I believe that most modern conservatives secretly favor Jim Crow laws. I think both groups have absorbed at least some of the lessons of the 20th century. Both have been somewhat enlightened. But as long as each side continues to talk the way they do, then progressives will continue to suspect that conservatives are secret racists, and conservatives will continue to think that progressives are secret Marxists.
<..>
Where is the conservative outrage over 100,000s of black Americans who are in prison for drug law violations, whereas conservatives like Rush Limbaugh go to places like the Betty Ford clinic, not jail."

Brad DeLong - industrial revolution - "Some say it was an agricultural revolution that allowed transfer of a large chunk of the labor force into making things. But eleventh-century China had had a bigger and earlier agricultural revolution than eighteenth-century Britain had.
Some say it was the European conquest of the Americas. But what was shipped back from America across the Atlantic to Europe and what was paid for in imports from Asia with American products was never real wealth but was instead sterile gold, sterile silver, some empty calories (in the form of sugar), and some psychoactive chemicals—coffee, tea, chocolate, and nicotine.
Some say it was the commercial revolution and the rise of the middle class. But in 1776 Adam Smith and a little later David Ricardo were looking forward to a future for Britain in which it became a lot more like China—a full country with high agricultural productivity per acre and a well-developed division of labor but a very poor and low-wage peasantry and working class ruled by very rich landlords."

Donald Kohn - don't blame me for the crisis, blame science instead. And price level path targeting doesn't work, because third grade math problems will leave people perplexed

Fed vice chairman Donald Kohn thinks that the end of Great Moderation was caused by bad science:

"More study leading to a better understanding of the linkage between central bank actions and expectation formation should improve the ability of central banks to achieve society's inflation and output objectives more effectively under a variety of circumstances, including in a severe negative shock of the type we recently experienced."

In the earlier part of his speech it becomes clear that the problem is not with the linkage between central bank actions and expectations, but with central banks themselves:

"Given the severity of the downturn, it became clear that lowering short-term policy rates alone would not be sufficient."

If the key problem is central banks that were asleep at the wheel, should central banks correct their driving mistakes? According to Kohn, no, because third grade maths are two complicated:

"Another approach to this problem is for central banks to target a gradually rising price level rather than a constant inflation rate. Imagine a plot of the consumer price index (CPI) from today onward increasing 2 percent each year. Central banks would commit to adjusting policy to keep the CPI near that line.

The advantage of this approach, in theory at least, is that when a negative shock drives prices below the target level, people will automatically expect the central bank to increase inflation for a while to get back to trend. In principle, that expectation would lower real interest rates without the central bank changing its inflation commitment, even if nominal interest rates were pinned at zero. It could also make it easier for people to make long-term economic decisions because they could anticipate that inflation misses would be reversed over time, reducing uncertainty about the future price level.
While I appreciate the elegance of this price-level-targeting idea, I have serious doubts that it would work in practice. Central to the idea is that the Federal Reserve would be committing to hit a price level that was growing at a constant rate from a fixed point in the past. The specific inflation rate that could be expected in the future would change over time, depending on the inflation that had been realized up to that point. You could know what inflation rate to expect only if you knew both the current consumer price index and the Fed's target for the index in the future. In addition, the inflation rate that you could expect would be different for different horizons. Moreover, central banks are able to control inflation only with a considerable lag and even then only imprecisely, so the process of hitting a target would likely involve frequent overshooting and correction and consequently frequently shifting inflation objectives.

Contrast this approach with the communications required of central banks when targeting a specific inflation rate. For example, central banks targeting a 2 percent inflation rate typically put that target prominently on their webpage. If those banks were instead targeting a price level growing at 2 percent, their webpages would have to provide a table of inflation rate targets for a variety of horizons, and the targets would change each month. I fear that rather than anchoring people's expectations about prices, it could leave them perplexed."

Really great links - Textbook models and extra reserves - Calibrating the quantitative easing - China bubble - Krugman vs. Krugman

Donald Kohn - Textbook models and extra reserves - "A second issue involves the effect of the large volume of reserves created as we buy assets. The Federal Reserve has funded its purchases by crediting the accounts that banks hold with us. Those deposits are called "reserve balances" and are part of bank reserves. In our explanations of our actions, we have concentrated, as I have just done, on the effects on the prices of the assets we have been purchasing and the spillover to the prices of related assets. The huge quantity of bank reserves that were created has been seen largely as a byproduct of the purchases that would be unlikely to have a significant independent effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which emphasizes a line of causation from reserves to the money supply to economic activity and inflation. Other central banks and some of my colleagues on the Federal Open Market Committee (FOMC) have emphasized this channel in their discussions of the effect of policy at the zero lower bound. According to these types of theories, extra reserves should induce banks to diversify into additional lending and purchases of securities, reducing the cost of borrowing for households and businesses, and so should spark an increase in the money supply and spending. To date, that channel does not seem to have been effective; interest rates on bank loans relative to the usual benchmarks have continued to rise, the quantity of bank loans is still falling rapidly, and money supply growth has been subdued. Banks' behavior appears more consistent with the standard Keynesian model of the liquidity trap, in which demand for reserves becomes perfectly elastic when short-term interest rates approach zero. But portfolio behavior of banks will shift as the economy and confidence recover, and we will need to watch and study this channel carefully."

