by Tom Bozzo

Back in 2005, I argued at Old Marginal Utility that "Greenspan exceptionalism" was not very well founded in that observers rarely engaged in a proper counterfactual analysis of how well Alan Greenspan performed relative to the next best monetary policy technocrat. That's a fairly stringent evaluation criterion, and even Brad DeLong's glass-half-full response revealed what could be considered major errors in Greenspan's judgment. 2009 hindsight of course shows that there was another major error in inflating the housing bubble, failing to recognize it, and allowing his Rand discipleship to overcome common sense in using Fed powers even to skim the froth.

Now some elite opinion favors Ben Bernanke's reappointment, but politicians are irritated over Fed stonewalling of bailout oversight and others (e.g. Dean Baker) point out that Ben Bernanke who put the Fed throttles to the firewall to save the world is also the Ben Bernanke who carried over Greenspan policy until it was too late among other things.

So what should the counterfactual-based evaluation of Bernanke say? What would the hypothetical panel of smart graduate students have done? It seems even harder to suggest that Bernanke was essential than Greenspan — in this case, because well-read economists should have had it from Ben Bernanke the academician that in a depression-level crisis you don't skimp on the monetary policy intervention. Meanwhile, Bernanke gets no points for prescient instincts as the save-the-world interventions have seemed to be firmly of the close-the-barn-doors-after-the-horses-have-bolted variety.

Meanwhile, significant elements like the opaque lending programs have the appearance if not reality of being in part the predator state (a la Jamie Galbraith) in action. There's a line of 'b-b-but Bernanke and Paulson saved the world' opinion along the lines of this bit of fail from the often incisive Joe Nocera:

So why the anger? Why the suggestions of “cover-up” and “lies”? On Thursday, as I watched Mr. Paulson being castigated, it dawned on me. Seven months later, with the palpable fear of a financial collapse largely subsided, it really all boils down to how you view what happened last year. Was it, as Mr. Towns believes, a bailout of a handful of unworthy but too-big-to-fail institutions? Or was it, in the eyes of Mr. Paulson, a rescue of a teetering financial system? My vote is for the latter.

To which the obvious response is, duh, who says it has to be one or the other? A reality-based critique of the bailouts allows them to be both effective at saving the world and unconscionable screw-jobs that kept an array of bad actors from paying for their greed and incompetence. (The latter clearly feeds a lot of the underlying sentiment of the tea partiers, even if it's ultimately the greedy and incompetent who are marshalling it.) However, considering Team Obama's political tone-deafness, it'll be a pleasant but major surprise if they don't let Bernanke go back to Princeton for some R&R.

(Cross-posted at Marginal Utility.)

I'm just going to "Go Thoma" on him, since I can't find anything to cut:

Barack Obama tells us we should not investigate American intelligence agents or their overlings who are responsible for torturing hundreds of suspects in their custody. We have to forget about the past, he says, to concentrate our attention on the future. That might be a convincing argument if Obama were going all out for an ambitious program to remake our economy and our relationship to the rest of the world. But the future is on hold because the number one job today is bailing out the financial system, so we can preserve the money moguls who juiced our economy in the past.

Tom Bozzo

I've been hearing about various potential schemes to game the PPIP, and Jeffrey Sachs gets in on the action with a pure self-dealing scenario (via Americablog):

Here's how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.

Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.

Did Sachs read the PPIP Legacy Securities term sheet [PDF] before writing that? [Though see the addendum below.] That sort of transaction appears to be forbidden under the 'Governance and Management' section of the summary terms:

A Fund Manager may not, directly or indirectly, acquire Eligible Assets from or sell Eligible Assets to its affiliates, any other Fund or any private investor that has committed 10% or more of the aggregate private capital raised by the Fund. Private investors may not be informed of potential acquisitions of specific Eligible Assets prior to acquisition.

Geithner and Summers may or not be the poster children for 'regulatory capture,' but they're not stupid. (For that matter, Sachs's scenario presumes that only Citi can detect the underlying worthlessness of the asset, so FDIC will permit the maximum leverage under the program.)

There are also some more complicated scenarios that use secret deals and kickback schemes to get around the anti-self-dealing provisions of the PPIP. For now, I would judge those to represent descriptions of serious frauds rather characterizations of actual PPIP loopholes. Such time as Treasury (or DOJ) is caught playing see-no-evil with those, then there may be something more than an attempt to pile on.

This is not at all to say that there are not serious and valid concerns regarding PPIP design. Among other things, I'd be much happier if I saw the likes of Larry Ausubel and Peter Cramton hired to ensure that the private managers effectively compete for the public subsidies and do not overpay relative to some reasonable assessment of fundamental (not necessarily 'market') asset values.

Added: The anti-self-dealing terms from the Legacy Securities program, quoted above, are from a 4/6 revision of the term sheet (thanks to KHarris for pointing that out) and may have crossed paths with Sachs's article (also of 4/6); they're a little different from the Legacy Loans terms sheet where a prohibition on self-dealing has been a feature all the time. Here's the original (and apparently current) language for the Legacy Loans sheet:

Private Investors may not participate in any PPIF that purchases assets from sellers that are affiliates of such investors or that represent 10% or more of the aggregate private capital in the PPIF.

It would take a lawyer to determine how this compares to the Legacy Securities terms. The ban on communication prior to asset sales looks new and makes it clear that schemes to coordinate Legacy Securities sales with purchasers are improper.

An issue with many of these critiques is that they seem to combine elements of the two programs. Sachs's example is based on leverage ratios allowed under the Legacy Loans program but not Legacy Securities, in which case other Legacy Loans program terms should apply.

Suppose I told you that there was a crisis with a stock, say, GE. That the price of the stock had dropped around 75% in the past year. And you responded, "But the problem is solved; the prices of long-term Call Options (say, the January 2011 20s) has gone up, as has their Open Interest.

