Why Thomas Friedman is wrong again

In Sunday's NY Times columnist Tom Friedman has another column demonstrating how to contradict oneself within a paragraph or two and misunderstand markets and politics at the same time. He is bemoaning the descent into political madness of the large part of the Republican electorate that rejects any tax or gun control measures out of hand. The folks who believe that restrictions on automatic weapons are a giant threat to freedom but support massive government intervention into the health choices of women. He roles out reasonable objections to their positions such as objecting to a minor symbolic treaty for weirdly paranoid reasons. or not taking advantage of President Obama's ill considered offer to make senior citizens pay for tax cuts for families with comes over $250K.

But Friedman continues to make the same objectionable mistake in writing about politics that he always does...because he either knows little about electoral political history and public policy or chooses to ignore the evidence. He claims the Republicans need a DLC, an organized force to try to bring them to the corporatist middle. Ignoring the fact that the Democratic Party already fills that space and that when it followed his much praised pattern it did not achieve 50% of the vote in a presidential election even during the two Clinton victories. He claims there was some substantial split in the party because of "pragmatism" that resulted in Ralph Nader allowing GW Bush to win in 2000. How wrong could he be? The problem was the the fact that Nader could have a substantial impact on a poorly run election by getting so few votes. There was no split in the party as there was no substantial constituency from within the party that supported Nader in his candidacy. Most all Nader votes came from states that were not competitive.

That aside, Friedman continues on his desire to have two parties with no differences. It is a shame he does not think that the US is ready for democracy. He argues for "market based solutions" to public policy decisions but not to politics? The best way to get the Republicans to moderate their positions would be for people not to vote for them and for the "market" to reject their product. But what space is their for the "right-of-center" policy he seeks? Isn't the Democratic Party already the "right-of-center" offering? On most any policy issue the Democratic Party is to the right of the mainstream of thought in other advanced countries. Isn't the real opening for a more social democratic party in the US leaving the middle for the Republicans?

The challenge is lack of consensus in contemporary American politics. With a fight to the death to protect Social Security and Medicare the divide between the parties is substantial but we should not mistake that for left and right. Rather the center right and the hard right.

Europe (read Euro Zone) at it again

The "it" referred to in the headline is the ongoing European agony over the terms to extend further aid to Greece. The Germans are objecting to terms that may allow for official loses on sovereign loans. What is painful to watch is that in fact Germany has been a major facilitator of Greece's slide into crisis. In fact, the persistent trade deficit that Greece runs with Germany and the rest of the world is a significant cause of the problem. Since Greece must import manufactured goods and exports agricultural products (and tourism) it sends many Euros out of the country.

If Greece had their own currency then the balance of payments would require much if not all of the funds to return to the country as asset purchases. However, since Greece is paying its bills in Euros the funds can flow back into any Euro Zone country causing net flows out of the country. Not until the economy becomes exceedingly depressed will the Greek competitive advantage be significant enough to generate capital inflows. (Oh Greece lets invest there because they work so cheap.)

Germany benefitted from the weakening of the Greek position because it provided a market of higher income consumers for its products. And now they are threatening the spigot that provides Greece's lifeline. Even this article which tries to condemn Greek public finance choices (tax is too low, spending too high) they clearly show how Germany has benefitted from the situation in the past. Shouldn't they participate significantly in rectifying the imbalances?

UK Economy and Excuses

This would actually be funny except for the fact it is ruining millions of lives.

The UK announced second quarter GDP fell for the third quarter in a row. In fact the downturn is slowly increasing (-.4, -.3, -.7). In the middle of the article from FT.com describing the downturn is the following...


http://www.ft.com/cms/s/0/4d4586da-d634-11e1-ba60-00144feabdc0.html#ixzz21dmILKKM

"The output drop was exacerbated by the one-off effect of the Queen’s diamond jubilee bank holiday, which removed a working day from the quarter. The Office for National Statistics said it was too soon to try to quantify this distortive effect, but most economists had predicted it would knock about 0.5 percentage points from gross domestic product growth."



but here is the same set of excuses from the same period in a previous year...


Finally, the ONS believes that a whole range of one-off factors – including the extra bank holiday for the royal wedding and the disruption to industry's supply chains caused by the Japanese tsunami – depressed activity by around 0.5% in the three months to June. (The Guardian)


While there are certain types of economic output that would be lost due to holidays, it isn't a one time event if it happens every year. The cause of the downturn in the UK is the same austerity that is plaguing the continent.

SF FRB on fiscal policy

FRBSF Economic Letter: U.S. Fiscal Policy: Headwind or Tailwind? (2012-20, 7/2/2012) http://www.frbsf.org/publications/economics/letter/2012/el2012-20.html?utm_source=tw&utm_medium=social&utm_campaign=el20

David Cay Johnston on the bad economics of retail subsidies

How corporate socialism destroys | David Cay Johnston http://blogs.reuters.com/david-cay-johnston/2012/06/01/how-corporate-socialism-destroys/

Short selling

Excellent but technical explanation of stock trades and short selling. Business Insider http://www.businessinsider.com/john-carney-how-to-understand-naked-shorting-2009-9?op=1

Public Private effort to combat world hunger

I think Harry Chapin would be proud.
NYT: White House Enlists 45 Firms t http://mobile.nytimes.com/2012/05/18/business/white-house-enlists-45-firms-to-give-3-billion-to-grow-food-for-worlds-poor.xml

JP Morgan's Loss: The Explainer | Marketplace from American Public Media

This incident shows the need for aggressive regulation of the financial services industry. The capability to lose large amounts of wealth for shareholders and taxpayers must be observed by responsible authorities. This is just another variation on the theme that struck the mortgage derivative market. The industry does not create any value by engaging in these kind of practices. In economic theory they are supposed to be "efficient intermediaries" between savers and borrowers. In fact they act on a different kind of rationality discovered through the "principal-agent" problem. They take on huge risks in order to maximize short term profits to also maximize bonus payouts.