Donald Kohn - Quantifying the quantitative easing - "However, the economic effects of purchasing large volumes of longer-term assets, and the accompanying expansion of the reserve base in the banking system, are much less well understood. So my second homework assignment for monetary policymakers and other interested economists is to study the effects of such balance sheet expansion; better understanding will help our successors if, unfortunately, they should find themselves in a similar position, and it will help us as we unwind the unusual actions we took.
One question involves the direct effects of the large-scale asset purchases themselves. The theory behind the Federal Reserve's actions was fairly clear: Arbitrage between short- and long-term markets is not perfect even when markets are functioning smoothly; and arbitrage is especially impaired during panics when investors are putting an unusually large premium on the liquidity and safety of short-term instruments. In these circumstances, reducing the supply of long-term debt pushes up the prices of the securities, lowering their yields.
But by how much? Uncertainty about the likely effect complicated our calibration of the purchases, and the symmetrical uncertainty about the effects of unwinding the actions--of reducing our portfolio--will be a factor in our decisions about the timing and sequencing of steps to return the portfolio to a more normal level and composition. Good studies of these sorts of actions are sparse. Currently, we are relying in large part on studies that examine how much interest rates dropped when purchases were announced in the United States or abroad. But such event studies may not be an ideal means to predict the consequences of reducing our portfolio, in part because the economic and financial environment will be very different, and also because event studies do not measure effects that develop or reverse over time. We are also uncertain about how, exactly, the purchases put downward pressure on interest rates. My presumption has been that the effect comes mainly from the total amount we purchase relative to the total stock of debt outstanding. However, others have argued that the market effect derives importantly from the flow of our purchases relative to the amount of new issuance in the market. Some evidence for the primacy of the stock channel has accumulated recently, as the prices of mortgage-backed securities appear to have changed little as the flow of our purchases has trended down."

Willem Buiter - "A bubble is a manifestation of out-of-control or over-the-top economic success; you find bubbles in countries with strong fundamentals. In no major country are the fundamentals stronger, the structural change more dazzling or the policy authorities less experienced at managing a market economy than in China. We recognize that experience and familiarity with the modus operandi of a financial market economy are no guarantor of good policy. Even highly experienced monetary policymakers and financial regulators, heading institutions with a track record of decades, like the current and previous Federal Reserve Chairmen, failed to identify and prevent excessive credit growth and asset bubbles, and may indeed have contributed through their regulatory and monetary policy actions (or inaction) to the financial boom, bubble and bust that severely damaged the financial system of the US. Even so, the fact that those in charge of monetary, financial and credit management in China are operating in terra incognita increases the risk of policy errors."

Greg Mankiw - Krugman vs. Krugman - "In my view, a default on U.S. government debt is less likely than another scenario, suggested by Paul Krugman:

How will the train wreck play itself out?...my prediction is that politicians will eventually be tempted to resolve the crisis the way irresponsible governments usually do: by printing money, both to pay current bills and to inflate away debt. And as that temptation becomes obvious, interest rates will soar. It won't happen right away....But unless we slide into Japanese-style deflation, there are much higher interest rates in our future.
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that "a fiscal crisis threatens our future standard of living" — investors still can't believe that the leaders of the United States are acting like the rulers of a banana republic. But I've done the math, and reached my own conclusions.

Actually, Paul wrote that in 2003, and we know now that his prediction of higher inflation did not come to pass"

Really great links - left-wing support for nominal GDP targeting - China bubble

Liberal think-tank supports NGDP targeting, the idea associated in the blogosphere with the right-winger Scott Sumner - Centre Forum - start targeting nominal GDP until the output gap is closed - "The markets need to know that the Bank will not rest until the economy is growing fast enough to close the output gap. So CentreForum’s first recommendation is for the Bank explicitly to target high growth in nominal GDP (NGDP) for the next five years.
<..>
Finally, the political economy of central bank independence provides another reason to support NGDP targeting. The Bank needs to maintain popular support if it is to manage long term price expectations. A persistent failure to return the economy to growth may pose a larger risk to Bank independence than a change in targeting methodology. If the economy stays weak and the output gap remains unclosed, the government’s fiscal problems may well get worse, and fears of a truly inflationary solution to the crisis will grow. As former MPC member Sir John Gieve said in February 2009: “The Bank and MPC need to convince [the general public] that the policy we are pursuing is the best way of restoring growth and full employment without reawakening inflation”."

Edward Chancellor - China's Red Flags (free reg. required) - "In fact, bubbles can be identifi ed ex ante, as the economists like to say. There also exists an interesting, if rather neglected, body of research on leading indicators of fi nancial distress. A few years ago, many of these indicators were pointing to rising economic vulnerability in the United States and other parts of the globe. Today, those red fl ags are fl ying around Wall Street’s current darling, The People’s Republic of China."

Really great links - EU - China - Austrian vs Minsky story

Ambrose Evans-Pritchard - Has Germany just killed the dream of a European superstate? - "Let me be clear. I do not blame Greece, Ireland, Italy, or Spain for what has happened. No central bank could have tried more heroically than the Banco d’España to counter the effects of negative real interest rates, but the macro-policy error of monetary union washed over its efforts."

Nick Rowe - ""Blame China" is not necessarily the lesson to be drawn here. It is quite understandable that some countries might legitimately want or need to accumulate international reserves. "Blame the international reserve system" seems a more appropriate lesson.
For example, if China allowed the US to accumulate yuan, the US Fed could hold yuan reserves, just as China holds dollar reserves. Then, if China wanted to increase its dollar reserves but the US didn't want to increase its liabilities to China, then China could accumulate dollars, and the US Fed could accumulate an equal value of yuan.
Perhaps, if we want to blame China for something, we should not blame it for buying dollars. We should blame it for not allowing the US to buy yuan."

Arnold Kling - Austrian vs Minsky story - "In the Austrian view, misleading signals are created by low interest rates set by the central bank. In the Minsky view, misleading signals are endogenous to the financial process. I think that the Minsky story has merit."