You will (rightly) point out that this won't revitalise the assets themselves and I will (rightly) note that option markets rather saved the equity markets in 1987, for instance. You will note that I am too optimistic, and I will agree, holding up a Brad DeLong mask (since I'd rather have DeLong's [relative to mine] abundant hair than Geithner's abundant forehead).

Then I will drop the other shoe and say that the toxic ("legacy") assets should be priced as if the Fed-supported trades were options, with the underlying current price worked out by Black-Scholes. (As I've noted before, B-S is specifically INappropriate for this exercise, as it will overvalue the option. And therefore anyone suggesting the toxic ["legacy"] assets should be priced—or carried on their books—at a level higher than that model will clearly be insane.)

Ladies and Gentlemen, welcome to The TARP Solution. Details beneath the fold.


TARP is the Treasury Department's attempt to confront two realities: (1) it isn't a "market" in any reasonable sense of the word if the Fed is putting up 85% of the cash. (People who tell us that this means firms are committing a "large amount" to the process either do not understand the English language,or are hedge fund managers trying to sell something.) So let's put some random numbers together.

Those "legacy" assets are trading in the market around 30. The Big C and others are carrying them on their books around 80. Several people who should know better (Summers, Geithner, DeLong) have conflated "the market is underpricing the assets" with "the true price of the assets will make the banks solvent again."*

So we know three things. (1) People are willing to pay 30% of their own money to buy these assets, (2) the Fed is only requiring them to pay 15%, and (3) the fair value is between 30 (the current market price) and 80, and probably closer to the former than the later.

So again, using back-of-the-envelope principles, let's pretend that we think the recovery will be soon, that the defaults will slow (or at least that resales will be quick and frictionless), and that the market reaches that consensus quickly. And so fair value should be around 50.**

So let's say the Fed offers to buy a MBS for 50. How, as an investor, do I make money off this? Three possible ways:

1. If I own securities for which I paid <50, I sell them to the Fed.
   
2. If I own securities for which I paid >50, and which I cannot sell for 50 without revealing myself to be insolvent, I buy securities at 50 along with the Fed and "average in." (This is the "how to stay solvent longer than the market can be rational" act.)
   
3. If the Fed is buying securities at 50 so that I can no longer buy them at 30—I buy a LONG-dated Call Option on the security.

It is that last that explains TARP. Effectively, the co-investors with the Fed will be buying a Call option at 7.5 on the security at 50.***

Of course, it may not be an at-the-money Call option. More likely, the hedge fund effectively will be buying an out-of-the-money option (say, a 49.5 Call for 8) where some portion of the purchase is put up by the government.

Now you will note that, technically, TARP requires the hedge fund to buy the asset. So you might argue that this is not an option. But let's look at the generic payoff diagram to the hedge fund of the two scenarios.

Amazingly, you can't tell the difference on the payoff diagram as the security gains.**** In both cases, the hedge fund manager has just gone long volatility.

Expect that to have a ripple effect—I'm guessing dampening, cet. par.—on other option volatility trades.

All that is left is to back out what actual value of the security was assumed by the hedge fund when they bought the option. Which I will also leave as an exercise to the reader, while suggesting that a fair indication is min[x, TotalFedContribution] s.t. x a.s. approaches TotalFedContribution.

Will this bring the markets back, or make bank balance sheets more stable? I'm still saying "No," and hoping to be proved wrong.

But what it should do is reduce volatility buying, especially in the other debt markets, for the foreseeable future. So if any of those Bankrupt "legacy asset constrained" institutions has a long volatility position, there will be even more "Unintended Consequences."

*In fairness to Brad DeLong, I don't believe he believes this. As Dr. Black noted, George Voinovich "wants to see a pile of money in flames before he's willing to vote for what's necessary," and DeLong therefore sees this as a necessary evil. Having seen no evidence from the Obama Administration that they Have a Clue, I am naturally suspicious that this particular idiocy will do anything other than waste time and money—both of which are in increasingly short supply—but, since Larry Summers has shown his brilliant foresight before and clear has no skin in the game, I am reassured that there is no Principal-Agent problem at work here, as they was when Christopher "I never saw a regulation I like" Cox was named head of the SEC by the Previous Administration.

**While we're at it, can we pretend that Amber Benson will be my next wife, which is probably very little less likely than those other possibilities (especially since I'm already married to an sf-writing actress/director)? (Amazingly, even without those conditions, we would be using a BotE number of 50: though there is a legitimate argument that 60 would be easier to work with, I'm assuming no one is that stupid.)

***This is why 60 would have been easier; 15% of 60 is 9, so I wouldn't have to pay attention to decimal places. 40 would also have been easier—and both certainly more realistic than 60 and arguably more realistic than 50, but I want to maintain the pretense of the U.S. Treasury that this is a liquidity, not a solvency, crisis. (They're wrong, but it's their game.)

****The reason we can tell the difference on the losses is the possibility that the hedge fund treats the position as if it were an in-the-money Call option for which the Fed paid the in-the-money portion; the real returns to the hedge fund of the position in a TARP security are the same in both cases; there would be differences in the way the rest of the portfolio was managed, though, which are left as an exercise to the reader.

By Divorced one like Bush

This past weekend I wrote about the OCC, Office of the Comptroller of the Currency and 4 rulings that this office has made over the last two presidencies.
1. Preventing state AG's and the state banking departments from investigating and regulating national banks. 2004.
2. Allowing Banks to become real estate developers and managers to including wind mill operations. 2006
3. Asserting that credit card insurance via telemarketing was not insurance and thus again immune from state AG's and the state insurance departments. 2002 This particular ruling being the result of the Gramm-Leach-Bliley Act of 1999. The act that is now pegged as THE deregulating action of the current economic mess.
4. Allowing banks to sell insurance. 1996.

All four are clearly rulings that can have lines drawn directly to the what we are hearing today as to why the alphabet soup of “financial products” created by “to big to fail” entities have required a combination of delivering funds and pledging funds to the tune of around $9.5 trillion dollars. I googled the current number and could only find numbers dating from December 2008 such as this site suggesting then the total was $8.5 trillion.