By the way, Jamie Dimon of Chase has been a vocal critic of the efforts to rein in the financial services sector. Perhaps he should pay more attention to the business and less to the politics.

JP Morgan's Loss: The Explainer | Marketplace from American Public Media

Great piece in challenges in Europe 2012

EconoMonitor : EconoMonitor » The Coming Revolt Against Austerity http://www.economonitor.com/blog/2012/05/the-coming-revolt-against-austerity/

The Iron Grip of Accounting Identities

The Iron Grip of Accounting Identities

Important information for Political Economy students

Good discussion of taxes and rates

Bruce Bartlett: Would a Higher Top Tax Rate Raise Revenues? - NYTimes.com http://economix.blogs.nytimes.com/2012/03/13/would-a-higher-top-tax-rate-raise-revenues/?smid=tw-nytimeseconomix&seid=auto

Will market concentration come to pass in PC's?

What the New iPad means for Apple rivals: "No Air." - OriginalSpin http://originalspin.posterous.com/what-the-new-ipad-means-for-apple-rivals-no-a

UK Industrial Policy at work

BBC News - Infiniti unveils UK-made supercar http://www.bbc.co.uk/news/business-17190806?utm_source=twitterfeed&utm_medium=twitter

Adam Smith on morality

Adam Smith's Lost Legacy: The Limits of Self-Interest According to Adam Smith http://adamsmithslostlegacy.blogspot.com/2012/02/limits-of-self-interest-according-to.html?m=1

Ukraine

EconoMonitor : Don't Shoot the Messenger » Staring Into the Ukrainian Economic and Political Abyss http://www.economonitor.com/edwardhugh/2012/02/26/staring-into-the-ukrainian-economic-and-political-abyss/

Market mechanisms and climate change

Beyond Cap and Trade, A New Path to Clean Energy by Ted Nordhaus and Michael Shellenberger: Yale Environment 360 http://e360.yale.edu/feature/nordhaus_shellenberger_beyond_cap_and_trade_a_new_path_to_clean_energy/2499/#.T0u4RUu6f14.twitter

World Bank report in China for Macro and Political Economy Students

NYT: A Call for Beijing to Loosen I http://mobile.nytimes.com/2012/02/28/business/global/world-bank-calls-for-changes-in-chinese-economy.xml

Excellent overview of fiscal policy for students

Quick Thoughts on Modern Monetary Theory | CEPR Blog http://www.cepr.net/index.php/blogs/cepr-blog/quick-thoughts-on-modern-monetary-theory

Goldman, AIG and More

           The news this week that Goldman Sachs purchased a significant amount of mortgage based securities from the Federal Reserve brought several issues to mind. This story illustrates the capability of politically and financially powerful individuals to profit off government actions. It also reveals some of the darker history of the financial crisis that began in 2007, but resulted from actions taken years and decades earlier.

            

             This week the NY Federal Reserve bank announced that Goldman Sachs purchased over $6 Billion in bonds from the Maiden Lane fund it established to handle the ownership of assets it received while facilitating the infusion of capital to AIG. The monies ($182 Billion) were originally used to allow AIG to make counter party payments to firms that had bought credit default swaps (insurance) against the default risk of mortgage backed securities (CDOs). It is anticipated that the Federal Reserve will receive just fewer than 50% value on the bonds. The $6 Billion in bonds will bring $3 Billion in payments. Here is an article from the WSJ giving technical details of the recent purchase by Goldman Sachs (http://online.wsj.com/article/SB10001424052970203824904577213681132892356.html#articleTabs%3Darticle).  Here is one from The New York Times (http://dealbook.nytimes.com/2012/02/08/goldman-wins-auction-for-6-2-billion-of-a-i-g-assets/).

            The irony comes from the final year of AIG’s life. As recounted in the book, All The Devils Are Here by Bethany MacLean and Joe Nocera, in 2007 Goldman Sachs started to put pressure on AIG. At the time AIG was the firm Goldman went to for insurance against the mortgage backed securities it was creating or buying from other firms (credit default swaps). As the value of those securities started to fall (with housing prices dropping and mortgage defaults rising) Goldman demanded that AIG take assets to post as collateral in case of the need for insurance payouts. This meant that the asset position of AIG was significantly weakened. AIG as an insurance firm had long traded on its solid reputation and AAA rating. As the exposure increased to insurance claims related to the mortgage backed securities (which AIG issued far in excess of its equity) concerns rose about the financial stability of the firm.

            

           Goldman recognized this and at the same time it was demanding further collateral it was betting against the financial health of AIG. (Goldman’s explanation of their behavior http://www2.goldmansachs.com/media-relations/comments-and-responses/archive/aig-summary.html). Goldman did this buy selling short the stock of AIG and buying insurance against AIG. The irony was that Goldman was also AIG’s investment bank., meaning that Goldman had a trusting relationship and financial benefit from AIG. So as AIG declined, Goldman made money. When the federal government stepped in to backstop AIG then Goldman was one of the firms (including many other banks in the US and abroad), which received money.

            

           With this auction, Goldman is getting another chance to make money off of securities they have already been paid on by the government. They also made money on these transactions buy betting against AIG, a firm that failed. This is the perfect illustration of the libertarian point about the risk of government intervention in the economy. It results in transfers of resources from the taxpayers to the most powerful. The question remains; should the government have taken these actions? Where would we be if they had not? Even more important, should firms like Goldman Sachs be allowed to these types of trades where they are betting against a customer?