Really great links - Greenspan on Lehman - Mankiw on Greenspan - Greenspan on bubbles - Mankiw on health bill - Brad DeLong on housing bubble

Alan Greenspan - "Financial crises are characterized by a progressive inability to float, first long term debt and eventually short term, and overnight, debt as well. Future uncertainty and therefore risk is always greater than near term risk, and hence risk spreads always increases with the maturity of a financial instrument. The depth of financial crisis is properly measured by the degree of collapse in the availability of short term credit.
The evaporation of the global supply of short term credits within hours or days of the Lehman failure is, I believe, without historical precedent. A run on money market mutual funds, heretofore perceived to be close to riskless, was underway within hours of the Lehman announcement of default."

Greg Mankiw - Comments on Alan Greenspan's "The Crisis" - "The issue I am wrestling with is whether this maturity transformation is a crucial feature of a successful financial system. The resulting maturity mismatch seems to be a central element of banking panics and financial crises. The open question in my mind is what value it has and whether the benefits of our current highly leveraged financial system exceed the all-too-obvious costs.
To put the point most broadly: The Modigliani-Miller theorem says leverage and capital structure are irrelevant, while undoubtedly many bankers would claim they are central to the process of financial intermediation. A compelling question on the research agenda is to figure out who is right, and why."

Alan Greenspan - "Some bubbles burst without severe economic consequences, the dotcom boom and the rapid run-up of stock prices in the spring of 1987, for example. Others burst with severe deflationary consequences. That class of bubbles, as Reinhart and Rogoff data demonstrate,20 appears to be a function of the degree of debt leverage in the financial sector, particularly when the maturity of debt is less than the maturity of the assets it funds.
I very much doubt that in September 2008, had financial assets been funded predominately by equity instead of debt, that the deflation of asset prices would have fostered a default contagion much beyond that of the dotcom boom. It is instructive in this regard that no hedge fund has defaulted on debt throughout the current crisis, despite very large losses that often forced fund liquidation."

Greg Mankiw - CBO scoring of the health bill - "Recall that the bill raises taxes substantially. Some of these tax hikes are the explicit tax increases on capital income to pay for the insurance subsidies. Some of these tax hikes are the implicit marginal rate increases from the phase-out of the insurance subsidies as a person's income rises. Both of these would be expected to reduce GDP growth.

Indeed, to be very wonkish about it, these tax changes could have especially large GDP effects. Some people like to argue that taxes have small GDP effects because income and substitution effects offset each other. But if you give someone a subsidy and then phase it out, both the income and substitution effects work in the direction of reducing work effort."

Brad DeLong - Interest Rates and the Housing Bubble - "Suppose that John Taylor is right: that prudent macroeconomic policy would have had the Federal Reserve begin to raise interest rates not in the middle of 2004 but in the middle of 2003, and raise them back to boom-time levels not in two years but in one year, like so:
What would have been the direct effect of such an alternative short-term interest rate path on housing prices?"

Really great links - Krugman - CDS on non-existing bonds - Keynes & Hayek - FT on NGDP

Paul Krugman - J'Accuse - "But the reality is that unconventional monetary policy is difficult, perceived as risky, and never pursued with the vigor of conventional monetary policy.
Consider the Fed, which under Bernanke is more adventurous than it would have been under anyone else. Even so, it has gone nowhere near engaging in enough unconventional expansion to offset the limitations created by the zero lower bound."

Edward Lucas - East European economies - "A good example of outsiders’ wrong views was the market in credit-default swaps on Estonian debt. This was a chance to trade bets on, in effect, the death of a non-existent horse, as Estonia has no publicly traded government debt."

Paul Kasriel - Keynes and Hayek - "Both J.M. Keynes, the founder of the school of economics named after him, and F.A. Hayek, an icon of the ultra-free-market Austrian school, both said that when the financial market is unable to create credit because of capital constraints and when private aggregate demand collapses, there is a role for increased government spending and central bank financing of that spending. Neither Keynes nor Hayek recommended such policies in “normal” times. In fact, Hayek argued that excessive central bank credit creation in normal times would ultimately lead to a depression. But if, what he called a “secondary depression” was imminent or upon us, it should be avoided or mitigated by an increase in government spending and central bank credit creation to help finance the government spending. <..> Neither Hayek nor Keynes believed that any good could be served by the deflation and unemployment that would accompany a secondary depression. In the early 1930s, it could reasonably be argued that the U.S. experienced a secondary depression. I believe that the U.S. was on the brink of secondary depression in late 2008."

Samuel Brittan - FT - "The alternative to inflation targets has long been known. It goes by the ungainly name of nominal gross domestic product. This is just the familiar GDP, but before adjusting for inflation. A nominal GDP objective was for long championed by the British economist James Meade, although it was implicit in many other proposals. I have often thought that its name is the main obstacle to its acceptance and have suggested paraphrasing it as a national cash objective.
The basic idea is that monetary and fiscal policy cannot “manage” demand and output in real terms, as so many postwar experiences demonstrated. What it can endeavour to do is to maintain the growth of cash spending by an amount sufficient to sustain normal growth if costs and prices remain stable. It is a fairly subtle compromise between an output and an inflation target."

Really great links - M3 - equity risk premium - Sumner responds to Krugman - Industrial Revolution

Macro Market Musings - M3 - The Correct Money Supply Measure for This Crisis

Aswath Damodaran - equity risk premium has returned to pre-crisis levels - "How do we explain this rapid back tracking to pre-crisis premiums? While some view it as irrational, there is a rational explanation. One component in the equity risk premium is the fear of catastrophe. What is a catastrophe? It is that infrequent event, which if it occurs, essentially puts you under water as an investor for the rest of your investing life. The Great Depression was a catastrophe for the US: an investor in US stocks in 1928 would not have recovered his principal for almost 20 years. The Japanese market collapse in the late 1980s was a catastrophe. Investors who had their investments in the Nikkei in 1989 will not make their money back in their lifetimes. In good times, that fear recedes and investors are lulled into complacency; stocks go down, but it assumed that the long term trend is always up. In fact, we hear nonsensical stories about how stocks always win in the long term; if these stories were true, the equity risk premium should be zero for really long term investors. In crisis times, the fear of catastrophe rises to the top of all concerns and drowns out all other information. In December 2008, there was the real possibility of a complete financial meltdown and the equity risk premium reflected that. In January 2010, that fear had dropped off enough that people were reverting back to the pre-crisis premiums. It is entirely possible that we over estimated the likelihood of catastrophe in December 2008 and are under estimating it now, but I think that it is the only explanation that I can provide."