We really need to start talking about the OCC. It is a player, if not the behind the scene player of a lot of what has become our financial system. Note, I did not say banking system. That is key.

Ok, yesterday it was proposed that as part of the solution, our Treasury head needs some new power. Already leadership is say "Yes".

This call for power with an already announced “Yes” immediately sets off my suspicion meter. After 8 years of power being concentrated into the hands of the one (Homeland Security), unitary executive powers still being exercised by Obama, lobbyist run wild, departments turned from working for the people to working for the industry (see labor, FDA, military), no bid contracts and their results, $9 billion in bundled crisp new hundred dollar bills missing in Iraq, Paulson asking for $750 billion, not strings attached (add yours here)...

ARE YOU FUCKING KIDDING ME!
You want to give the power to say "yeh" or "nay" on a financial institution to one person? Have we not learned?

Then it dawned on me. Think about the 1996 OCC ruling and the 2002. Think about the praise for the FDIC and the job it has been doing. Here is an entire entity congress created to take care of failed banks. Ah, you say entities like AIG are not banks, so there is no jurisdiction. At least that is what we are being told. However, being that the OCC has in it's rulings merged the banking, real estate and insurance industries (specifically ruling what was and was not insurance) I will not accept that all those smart lawyers in congress and the one that heads the White House would not be able to produce a winning argument that by the actions of the OCC rulings, the FDIC already has the authority to do to AIG what it has currently been doing.

That lead me to look at the FDIC web site. In particular, it's “About” page:

Mission
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

It does not say “banks”. It says “financial systems” and “managing receiverships”.

Not enough for you. Consider there was an advisory committee created in 2002 by the then Chair Donald Powell.

Scope and Objectives: The Committee will provide advice and recommendations on a broad range of issues relating to the FDIC's mission and activities, including, but not limited to: the delivery of services by the FDIC, its corporate infrastructure, and policy initiatives in the areas of deposit insurance, supervision of financial institutions, resolutions and management of failing and failed institutions, and other issues impacting the financial services industry.

It did not say “banking” or “banks” here either. And it specifically talks about exactly what we have here today: failed and failing institution. You can not get away from the all inclusive “financial services industry”.

Want more? Consider the bio of the current chair:

Before her appointment to the FDIC, Ms. Bair was the Dean's Professor of Financial Regulatory Policy for the Isenberg School of Management at the University of Massachusetts-Amherst since 2002.

The FDIC is already the entity with the power that Obama is now requesting for his surrogate. On the plus side in my book, it is an agency created from the destruction of the last time we were here. It is a New Deal institution and that makes it clean in my mind (at least cleaner than more recently created entities). So, even if I'm wrong, and I don't think I am because this nation for 13 years now has been blurring the line between banks, insurance and recently real estate to the point that it is one big industry and that counts when you go in front of a judge, the correct request that we should have been hearing from Obama is to expand the definition of banking to clarify all these new mongrel banking entities such that the entity this nation created specifically to do what the Treasury is asking for can do the job without question of jurisdiction. Simple, neat, maintains separation of power and not bureaucracy expanding.

So why didn't he?

Effect

Cause

Tom Bozzo

In this round-up of "experts" (Cramer?!) on whether to "soak the Rich" at the WaPo (the title of which, given the actual Obama budget plans, reminds one that mainstream discourse has really lost sight of the true rich-soaking possibilities), what really bugged me was this from Laura D'Andrea Tyson selling spending restraint in the Obama budget:

It is a shibboleth among critics that President Obama's budget relies almost exclusively on tax increases on the wealthy to fund increases in government spending, yet this not an accurate representation of the facts...

It reduces non-defense discretionary spending to 3.6 percent of GDP, compared with an average of 3.8 percent between 1969 and 2008. [emphasis added]

This begs the question of why the level of non-defense discretionary spending from an era of mostly Republican presidents and lately Republican Congresses should be considered adequate. Indeed, there seem to be more public investment funding shortfalls than funds so far committed to them.

Now a clever and socially useful direction signaled in the stimulus package is to address transition problems upfront for, e.g., sensible climate policy so the future implicit or explicit taxes aren't seen as quite so much of a hold-up for those unfortunate enough to have taken extra advantage of the legacy policy of free emissions. Properly executed, that can help keep the well-intentioned but wobbly on board with programs that need all the support that can be mustered to overcome entrenched interests. The risk is getting no more than the appearance of transformation, which would represent at a minimum a lost opportunity — especially given that it may be dawning on the public that not everything in the U.S. is optimally arranged.

Perhaps some of the administration's policies can be implemented as tax expenditures to direct private-sector activity in accordance with public policy, and I suppose (but don't know) that might not be included in the 3.6 percent. Some areas may be so starved for funding that they're regarded as hard to get off the ground quickly, though that's not so much of an issue over the longer planning horizons of the regular budget. It seems unavoidable that seriously unscrewing up the transportation and energy networks, the publicly-funded education system, and so on will at some point require some serious funding beyond the couple percent of GDP of extra stimulus spending. The administration might as well figure out what they really want and make a case for it, since as we've seen from the Kevin Hassetts among other right-wing, uh, luminaries, they're going to be tarred as dirty commies by the right whatever they do.

by Tom Bozzo

Much like the largely if not totally hypothetical family farm that might need to be sold off to cruel agribusiness to pay "death taxes," I suspect that trotting out charities as the Real Victims of Obama administration plans to reduce tax expenditures on the wealthy is the latest Luntzian effort to put a plausibly human face on the upward-redistribution beast. The combination of income- and estate-tax policies makes the net direction of the incentives for tax-deductible giving ambiguous, and a kicker is an observation well-buried in an NYT article on the subject from last week:

Robert F. Sharpe Jr., a fund-raising expert in Memphis, said many of the wealthiest donors are already limited to deductions of 28 percent for their charitable gifts because they are subject to the alternative minimum tax.

