Month: February 2009

This should be widely understood (which means it isn't), but it bears repeating nonetheless.  Josh Patashnik writes:

Clearly,
the projected growth rate of health care costs is unsustainable, and
finding ways to change that ought to be, far and away, the country's
top fiscal priority. But it's not as though the chunk of money going to
Social Security and "other spending" is simply an afterthought; this is
15 percent of GDP we're talking about.

The fact that, over some time horizon, Social Security nearly "pays for itself" is irrelevant when the goverment's fiscal position is viewed in a properly consolidated manner.  There is further commentary from Andrew Sullivan.  I am dismayed that some left-wing bloggers are breathing a sigh of relief that the supposed "fiscal responsibility showdown," scheduled for this past Monday, turned out to be a non-event.

Obama mentioned "universal accounts" in his coverage of social security last night and I am surprised the blogosphere has not picked up on this more.  This is probably Gene Sperling's idea and the key question is how much is "carve out" from existing benefits and how much is "add on."  In any case doing this reform at Dow = 7,000 makes more sense than doing it at Dow = 11,000.  It's even a way to boost stock prices (and possibly confidence?) though presumably it involves borrowing yet more money.

When you consider the speech as a whole, Obama is promising the largest and most ambitious attempt at rate of return arbitrage in the history of the human race.

Obama's speech was very effective but it is mostly about borrowing more money.  It is odd that in a time when capital markets and attempted arbitrage have so failed us the solution is to resort to…capital markets and attempted arbitrage.

The more events progress (what's the implicit A.I.G. liability for the
government these days? near one trillion?), the more I believe that the tax cuts in Obama's stimulus plan were a mistake.

If I were Taiwan I'd feel a wee bit more worried these days.

He is a very smart monetary economist at Bentley.  The blog is here.  Here is a very good post on Keynes's General Theory; excerpt:

When I hear people discuss the long run I am sometimes reminded of
students who mistakenly assume the term ‘long run’ means ‘the distant
future’ and ‘short run’ means ‘the present or near future.’  But that
is not at all what these terms mean.  The present, right now, is the
“long run” for policies instituted years ago.  So if Keynes believed
that in the long run nominal income is determined by monetary factors,
then he should have explained current movements in nominal income in
terms of past movements in monetary policy.  Of course that is not what
the GT does.

And this:

Krugman recognized that Keynes’ liquidity trap rested on a
foundation of sand and attempted to build a model of “expectations
traps” that was consistent with rational expectations.  I have doubts
about this model, but even if one accepts Krugman’s argument it doesn’t
really help the GT very much.  Krugman argued that temporary increases
in the money supply will be hoarded, leaving AD almost unchanged.  But
this would apply even more strongly to budget deficits, which unlike
money supply increases, must be temporary.

If a transitory budget deficit will have no long run impact on
nominal spending (holding money constant) then its effect on current
spending will be even weaker than otherwise.  There is a reason why
modern graduate macro texts place so little emphasis on the ideas that
Keynes developed in the GT, they are very hard to justify in a model
with rational expectations.  What puzzles me is why concepts such as
the MPC, the multiplier, the paradox of thrift, and fiscal stimulus
have recently become so widely debated among economists.  Do these
concepts help us understand movements in nominal spending?  And if so,
what is the model that justifies that view?

It is worth reading every single one of his (twenty-two, so far) posts, even though you must click to get under the fold.

He was a giant of business cycle theory.  Here is an appreciation, with links.

This is what I call deleveraging:

It used to be that credit-card companies lured customers with cash rewards. Now American Express
Co. is paying to get rid of them. The card issuer is offering selected
customers a $300 AmEx prepaid gift card if they pay off their balances
and close their accounts.

Addendum: Megan McArdle adds commentary.

Felix Salmon has an excellent article; here is one excerpt:

"The corporate CDO world relied almost exclusively on this copula-based correlation model," says Darrell Duffie,
a Stanford University finance professor who served on Moody's Academic
Advisory Research Committee. The Gaussian copula soon became such a
universally accepted part of the world's financial vocabulary that
brokers started quoting prices for bond tranches based on their
correlations. "Correlation trading has spread through the psyche of the
financial markets like a highly infectious thought virus," wrote derivatives guru Janet Tavakoli in 2006.

Read them here.  I liked the Chinese on Hillary.