Scott Sumner - Krugman, round two - "If the central bank is doing its job, then Chinese policies that look mercantilist to the average voter or average politician, will be nothing more than a source of low cost capital for the US economy."

Tyler Cowen - Industrial Revolution - "More generally, extended periods of economic growth require that technologies of defense outweigh technologies of predation." - "Building a strong enough state to protect markets from other states is very hard to do; at the same time the built state has to avoid crushing those markets itself. That's a very delicate balance. "

Really great links - zero rate bound - naked CDS - lending standards - Roubini - Jean-Cicero Trichet - Haiti

Everyday Economist - zero rate bound - "The zero lower bound represents a key failure of modern macro in that there is little consensus or agreement about the effects of monetary policy in such a circumstance. The issue is of central importance for determining the correct policy prescriptions — both monetary and fiscal. It is my hope that the recent surge in research on the zero lower bound will ultimately reach a consensus. What’s more, I hope that this consensus takes into account that we live in a world with more than two assets and, as a result, that the zero lower bound is nothing more than an intellectual curiosity."

Tony Jackson - FT - derivatives and risk management - "For specimen one, consider corporate pension funds. Trustees of those funds are now able to hedge most of their risks, from inflation to longevity. But the one big risk remaining – for funds in deficit – is bankruptcy by the corporate sponsor. One obvious hedge is to buy protection through credit default swaps (CDS) written on the sponsor’s bonds. But the “naked” purchase of protection, we are told, is an abuse. CDS should be permitted only for those who hold the bonds in question. But in this case, that would defeat the object. The natural course for a fund would be to buy CDS equal to the deficit. But if it had to buy the sponsor’s bonds in equal amounts, default by the sponsor would simply double the deficit through the writedown of those assets. Note, in passing, that one common objection to naked CDS purchase – that it violates the principles of insurance – does not apply here. Under insurance law, a policy is valid only if the policyholder has an insurable interest – that is, would derive harm rather than benefit from the event in question. The harm being insured against here is self-evident.

Specimen two involves the proposed shifting of all derivatives contracts on to exchanges. The risk here is that companies would have to post margin every time the market moved."

David Merkel - lending standards - "One job ago, at a hedge fund that was bearish on financials, we would talk about this all the time. Regulators could have stopped the crisis in the early 2000s had they simply enforced lending standards. The banks would have screamed and ROEs would have gone into the single digits, but the crisis could have been prevented.
But, regulators are to a degree subject to politicians. Politicians, in the absence of any moral compass aside from re-election, are mainly beholden to those that fund their campaigns, when the electorate is without education, or a moral compass as well. Thus, regulations were neutered."

Nouriel Roubini - private vs. public defaults - "Unsustainable private-debt problems must be resolved by defaults, debt reductions, and conversion of debt into equity. If, instead, private debts are excessively socialized, the advanced economies will face a grim future: serious sustainability problems with their public, private, and foreign debt, together with crippled prospects for economic growth."

Jean-Claude Trichet/FT Alphaville - Caesar vs. Cicero - "I started with Tacitus’ example of bold policy action. I would like to end with Cicero’s fides. There was a famous controversy between Julius Caesar and Cicero 80 years before the crisis described by Tacitus. Rome, at that time, was struggling with a debt overhang. Caesar proposed partly to remit the debt. Cicero strongly opposed such action. He argued that debt forgiveness would shake the foundations of the Roman Republic and destroy one of its most important values: fides. Fides is trust, confidence, good faith.

In modern terms, Cicero was hinting at the moral hazard that can – but need not – be created by intervention in a crisis. The ‘lender of last resort’ responsibility of central banks – that Walter Bagehot advocated 1800 years after Cicero and Tacitus – should always be a dual responsibility. It should be crisis management and future crisis prevention at the same time."

Tyler Cowen - One of the best ways to help Haiti - "Pass a law stating that the Foreign Corrupt Practices Act does not apply to dealings in Haiti. As it stands right now, U.S. businesses are unwilling to take on this legal risk and the result is similar to an embargo. You can't do business in Haiti without paying bribes."

Krugman is angry

Krugman is angry. Here is more:
"We’re currently living in a world in which both central banks and governments are unable or unwilling to pursue sufficiently expansionary policies to eliminate mass unemployment; so it’s a paradox of thrift world, in which anyone who tries to save more reduces demand, reduces employment, and – because investment responds to excess capacity – ends up actually reducing investment. By exporting savings to the rest of the world, via an artificial current account surplus, China is making all of us poorer.
<..>
The final argument I hear about the renminbi is that it’s useless to make demands, because the Chinese will just get their backs up, refusing to bow to external pressure. The right answer is, so?
Here’s how the initial phases of a confrontation would play out – this is actually Fred Bergsten’s scenario, and I think he’s right. First, the United States declares that China is a currency manipulator, and demands that China stop its massive intervention. If China refuses, the United States imposes a countervailing duty on Chinese exports, say 25 percent. The EU quickly follows suit, arguing that if it doesn’t, China’s surplus will be diverted to Europe. I don’t know what Japan does."
Some thoughts:
1. Krugman is relying on dubious assumption that Politburo of China are afraid of a trade war because they are smarter than senators Smoot and Hawley.
2. Krugman is not at his first-best here.