A more correct modifier on "donors" in this case might be "wealthier" as the AMT hits in something of a reverse donut hole pattern, where the highest-income taxpayers tend fall out of the AMT system because they have sufficient tax liabilities at the top statutory rates for the ordinary income tax.

So the vast majority of taxpayers — Obama's 95 percent — don't make enough money to face more than a 28 percent Federal income tax rate on their last dollar of income. Of the remaining 5 percent, many pay the AMT and the tax price of their contributions is based on a tax rate no higher than the AMT's 28 percent top rate. So we're really talking about the very small slice of the very fortunate who pay the top regular income tax rates and are outside the AMT system: generally, the tip-top of the income distribution and their beneficiaries.

Of course the NYT has a role as a house organ of the upper class (at least the portion for whom the role is not taken by the W$J), but this is an example of what Jonathan Chait very nicely described as the systematic blowing out of proportion of the tax concerns of the very rich.

A little more is below the fold.

The dirty secret of tax-deductible contributions is that it amounts to spending lots of public money on projects that have some combination of dubious value to secular society and alternative means for public and private funding. A now-aged CBO study describes the disposition of tax-deductible contributions, and nobody should be surprised that the biggest beneficiary group is religious institutions. Religion is dependent on voluntary contributions, but are not so exposed to wealthy individual donors. Arts, education, health, and social services groups tend to have significant other sources of revenue — tuition, other fees for services, grants. (Arts groups are notably exposed to corporate donations, and many have been slammed as their benefactors have circled the wagons.)

Now there's some evidence [PDF] out there that the tax-price elasticity of donations is greater (in absolute value) than 1 for some of the major categories of donations, which implies that the tax deduction elicits more donations than the tax cost. Otherwise, Establishment Clause issues aside, the government could rescind the tax deduction and make the charitable groups whole (at least as a group) through some system of grants.

Even this sort of Hicks-Pareto efficiency doesn't establish that the funds are being put to their highest-valued use, though. A lot of donations make rich institutions richer, and diminishing marginal productivities and utilities would lead you to conclude that those institutions can run out of useful things to spend money on and thus are pushed into activities of dubious social utility like, uhm, making themselves into tax-free hedge funds with educational side projects. So I'm in favor of giving a pretty hard look at the tax status of endowments too.

Tom Bozzo

John "Don't Say" Boehner makes (or should make) Greg Mankiw cry:

Mr. Boehner likewise criticized Mr. Obama’s cap-and-trade emissions permits proposal, saying, “Cap-and-trade is code for increasing taxes and killing American jobs, and that’s the last thing we need to do during these troubled economic times.”

As the NYT reports, the Obama budget actually would (mostly) rebate the proceeds of selling the credits via the 'Making Work Pay' credit, so Boehner is (mostly) lying about the tax increase part of the proposal. The administration should be concerned that the implicit tax will be passed on for fairness and political reasons, and a conceptually good way to deal with that is to make people approximately whole in a way that doesn't take away the price signal to reduce carbon emissions.

As for the job-killing business, I'd like to see any other job that Boehner would save in the name of inefficiency; jobs whose existence depends on free carbon emissions are being subsidized by the rest of society. Of course it's the net job creation or destruction that really matters. Insofar as there's not much net tax increase, usual arguments regarding incentive distortion of taxes don't really apply, and the net proceeds would go to low-carbon energy infrastructure and R&D that would be reasonably calculated to have substantial long-range returns, the job-killing claim looks histrionic. But if you don't have ideas, then I suppose there's not much to do but try to pound the table.

Tom Bozzo

Reader Roger Senserrich listened to the Obama reply that also caught CR's eye and sends a relatively favorable (to the administration) interpretation:

Let´s see if it makes sense.

1. Obama says that America doesn´t nationalize; it is not something we do. That´s actually false; ask IndyMac or WaMu shareholders on what hit them. The FDIC does nationalize.
2. The political system, however, does not perceive it as the "N" word. There was little backlash against those actions, as the FDIC is seen as non-political; some sort of a technocratic guardian that does what is needed.
3. Enter the stress test: Geithner talks about testing the banks to see if they can swim in these troubled waters. Only some banks; the 14 with assets over 100 billion, will take this wonderful "test". Depending on how well they fare, they will get more or less capital, and the treasury will grab more or less stock.

See where am I going? The administration could be looking for a way to benchmark and nationalize what is needed using a technocratic procedure with a clear way out, as a way of doing the work with some political cover. Essentially, the idea is to get the "N" word out of the debate, and make it about banks getting "intervined" after failing to comply with the "agency"´s regulations.

It is convoluted, and I might be looking for a rationale that is not actually there, but it makes sense; it gives them a way to do what is needed without actually having to name it. Nationalization might be economically necessary, but is not politically feasible; this could be a way to create political cover for it.

Tom here. For another sympathetic view, see Jeff Frankel. I read Obama's statement through the filter that Obama is a smart lawyer and note that he's foreclosed nothing going forward; the money quote in my view is that what we've seen so far represents "some of the tough love that's going to be necessary."

Now Geithner and Summers could yet find their pictures attached to the Wikipedia entry on regulatory capture, but we also need to avoid reacting as if we've been overconditioned to eight years of life under Davies' Law. This is not to counsel against vigilance with respect to the administration's deeds so much as to suggest a la Frankel that the "they have no clue and the Obama presidency has already failed" reactions are at least premature.

The political issue is not irrelevant. Policies that don't need to go through Congress would appear to operate under the constraint that it has to be able to be done with $350B in TARP Part II funds, the exercise of various Fed powers in coordination with Treasury, and whatever TARP Part I funds get paid back by institutions who think they can live without help from a Treasury less pliant than Paulson's. Those resources are substantial but not unlimited. A program that requires more than that needs to deal with the likelihood of opposition from most of the Party of No's representation plus other politicians capable of detecting that another dip into public funds for the financial services industry, however necessary, is likely to rival plague for popularity. At least as frightening as the problem that the "stress test" is window dressing is the likely size of the caucus who'd vote against an expanded bailout were the evidence of necessity delivered by the ghost of Ayn Rand herself. In fact, I'd say that right now there's no way a bailout expansion would pass.

That seems to put a premium on cleverly engineering a plan to the aforementioned resources. That may be observationally indistinguishable from a lack of boldness.

by divorced one like Bush
Updated comment at end

So, now that the Democratic Party has the majority and the White House, why am I not hearing about the use of the Nuclear Option? I mean, it occurred to me that if there was a way to end the partisan old ways, the Nuclear Option is it. It sure worked well for the Bush administration. You need 60 votes? Bring in the non-executive executive senate menber: Biden. Oh, you think there needs to be a tie to be broken before our hatchet man can be used? Well I have news for you. Being that everything comes down to breaking the 60 vote line to get anything done, by precedent of calling for a record number of filibusters the Republicans have set the new definition of a tie: 59/41. Biden makes it 60/41.

This gets me to the trust issue and I'm going to toot my own horn here for those who think human capital is bunk regarding getting us out of this mess. (Did I mention the flower shop was off 13% for Christmas and 45% for January? Yeah, I got skin in this game.)

Seems on the same day I posted my message to the Republicans and the Blue Dogs, a man officially of the economic science posted on the same subject (via C & L via Naked Capitalism).
Willem Buiter.

Here is what I said:

The greatest harm that is coming from the republican's drive to instill their minority will on the many out of selfish want, is to further the demise of the people's trust. For the blue dogs it is their ignorance of their economic ideology that creates the mistrust. The republicans/blue dogs, and those helping them by lending their "professionalism", think they are only effecting a political strategy. In truth, they are destroying the very basis for the wealth they desire. Their entire campaign for decades to discredit, to instill mistrust in the primary institution we have, the US (We the People) government, has been the primary cause to our economic decline. To increase the level of distrust is to decrease the available “intangible capital” which is 77% of our wealth generating power.

Here is Willem Buiter:

As part of this widespread erosion of social capital, both citizens and markets lost faith in the ability of governments to commit themselves to any future course of action that was not validated, at each future point in time, as the most opportunistic course of action at that future point in time - what macroeconomists call time-consistent policies and game theorists call ’subgame-perfect’ strategies.

This morality tale has important consequences for a government’s ability to conduct effective countercyclical policy. For a fiscal stimulus (current tax cut or public spending increase) to boost demand, it is necessary that the markets and the public at large believe that sooner or later, measures will be taken to reverse the tax cut or spending increase in present value terms. If markets and the public at large no longer believe that the authorities will assure fiscal sustainability by raising future taxes or cutting future public expenditure by the necessary amounts, they will conclude that the government plans either to permanently monetize the increased amounts of public debt resulting from the fiscal stimulus, or that it will default on its debt obligations.

Mr. Buiter is prescribing a different solution to the lack of trust than what I'm going to suggest. He thinks more money to the banks is needed to promote lending. Well, isn't that kind of giving to those you know you can not trust, not to mention just adding to the debt that he notes no one seems to want to consider? He did state the following as part of his “morality tale”:

During the decade leading up to the crisis, current account deficits increased steadily and became unsustainable. Strong domestic investment (much of it in unproductive residential construction) outstripped domestic saving. Government budget discipline dissipated; fiscal policy became pro-cyclical. Financial regulation and supervision was weak to non-existent, encouraging credit and asset price booms and bubbles.

Hope was the word. Trust is the need. I've seen and lived what the Republicans and Blue Dogs can do. I'm willing to take a chance for the benefit of building future trust, thus building with the 77% of our power, thus nurturing hope, and let Obama send in Biden to the Senate. Hell, maybe it's time they come up with the unitary vice executive theory and take it for a spin in the Senate! In-other-words, my solution is for Obama et al to just take god damn control and do what they want, then we'll have something to compare to along with "Republican brand" bipartisanship. We can decide come November 2012 how the brands compare. (Catch that “bringing business to governance” lingo of how to speak civics?)

We survived the last 4 years, we know where we'll be if we keep going as we are (no thanks to our free press), so I say let the Dem's pull a republican move: redefine what a tie is, have the Obama's legal council write up the unitary vice executive theory and send in Biden to the Senate.

I trust that it will not be worse than what we have now. And that, "my friends" is using our fullest economic power.
Almost forgot: Can we please broaden the discussion now?

Update: Two commentors noted that the tie break may not work as I suggested. RonE notes there is no need for the 60, just change the rules to a simple majority. TStockmann notes that we would not get all the Dem's to go along. I assumed the Dems would act tribal if they had someone to lead them, that is what is needed when you are fighting another tribe You can't beat the other tribe by acting all independent thinking virtuous as to the ideal bipartisanship.

But here is where my plan works. We're going to have the unitary vice executive who is president of the Senate just as soon as Obama has his attorney write it up. Or, maybe Biden should just have his attorney write it up ala Cheney. Then, he goes in and changes the rules (because he's the Unitary Vice Executive President) to a simple majority, we're golden.

by Tom Bozzo

whose Facebook status currently reads, "Tom is feeling an unaccustomed sense of not-shame, at least pending some action on the economics, energy/environment, and transportation fronts."

Meanwhile, over at FDL, they find Rep. Peter DeFazio saying:

I think [Obama]'s ill-advised by Larry Summers.[*] Larry Summers hates infrastructure.

And some of these other economists -- they were very much part of creating the problem, now they're going to solve the problem? And they don't like infrastructure. So they want to have a consumer driven recovery.

Others in the econoblogiverse ought to know (or at least offer a well-educated guess) as to whether DeFazio is right about Summers. Paging Prof. DeLong? A little more rant below the fold.

Whatever the case with Summers, the sentiments DeFazio mentions are kicking around notionally respectable provinces of the profession. E.g. Plus it's easy to find rail- and transit-phobic op-eds arguing that because 90% of commuters drive even the transit funding under the SAFETEA-LU regime is too generous.