Really great links - excess reserves - Krugman on China - Japanese trade surplus - the chances of a sizable upward shift in yields - scientific cover for Ron Paul

Brian P. Sack - NY Fed - "Chairman Bernanke discussed one possible sequence in his February 10 testimony. He suggested that operations to drain reserves could be run on a limited basis well ahead of policy tightening, in order to give market participants time to become familiar with them, and then could be scaled up to more significant volume as we approach the time for policy tightening.

Removing a portion of the excess reserves from the system ahead of increasing the rate paid on reserves is a cautious approach, as it should improve the Fed's control of short-term interest rates when it comes time to tighten monetary policy.4 To be sure, even at today's reserve levels, we would expect the interest rate paid on excess reserves to exert considerable pull on other short-term interest rates such as the federal funds rate or repo rates. However, we are unsure of the exact relationship between these rates and believe that it is likely to be tighter when the banking system is not as saturated with liquidity as it is today. Thus, it may be prudent to remove some portion of excess reserves before raising the interest rate on reserves."

Paul Krugman on China - "As Dean nicely puts it, “China has an unloaded water pistol pointed at our heads.” Actually, it’s even better: China can, if it chooses, throw some cold water on us — but it’s a hot day, and we would actually enjoy it."

Scott Sumner - "I seem to recall that back around 1970 the US government kept insisting that the Japanese trade surplus was caused by an undervalued yen. Then the yen was revalued 20%, but the “problem” continued. Then another 20%, then another 20%, then another 20%, then another 20%. The yen has now gone from 350 to 90 to the dollar. My math isn’t very good, but that sure seems like a lot of 20% revaluations. And the Japanese still run a current account surplus that is more than half the size of China’s surplus, despite having less than 1/10th China’s population. I think it’s fair to say that international economists have become increasingly skeptical of the notion that simply by manipulating nominal exchange rates you can eliminate current account imbalances that represent deep-seated disparities of saving and investing. But I guess hope springs eternal. Maybe this time it will finally work."

Brian P. Sack - NY Fed - "Moreover, looking out to longer maturities, the shape of the Treasury yield curve appears to incorporate not only expectations of policy tightening, but a decent-sized term premium on longer-term securities. Indeed, the term premium is well above the levels observed over most of the past several years, even though inflation is likely to be low and upside inflation risks are limited. This should help to diminish the chances of a sizable upward shift in yields."

George Selgin - central banks as sources of financial instability - Ron Paul will like this more than me - "The fact that the first central banks evolved from public banks established for purely fiscal reasons suggests that any stabilizing potential they harbored was unanticipated by their founders. That fact might simply mean that by a sheer stroke of good luck, institutions originally designed to serve governments’ narrow fiscal ends just happened to be ideally suited, given appropriate constitutional modifications, for scientific crisis management. I argue, however, that the public banks themselves were sources of instability and that their vaunted stabilizing potential was at bottom little more than a potential for self-discipline—a rather limited one at that."

NY Fed vs. Scott Sumner

Brian P. Sack (NY Fed):
"Some have discussed whether the draining of excess reserves has effects on the economy beyond the implications for short-term interest rates. In my view, it would be surprising if there were significant effects on the real economy or inflation associated with substituting one short-term, liquid, risk-free asset (reverse repos or term deposits with the Fed) for another (reserves), except for the degree to which that substitution affects the Fed’s control of overnight interest rates."

Scott Sumner:
"The Fed should stop paying interest on excess reserves, and if necessary should put a small interest penalty on excess reserves. This would encourage banks to stop sitting on all the money that has been injected into the system."

I think NY Fed is right here. I have debated this with Scott Sumner in this extra long comment thread.

Really great links - second wave of credit losses - price level targeting - sovereign debt explosion - Volcker rule - fiscal policy

John Hussman - mortgage resets - "From the pattern we observed during the round of sub-prime resets, delinquencies tended to follow the resets within about 3 months, and foreclosure actions within about 6 months. Although the 2010 peak in the Alt-A / Option-ARM reset schedule doesn't occur until July, with a much larger peak in mid-2011, a small initial round of resets is already in progress, having started about November of last year. I would expect that if we are indeed at risk of a second wave of mortgage defaults and credit strains, it will show up first as a surprising jump in 30-day "

The Globe and Mail - price level targeting in Canada - "The central bank is putting considerable effort into studying an intriguing, yet untested, technique called price-level targeting."

Mohamed El-Erian - How to handle the sovereign debt explosion - "More than 40 per cent of global GDP now resides in jurisdictions (overwhelmingly in the advanced economies) running fiscal deficits of 10 per cent of GDP or more. For much of the past 30 years, this fluctuated in the 0-5 per cent range and was dominated by emerging economies."

Axel Weber, Bundesbank president (via Money Supply blog) - "Taking aim at the proposed “Volcker rule” which would prohibit proprietary trading in deposit-taking institutions, Mr Weber said it could lead to greater instability in institutions that were not covered by the rule, such as hedge funds or investment banks. But the more serious problem, said Mr Weber, is that banning activities “that are perhaps more risky but not necessarily economically inefficient” is a “very far reaching economic intervention.”"

Nicholas Gruen - "As for the idea that monetary policy can substitute for fiscal policy if you're not at the zero bound, that might be true in the medium term, but not in the short term. Australia was able to dump a fiscal expansion of 1% of GDP into its economy within a couple of months of deciding to act - in (from memory) Oct 2008. Cheques were in the mail by December giving us a great Christmas - unlike just about everyone else."