The underlying problem is that helicoptering money to "consumers" by way of tax cuts or lump-sum grants a la last year's stimulus payments does little or nothing to help satisfy demands that are latent due to incomplete markets. Give me $100 and I can drive to Chicago for the day, not insignificantly because past public infrastructure spending built the roads from here to there. Give everyone in Madison $100 and it still does sod all for extending the Amtrak Hiawatha service, seeing as the city was cut off from such passenger rail network as still exists in the upper Midwest and reconnecting it requires a substantial investment. Maybe in libertarian fantasyland, there are no such things as collective action problems, but elsewhere overcoming them may be considered to be a useful function of government.

I've argued, and will say again, that it isn't necessarily desirable to rely too heavily on the stimulus for rail and transit expansion, partly because useful large expenditures a la CA and Midwest high-speed rail aren't necessarily very good as short-term stimulus [**] and partly because it may be politically undesirable to foster the impression that the expenditures are only worthwhile when the economy is in extremis. (Plugging holes blown in transit agencies budgets is another matter entirely.) So I'm agnostic pending information on what the surface transportation bill to follow SAFETEA-LU will look like. If rail and transit get short shrift there, then I'll be putting my analyst on danger money (baby).

-------------

[*] At least I wouldn't expect (a) that Summers's advisory role is telling President Obama what he wants to hear under pain of banishment, or that (b) the advisory role implies that the Summers view of anything is necessarily the Obama view.

[**] But committing funds to be spent in the near if not immediate future may nevertheless signal to firms that it's safe to expand or at least not contract.

Tom Bozzo

Via TrafficWorld:

According to the House Transportation and Infrastructure Committee, 50 percent of funds provided to states will be required to be obligated within 90 days.

Within 180 days of enactment, states must submit a program of projects outlining how the remaining 50 percent of the projects will be obligated within one year of enactment, according to the committee's proposal.

On the face of it, this looks good for projects that are in advanced stages of planning but not quite spade-ready — which may answer how to quickly obligate big bucks (by U.S. standards) for transit, passenger rail, and other projects more complicated than road repairs. It also suggests that the $85 billion amount being floated is an amount to be obligated in one calendar year rather than two (or the next one-and-a-half fiscal years).

Meanwhile, John Boehner rounded up his merry band of economists against the stimulus. When the #2 commenter on the (rather low-wattage*) list of skeptics is Donald Luskin, you're in trouble.

----------------------------

* And as a low-wattage economist myself, I use the term advisedly.

Tom Bozzo

Around election time, the House Transportation and Infrastructure Committee had identified $45 billion in ready-to-go infrastructure projects a stimulus package. Now TrafficWorld reports that the Committee now is looking at $85 billion:

The recommendations, outlined in a Dec. 12 memo, include $30 billion for highways and bridges, $12 billion for transit, $4.9 billion for passenger rail, $5 billion for airports, $14.3 billion for environmental infrastructure, $7 billion for the U.S. Army Corps of Engineers and $10 billion for federal buildings, according to the committee.

To put this amount in perspective, under SAFETEA-LU, the highway and transit funding bill in effect through FY09, federal highway and transit expenditures run around $60 billion/year ($284 billion for FY05-FY09), so $42 billion on highways and transit is a pretty big increment.

That's not to say that $100 billion/year is necessarily a large amount of money to spend in the less-short term, especially if we want things like vastly improved transit and passenger rail systems and considering some of the things $100B/year were spent on during the Bush administration. Politically, it seems to me that it would be better to fund the medium-term projects outside the stimulus package in a FY10+ infrastructure bill to follow SAFETEA-LU, which just so happens to be due this year. If the projects are valuable — and many are or will be — then then they should not be funded only in case of economic emergency.

Tom Bozzo

is amazed at the reaction of leading figures in the left blogiverse to the W$J's "news" that there will be tax cuts as part of the stimulus. See Aravosis, Digby, Krugman, Marshall.

Can we cancel the circular firing squad?

As far as I can tell from the Journal's reporting, the main tax elements are largely indistinguishable from what Obama was promoting in the fall. Here, for instance, is a snippet of the third debate:

[Bob Schieffer:] Senator Obama, you proposed $60 billion in tax cuts for middle- income and lower-income people, more tax breaks to create jobs, new spending for public works projects to create jobs...

[TB Note: The $60 billion mentioned by Schieffer is an annual figure, while the $300B reported by the W$J is over two years.]

[Sen. Obama:] Number one, let's focus on jobs. I want to end the tax breaks for companies that are shipping jobs overseas and provide a tax credit for every company that's creating a job right here in America.

Number two, let's help families right away by providing them a tax cut -- a middle-class tax cut for people making less than $200,000, and let's allow them to access their IRA accounts without penalty if they're experiencing a crisis.

Now Prof. Krugman's analysis actually is pretty solid on the economics of stimulating via a combination of tax cuts and public expenditures, and he seems to detect the underlying politics. That is, use a spoonful of tax cuts that the Obama camp was going to push anyway to peel off enough Republican votes to advance a lot of stuff that the Senate Republicans' paleolithic caucus won't like (and, let's face it, can't stop, whatever Mitch McConnell might say about wanting to lend rather than grant money to the states and such). If the 'carrot' approach is followed by capitulation rather than by aggressive pressure to promote the plan a la Obama, then the political observers may have something to gripe about.

On the economics, I don't especially care for the business tax cut components, which in the absence of a general loophole-closure program I'd expect would as likely as not stimulate the tax law sector of the economy while the Tax Foundation still gets to gripe about high statutory corporate rates. And it's a matter both of Our Stupid Discourse and government accounting methods that fail to distinguish between government consumption and investment spending that tax cuts are less controversial than appropriately targeted spending. But anyone who's surprised by this part of the stimulus package wasn't paying attention during the campaign.