Really great links - baptists, bootleggers and the Fed - derivatives - S&P total net return - prescient Krugman

Arnold Kling on Baseline Scenario - "Johnson and Kwak even depart from the usual progressive narrative in which the Federal Reserve was the creation of forward-thinking experts seeking to modernize the U.S. financial system. Instead, they tell more of a bootleggers and baptists story. p. 27:

Nelson Aldrich represented the viewpoint of the banking industry...Aldrich was the chair of the National Monetary Commission...which recommended the creation of a central banking system largely controlled by the private bankers themselves...What these bankers wanted was a bailout mechanism that would protect the financial system in the event of a speculative crash...They knew that a new central bank would need the political backing and financial support of the federal government, but at the same time they wanted to minimize government interference, oversight, or control.

"
David Merkel - "There is no net hedging in the market. At the end of the day, the world is 100% net long with itself. Every asset is owned by someone, regardless of the synthetic exposures that are overlaid on the system. There are many people, particularly dumb politicians, who think that derivatives are magic. "

Mahalanobis - "While the S&P 500 returned an average of 9.5 % annually over the last 50 years, the comparable figure after accounting for trading and management costs, dividend and capital-gains taxes, and inflation was a mere 1.3 %"

From the archives of Paul Krugman (October 16, 2008) - prescience watch - "In other words, there’s not much Ben Bernanke can do for the economy. He can and should cut interest rates even more — but nobody expects this to do more than provide a slight economic boost."

George Soros and naked CDS

Rajiv Sethi continues the theme of credit default swaps and their role in self-validating bear raids, and he has included an excerpt from an article of George Soros. I am very concerned about the excess volatility in credit markets, but I think that this specific attack by Soros on CDS is pretty weak:
"First, there is an asymmetry in the risk/reward ratio between being long or short in the stock market... Being long has unlimited potential on the upside but limited exposure on the downside. Being short is the reverse. The asymmetry manifests itself in the following way: losing on a long position reduces one’s risk exposure while losing on a short position increases it. As a result, one can be more patient being long and wrong than being short and wrong. The asymmetry serves to discourage the short-selling of stocks. The second step is to understand credit default swaps and to recognise that the CDS market offers a convenient way of shorting bonds. In that market the asymmetry in risk/reward works in the opposite way to stocks. Going short on bonds by buying a CDS contract carries limited risk but unlimited profit potential; by contrast, selling credit default swaps offers limited profits but practically unlimited risks. The asymmetry encourages speculating on the short side, which in turn exerts a downward pressure on the underlying bonds."

His comparison of stock market and bond market is misleading, as losing on long position decreases risk both in stocks and in long-credit side of CDS. And I doubt anybody would agree with the stockmarket version of the point George Soros makes about limited risk and unlimited reward. Have you heard anybody saying that asymmetric nature of put options encourages speculating on the short side by buying puts, which in turn exerts a downward pressure on the underlying stocks? There were not enough buyers of deep out of the money Pets.com puts in 1999, and I wish that CDS spreads on Iceland were wider in 2005.

Related posts:
Naked CDS, market efficiency and the run on Greece
Rajiv Sethi on EMH

Really great links - heads I win, tails someone else loses banking - debt/GDP and population growth - naked bubble

Paul Krugman on "heads I win, tails someone else loses" banking - "So what can we learn from the way Ireland had a U.S.-type financial crisis with very different institutions? Mainly, that we have to focus as much on the regulators as on the regulations. By all means, let’s limit both leverage and the use of securitization — which were part of what Canada did right. But such measures won’t matter unless they’re enforced by people who see it as their duty to say no to powerful bankers."

Nick Rowe - debt/GDP and population growth - "Now compare two countries: the first has 1% population growth; and the second 0%. The country that has a growing population has half the debt burden of the country with constant population, if both have the same debt/GDP ratio. And the country with a growing population can handle twice the debt/GDP ratio with the same debt burden."

Rick Bookstaber - The naked bubble in gold - "Usually the markets have the courtesy of giving cover for bubbles. We adorn the bubbles with some justification. Even if a guy is just after sex, he at least has the decency to act like there is some substance behind his interest. For the Internet bubble, it was that fundamental analysis based on the brick and mortar world did not bear relevance in the New Paradigm. For the Nikkei bubble, it was that the crazy P/E ratios were not considering one subtlety or another in the Japanese accounting system. But with gold, no one seems even to care about giving a justification, other than “gold has been a store of value throughout 5,000 years of monetary history”. Which is fine as far as it goes, but that doesn’t say anything about what the price of that store of value should be."

Naked CDS, market efficiency and the run on Greece

Rajiv Sethi makes the case that prohibition of naked credit default swaps can be supported on the grounds of Diamond and Dybvig's financial instability model:
"In this case, expectations of default can become self-fulfilling even when solvency would not be a concern if expectations were less pessimistic. What does this have to do with naked credit default swaps? As John Geanakoplos notes in his paper on The Leverage Cycle, such contracts allow pessimists to leverage (much more so than they could if they were to short bonds instead). The resulting increase in the cost of borrowing, which will rise in tandem with higher CDS spreads, can make the difference between solvency and insolvency. And recognition of this process can tempt those who are not otherwise pessimistic to bet on default, as long as they are confident that enough of their peers will also do so. This clearly creates an incentive for coordinated manipulation."

Even if we thought that naked CDS speculation is not stabilizing, it is important to realize that self-fulfilling run can happen without any possibility of shorting. If some traditional bond investors are afraid that other traditional bond investors will not roll over their investments in Greek bonds, crisis can happen without any involvement of hedge funds. Without leverage embedded in naked CDS, most probably such crisis will occur later, when Greek debt/GDP ratios and deficits become larger. This just means that adjustments caused by the crisis will happen later, but they will be much more painful. Criticism of naked CDS will not move us closer to the ultimate solution of the financial instability problem. The real answer to the current crisis is better monetary policy, macroprudential regulation of systemwide leverage and a more effective version of European Stability and Growth Pact that should include the eurozone member equivalent of bank deposit insurance. Criticism of naked CDS will not move us closer to the ultimate solution of the financial instability problem.

There is also a strong argument for allowing naked CDS on market efficiency grounds. One of the most important assumptions behind the capital asset pricing model is unlimited shorting. Naked CDS allow market participants to move prices of credit instruments closer to mean-variance efficient frontier and in this process efficient market hypothesis becomes more applicable to bonds. Bond markets inefficiently ignored the Greek violations of European Stability and Growth Pact before the crisis because there was not enough leveraged shorting of Greek bonds. Don't get me started about how bond markets inefficiently allowed Iceland to ruin itself.

Really great links - monetary policy and asset prices - Yuan/USD - Eurozone bond markets - EMH and computational complexity

Olivier Blanchard & Co. - "Part of the debate about monetary policy, even before the crisis, was whether the interest rate rule, implicit or explicit, should be extended to deal with asset prices. The crisis has added a number of candidates to the list, from leverage to measures of systemic risk. This seems like the wrong way of approaching the problem. The policy rate is a poor tool to deal with excess leverage, risk taking, or apparent deviations of asset prices from fundamentals. A higher policy rate also implies a larger output gap.
Other instruments are at the policymaker’s disposal—call them cyclical regulatory tools. If leverage appears excessive, regulatory capital ratios can be increased; if liquidity appears too low, regulatory liquidity ratios can be introduced and, if needed, increased; to dampen housing prices, loan-to-value ratios can be decreased; to limit stock price increases, margin requirements can be increased. If monetary and regulatory tools are to be combined in this way, it follows that the traditional regulatory and prudential frameworks need to acquire a macroeconomic dimension. This raises the issue of how coordination is achieved between the monetary and the regulatory authorities. The increasing trend toward separation of the two may well have to be reversed. Central banks are an obvious candidate as macroprudential regulators."

Jim O'Neill (Goldman Sachs) - One-Way Yuan/USD Bet Is Over - "Our GSDEER model used to show that the CNY was undervalued but it is not any longer. We discussed our estimated CNY results in the box earlier. It should not be forgotten that the CNY has risen by close to 20% on a trade-weighted basis in real terms, which has removed the undervaluation we estimated."

GaveKal - bond vigilantes have restored the Stability and Growth Pact - "The hierarchy of sovereign spreads on Euro financial markets closely follows the logic of the Stability and Growth Pact (SGP). The European bond markets are thus remarkably consistent and sending a clear and powerful message to the governments of the euro zone to stick to the agreed rules or suffer the consequences.
As of today, there seems to be no additional risk premium related to the possible dislocation of the Eurozone. Clearly, this possibility would have such devastating effect on world financial markets that investors cannot even think of it (even if many talk about it)."

This should persuade most computer scientists that EMH is false (via Tyler Cowen) - "I prove that if markets are weak-form efficient, meaning current prices fully reflect all information available in past prices, then P = NP, meaning every computational problem whose solution can be verified in polynomial time can also be solved in polynomial time. I also prove the converse by showing how we can "program" the market to solve NP-complete problems. Since P probably does not equal NP, markets are probably not efficient. Specifically, markets become increasingly inefficient as the time series lengthens or becomes more frequent. An illustration by way of partitioning the excess returns to momentum strategies based on data availability confirms this prediction."

Really great links - lack of global aggregate demand - Bank of Canada - Warren Buffett

Bill Gross (PIMCO) - "To begin with, let’s get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today"

David Rosenberg - Bank of Canada - "Many pundits come back and say that we have emergency interest rate levels and yet the emergency has passed. This is circular reasoning because a key reason why the emergency has passed is because the Bank (and the Fed) has kept rates at their extremely low levels."
- "While the Bank’s economic outlook for 2009, 2010, and 2011 have undergone changes since the last rate cut in April of last year, there has been no change in when the central bank expects the economy to reach full capacity, which is in the third quarter of 2011. At the time the Bank last cut rates, its forecast was 2.5% GDP growth for 2010 and 4.7% for 2011; the latest published forecasts show 2.9% for 2010 and 3.5% for 2011 (while the economy, looking at the rear view mirror, has not done as badly as was expected, the Bank has since actually shaved its 2011 growth forecast from the time it last eased).
It still must be stated that when the Bank cut the policy rate to 0.25% it had a 4.7% GDP growth forecast for 2011 and that forecast now is down to 3.5%; and the Bank, at the margin, moved today to validate market expectations of a rate hike this summer. It does boggle the mind somewhat."
- "Finally, the Bank cited upside risks to the overall outlook as being “stronger-than-projected global and domestic demand” and downside risks as being “a more protracted global recovery and persistent strength in the Canadian dollar.” As for how I think these risks shape up, let’s just say that the outlook for Europe is particularly clouded at the present time as many countries are responding to heightened fiscal risks via aggressive policy restraint and the latest musings out of the key policymakers at the Fed (Bernanke, Yellen, Dudley) paint a fairly somber picture of recovery prospects stateside. Europe and the USA, as an aside, represent more than 80% of Canadian exports and 20% of GDP.
As for the Canadian dollar, as it stands now, it is already nearly five cents above its fair-value estimate and as such will act as a pervasive overhang for local exporters. As for domestic demand, there is a very good chance that the housing boom will soon come to an end, with or without the help from the BoC, in the aftermath of the recent CMHC changes and what is likely to be a fairly austere federal budget.
All that said, the Bank of Canada opted yesterday to ratify market expectations of a summertime rate hike, and looking at what is priced in, the next question is whether the Bank will follow what is priced in and keep going through to mid-2011 (a 1.75% policy rate).
Either way, the question must be asked as to whether we could be on the precipice of a classic policy mis-step. While the Bank has never successfully led the Fed into a tightening cycle, it actually in the past did try once to get the ball rolling first and it was a mistake of historic proportions — and this also followed on the heels of a 5% GDP growth quarter. What I am talking about was the aborted move by the Bank to raise rates in the spring and summer of 2002 in the very early stages of the post-tech-wreck healing phase, but to only then see the Fed go ahead and ease policy in both November 2002 and again in June 2003. The Bank was then forced into reverse course. In fact, the BoC policy rate, which had been boosted from 2.00% to 3.25% in 2002/03 was eventually cut all the way back to 2.00% in early 2004 (and the Bank then waited three months after the Fed finally embarked on its tightening cycle in mid-2004 to re-ignite the Canadian rate-hiking program)."