Ken Houghton

CR beat me to commenting on this Mankiw whine post, partially because I couldn't think of anything reasonable to say about it. (CR could. That's why he gets the big bucks.)

But now that CR has done the heavy lifting, let's look at the other aspect: Mankiw's standard:

Based a standard ranking of economists' academic accomplishments as of October 2008...[emphasis mine]

11. Larry Summers
21. Greg Mankiw
35. Ben Bernanke
99. Eddie Lazear
132. Glenn Hubbard
249. Harvey Rosen
391. Christy Romer*
653. Austan Goolsbee

[emphases Mankiw's; Bush administration officials]

Leaving aside whether the ranking used makes sense, we ask the next question: What does this have to do the performance of the individual in a government role?

So I realised we've been thinking about the Obama Administration in exactly the wrong way.

Several people are referencing the late David Halberstam's The Best and the Brightest, a biography of the Kennedy Administration's well-educated pedigree and their policy missteps. Krugman used it as a cautionary phrase in the exact post about which Mankiw whimpered. As John McCain once wrote:

The term "best and brightest" has become an insult, not an accolade, thanks largely to Halberstam's magnificent, scabrous epic about the policymaking blunders that swept the United States into Vietnam. This classic work is part of the Vietnam canon, but it is not really about Vietnam; it is very much a Washington book, focused on the surety of the hawks stateside rather than the misery and warfare in Indochina. [italics mine]

But look at (most of*) Obama's picks:

Orszag - Currently at the OMB. Prior experience at CEA, and then as a Special Assistant to the President during the Clinton Administration.
Summers - veteran of the Clinton Administration
Geithner - veteran of the Clinton Administration
Paul Volcker - veteran of the Carter and Reagan Administrations, named Chair of the Federal Reserve by Carter.
Melody Barnes - Eight years as Chief Counsel to Senator Kennedy on the Senate Judiciary Committee
Heather Higginbottom - Eight years as legislative director for Senator Kerry

The list goes on, but what is notable is that—with the exceptions of the Advisors Goolsbee and C. Romer—all have extensive government policy experience.

Let's look at the Bush people:

Mankiw - columnist for Fortune, textbook author. As Bruce Bartlett noted in 2003, "Mankiw endorsed the election of George W. Bush because, unlike Al Gore, he would cut taxes, reform Social Security and antitrust policy, and try to implement school choice." Spent one year as a CEA staff member—twenty years prior to being named CEA Chair.
Lazear - No policy-making experience prior to being named to the CEA.
Hubbard - No policy-making experience prior to being named Chair of the CEA.
Harvey S. Rosen - Deputy Assistant Secretary (Tax Analysis), Department of the Treasury, 1989-91, then no government experience again until named to the CEA in 2003. (Fairness note: the interim is largely a Democratic Administration. No indication what he did from 1991 to 1993, save possibly returning to Princeton to teach). Note that he officially did exactly that in 2005, though he had warned that might happen.

Comparing the actual policy experience of the two Administrations, references to Halberstam's work are much more applicable to the Bush Administration than the incoming Obama Administration.

Despite having a relative disadvantage in looking for people with policy-making experience (eight years with a Democrat in the executive branch over the past 28 years v. Bush's twelve of the previous twenty), the Bush Administration's combined highlights list has less total experience in policy-making than Summers alone.

Knowing how to make sausage is a Comparative Advantage when one is working in a sausage-making environment. Otherwise, you just end up with a "hack."

*Mankiw uses Greg and Ben and Eddie as well, so I assume the use of "Christy" is not meant to pejorative. Firedoglake's mileage may vary.
**Goolsbee is the notable exception, and he is in a Senior Advisory role, specifically the Economic Recovery Advisory Board, where he will be working with Paul Volcker.

Ken Houghton

CR beat me to commenting on this Mankiw whine post, partially because I couldn't think of anything reasonable to say about it. (CR could. That's why he gets the big bucks.)

But now that CR has done the heavy lifting, let's look at the other aspect: Mankiw's standard:

Based a standard ranking of economists' academic accomplishments as of October 2008...[emphasis mine]

11. Larry Summers
21. Greg Mankiw
35. Ben Bernanke
99. Eddie Lazear
132. Glenn Hubbard
249. Harvey Rosen
391. Christy Romer*
653. Austan Goolsbee

[emphases Mankiw's; Bush administration officials]

Leaving aside whether the ranking used makes sense, we ask the next question: What does this have to do the performance of the individual in a government role?

So I realised we've been thinking about the Obama Administration in exactly the wrong way.

Several people are referencing the late David Halberstam's The Best and the Brightest, a biography of the Kennedy Administration's well-educated pedigree and their policy missteps. Krugman used it as a cautionary phrase in the exact post about which Mankiw whimpered. As John McCain once wrote:

The term "best and brightest" has become an insult, not an accolade, thanks largely to Halberstam's magnificent, scabrous epic about the policymaking blunders that swept the United States into Vietnam. This classic work is part of the Vietnam canon, but it is not really about Vietnam; it is very much a Washington book, focused on the surety of the hawks stateside rather than the misery and warfare in Indochina. [italics mine]

But look at (most of*) Obama's picks:

Orszag - Currently at the OMB. Prior experience at CEA, and then as a Special Assistant to the President during the Clinton Administration.
Summers - veteran of the Clinton Administration
Geithner - veteran of the Clinton Administration
Paul Volcker - veteran of the Carter and Reagan Administrations, named Chair of the Federal Reserve by Carter.
Melody Barnes - Eight years as Chief Counsel to Senator Kennedy on the Senate Judiciary Committee
Heather Higginbottom - Eight years as legislative director for Senator Kerry

The list goes on, but what is notable is that—with the exceptions of the Advisors Goolsbee and C. Romer—all have extensive government policy experience.