David Merkel on Warren Buffett - "My summary of what he is trying to do can be summarized in one sentence: “A business with a big moat, financed by cheap insurance float, will lead to book value growth.” Moat — the business possesses sustainable competitive advantages that are significant. It would be very difficult to reverse-engineer the competitive position of such a business. Float — ordinarily, property-casualty insurers lose money on operations, but make it up on investing the funds that exist because of the delay in time between premium payments and claims. Buffett calls that cost “float,” and indeed over the last seven years, Berky has made money on the insurance operations, far from it being a cost. All the better as he invests the funds generated from insurance operations in businesses that will generate a growing stream of earnings in businesses that have sustainable competitive advantages, such as Burlington Northern and his utility investments."

Really great links - Fed funds rate - Okun's Law - Naked CDS - Tim Duy - bubble in Australia - book cost illusion - gold

Olivier Coibion, Yuriy Gorodnichenko - When will the Fed raise interest rates? - "The Taylor rule with a response to the growth rate of output generates interest rate predictions which are quite consistent with financial and professional forecasts of future interest rates. The key to this consistency is that the historical behaviour of the Fed (since Volcker) has been characterised by a strong response to output growth, which returns to normal levels quickly, rather than solely the output gap, which recovers only gradually. Hence, there is a broad consensus that, given current information and barring political or populist pressures, one can reasonably expect the Federal Reserve to start raising interest rates toward the end of this year in its attempt to balance the risks of higher inflation against prolonging the current economic downturn."

Justin Wolfers - Okun's Law - "What’s good news for Okun’s law, though, is bad news for the economy. This alternative measure of output growth suggests that the recession may have been deeper, and longer-lasting than previously thought, although data for the fourth quarter aren’t yet available. While many economists believe the recession ended in the second quarter of 2009, this income-based measure of output kept shrinking in the third quarter, too. And while the expenditure-based measure is back to its level from the third quarter of 2006, the income-based measure suggests that output is still 3.5 percent below that level. That’s a pretty big hole to dig out of." (H/T DeLong)

Sam Jones - FT Alphaville - The benefits of naked CDS - "Firstly, any naked CDS buying – as slated by Mr Münchau – occurred, by hedge funds at least, well before the current crisis. Hedge funds have not been the most significant buyers of CDS in recent weeks. (Banks, stuffed to the gills with sovereign debt thanks to the ECB, have) Ergo, there is no speculative, opportunistic “attack” underway to try and push Greece further into catastrophe (as Mr Münchau notes, Greece seems content to do this all on its own anyway).
Secondly, and more importantly, however, hedge funds, completing their clever trade, have been buyers of Greek government debt, or else insurers of other holders as CDS writers. In a market where one of Greece’s principal market makers -– Deutsche Bank –- says it will not buy Greek bonds, and where European politicians are having to force their own national banks to do so in order to try and avert the threat of a Greek bond auction failing, the boon from hedge funds looking to hoover-up Greek debt is undeniable.
And the only reason they are in the market to buy is because of naked CDS positions they laid on many months -– and in some cases years -– ago."

Tim Duy - "Interesting that we should be debating the necessity of raising inflation targets when we can't even get the Fed to direct policy at the target we already have. But I suspect the Fed believes that doing anything more would be the equivalent of raising inflation expectations, a bridge they are not ready to cross."

Bond Vigilantes - Property bubble in Australia - "On my first night out in Sydney I was fortunate enough to get chatting to a couple of the locals who were out celebrating, one of them having just completed the purchase of her second property. The other, who already has two, thought it totally normal that two girls in their mid 20’s - one an interior designer, the other a shop assistant - should be able to do this."

Adam Ozimek - book cost illusion - "Is there a name for when consumers are willing to pay less for something because they falsely perceive that costs have gone down? This is apparently the conundrum facing publishers, who have found that many consumers believe that a significant portion of the cost of a book is the price of the physical book, and thus expect that without printing costs, e-books should be significantly cheaper. It seems that the cost illusion that publishers have benefitted from for so long is finally coming back to bite them."

Soros - when he sees a bubble he buys - "George Soros is helping drive up gold prices by doubling his bet in a market even he considers a “bubble” as Goldman Sachs Group Inc., Barclays Capital and HSBC Holdings Plc predict more gains before it bursts."

Scott Sumner - Indeed my only disagreement with those on the left is about incentive effects, not ethics. I think the supply-side effects of high taxes and subsidies (in the long run) are much more important than many others believe, indeed they are much more important than common sense suggests. Thus I favor a low-tax welfare state similar to Singapore, which spends enough to eliminate severe poverty, and also provide universal health care, education, etc. BTW, Singapore spends much less than we do, so calling for the US to move to that “welfare state” system is equivalent to calling for dramatically lower taxes on the rich.

ADMINISTRIVIA - subheading changed from "Scientifical Learnings of Kazachian Macroeconomists for Make Benefit Glorious Nation of America" to "Delicious Journeys Through Macroeconomics for the Purpose of Making Central Bankers Visibly Uncomfortable in the Presence of Really Great Links about Their Errorrs"