Let's look at the Bush people:

Mankiw - columnist for Fortune, textbook author. As Bruce Bartlett noted in 2003, "Mankiw endorsed the election of George W. Bush because, unlike Al Gore, he would cut taxes, reform Social Security and antitrust policy, and try to implement school choice." Spent one year as a CEA staff member—twenty years prior to being named CEA Chair.
Lazear - No policy-making experience prior to being named to the CEA.
Hubbard - No policy-making experience prior to being named Chair of the CEA.
Harvey S. Rosen - Deputy Assistant Secretary (Tax Analysis), Department of the Treasury, 1989-91, then no government experience again until named to the CEA in 2003. (Fairness note: the interim is largely a Democratic Administration. No indication what he did from 1991 to 1993, save possibly returning to Princeton to teach). Note that he officially did exactly that in 2005, though he had warned that might happen.

Comparing the actual policy experience of the two Administrations, references to Halberstam's work are much more applicable to the Bush Administration than the incoming Obama Administration.

Despite having a relative disadvantage in looking for people with policy-making experience (eight years with a Democrat in the executive branch over the past 28 years v. Bush's twelve of the previous twenty), the Bush Administration's combined highlights list has less total experience in policy-making than Summers alone.

Knowing how to make sausage is a Comparative Advantage when one is working in a sausage-making environment. Otherwise, you just end up with a "hack."

*Mankiw uses Greg and Ben and Eddie as well, so I assume the use of "Christy" is not meant to pejorative. Firedoglake's mileage may vary.
**Goolsbee is the notable exception, and he is in a Senior Advisory role, specifically the Economic Recovery Advisory Board, where he will be working with Paul Volcker.

By Bruce Webb

PGL raises and answers this question over at Econospeak Health Care Debate: So This is Why Conservatives Hate Social Security. Or rather he allows Conservatives in the person of Michael Cannon at Cato admit the fundamental truth: successful government social programs fatally undercut future political success for the Right. Cannon: Blocking Obama's Health Plan is Key to the GOP's Survival

PGL sums it up as follows:

Truth be told – this is a major reason why conservatives want to undermine the Social Security program. Yes – they do try to tell us it’s some sort of Ponzi scheme, which of course, is just blatant dishonesty. But the real reason that they hate Social Security is that it is popular – as well as good policy from the perspective of those who care at least as much about the working class as the investor class.

Another way of saying this is that the debate over Social Security is not and never really has been about the best way to insure retirement security for workers, opponents simply don't care that their numbers don't add up, when indeed they use numbers at all. Instead they approach the subject from two conjoined perspectives: one that Social Security (and Universal Health Care coverage) is Socialism and/or two that Social Security (and Universal Health Care) if perceived to be successful are political winners for the Democrats for possibly decades to come.

In practice it is hard to separate out the Hayekians who believe that all of this is just the first steps on the Road to Serfdom from the Rovians who believe that successful social programs are instead the Road to Political Oblivian for the Republican Party from the Sheep who simply know what they have been told. And of course these groups all to a degree cross-cut, it is difficult to reliably differentiate knave from fool. But no one who cares about Social Security or Universal Health Care coverage should assume that the opposition they encounter are solely motivated by data about program effectiveness and relative costs, that you are going to get through to these people by explaining how small the problem is in the case of Social Security or how honest cross-country cost/outcome numbers show that other developing countries get more bang for their health care buck, that is to make the simple mistake that political discourse on these topics is fundamentally Reality Based instead of being what it really is: driven by ideology on one hand and political outcomes on the other.

For many, many people the claim "There is no Crisis" is not the answer to a specific problem, instead it IS the problem. Without 'Crisis' they got nothing. And the smarter, better informed ones know it (hence the whiff of panic floating around the halls of Cato).

By Bruce Webb

PGL raises and answers this question over at Econospeak Health Care Debate: So This is Why Conservatives Hate Social Security. Or rather he allows Conservatives in the person of Michael Cannon at Cato admit the fundamental truth: successful government social programs fatally undercut future political success for the Right. Cannon: Blocking Obama's Health Plan is Key to the GOP's Survival

PGL sums it up as follows:

Truth be told – this is a major reason why conservatives want to undermine the Social Security program. Yes – they do try to tell us it’s some sort of Ponzi scheme, which of course, is just blatant dishonesty. But the real reason that they hate Social Security is that it is popular – as well as good policy from the perspective of those who care at least as much about the working class as the investor class.

Another way of saying this is that the debate over Social Security is not and never really has been about the best way to insure retirement security for workers, opponents simply don't care that their numbers don't add up, when indeed they use numbers at all. Instead they approach the subject from two conjoined perspectives: one that Social Security (and Universal Health Care coverage) is Socialism and/or two that Social Security (and Universal Health Care) if perceived to be successful are political winners for the Democrats for possibly decades to come.

In practice it is hard to separate out the Hayekians who believe that all of this is just the first steps on the Road to Serfdom from the Rovians who believe that successful social programs are instead the Road to Political Oblivian for the Republican Party from the Sheep who simply know what they have been told. And of course these groups all to a degree cross-cut, it is difficult to reliably differentiate knave from fool. But no one who cares about Social Security or Universal Health Care coverage should assume that the opposition they encounter are solely motivated by data about program effectiveness and relative costs, that you are going to get through to these people by explaining how small the problem is in the case of Social Security or how honest cross-country cost/outcome numbers show that other developing countries get more bang for their health care buck, that is to make the simple mistake that political discourse on these topics is fundamentally Reality Based instead of being what it really is: driven by ideology on one hand and political outcomes on the other.

For many, many people the claim "There is no Crisis" is not the answer to a specific problem, instead it IS the problem. Without 'Crisis' they got nothing. And the smarter, better informed ones know it (hence the whiff of panic floating around the halls of Cato).

Geithner it is.

I guess we can pretend he's not a Clinton administration alum. And he has the right experience:

Though not an economist, Mr. Geithner has a deep understanding of monetary and fiscal policy and broad experience in international trade issues. Before the current crisis, he was involved in the bailouts of Mexico, Indonesia, Korea, Brazil and Thailand.

He also continues the tradition of being younger than most of the posters at Angry Bear.