Wine, Physics, and Song

Jon Hilsenrath article on the Fed’s deliberations over the recent decision not to let its balance sheet shrink.

No time now to do a detailed analysis of FOMC member and Dallas Fed president Richard Fisher’s speech, which is posted on the Dallas Fed website, though containing the disclaimer “The views expressed by the author do not necessarily reflect official positions of the Federal Reserve System.”  Of course there is something in the idea that regulatory and other policy uncertainty can have an inhibiting effect on business investment, but I really, really do not think that is much of what is going on with the recovery here.  Fisher’s speech looks to me—after a couple of readings, but not a thorough analysis—like he is peddling the current Republican line on why the economy isn’t recovering better, and I think this line is ludicrous.  Yeah, I think the length of the financial reform bill is maybe an issue (but you could probably say this about any serious policy legislation these days, and probably could have said it when the economy was booming,  e.g. during the Clinton presidency).  Business and banks have loads of bigger worries right now than uncertainty over policy reform or future deficits.  Like uncertainty about, and low expectations for, near-term demand for their products.   Fisher worries that the regulatory discretion being given to the Fed creates uncertainty;  you might hope some of the length of the bill is caused by trying to specify things enough to remove some of this uncertainty, and for the rest—well, there isn’t really any substitute for well-excecuted regulation in some matters.  Ludicrous to think *this* is the issue in the protraction of the current slump. First mention, though is given to “Fiscal Policy Uncertainty”.  Fisher:

By latest accounts, under the least felicitous conditions (what the Congressional Budget Office recently called an “alternative fiscal scenario”), publicly held debt bests the all-time high of 109 percent of GDP around 2025 and reaches a staggering 185 percent of GDP by 2035—more than twice the level of debt at which some economists believe significant crowding-out of private-sector economic activity occurs. This is not the baseline scenario. But the possibility of it occurring, however remote, frightens business operators, for they are uncertain not only about whether fiscal authorities will actually mitigate this risk, but also how they might go about doing so.

Okay, the mechanism of crowding-out in that remote eventuality will be higher interest rates on corporate borrowing, caused by government borrowing having driven up interest rates more generally; but we hardly see the markets anticipating that in long-term government bond rates.   It’s true Fisher prefaces this with “Let me turn to what I hear from businesses, the players on the field.”  And it’s true local Fed branches try to keep in touch with local economic reality, including business sentiment.  But it seems to me pretty likely you might hear many businesspeople, especially right-leaning ones (of which there are a few, I think) parroting whatever blame-the-government line the right-wing media feeds them, and one would hope that a local Fed president would do more, even in a speech to the local business community, than parrot that back.

The issue is uncertainty about — and perhaps even more, pessimistic expectations about— demand over the next few years.

When Fisher says:

our political leaders should muster the courage to pull up their socks and strike a better balance between the long-term need to keep government debt low and the short- to medium-term need for an appropriate level of fiscal stimulus.

could this mean he’s realizing the need for a higher level of short-term fiscal stimulus, combined with assurances (which the bond markets seem to believe they have) that potential long-term deficit problems will be dealt with soon enough?  Somehow, I don’t think so.  The fact that the phrasing is ambigous enough to permit this among other interpretations seems to me to stem from the need to restrain himself, just a bit, from seeming too nakedly partisan, or perhaps just too prescriptive, but the Greater San Antonio Chamber of Commerce can probably read the lightly-coded message just fine, and it ain’t that we need more stimulus.

Uncertainty about whether the Bush tax cuts will be continued is cited as another biggie holding back the economy.  Again, somehow I don’t think the message is “kill ‘em now, so we can stop worrying about what will happen and invest”.  Or even “kill ‘em now, so we can worry less about future deficits and invest.”  I do believe tax cuts can provide fiscal stimulus, and ones targeted at lower income brackets can probably provide more; because the highest income taxpayers have a higher marginal propensity to save, tax cuts primarily benefiting them are one of the least effective fiscal instruments for boosting aggregate demand, and let me say it again, we are in a primarily aggregate-demand-limited situation here.

More than I intended on Fisher; not a full analysis, since I haven’t dealt with his comments on the main Fed bailiwick, monetary policy.  But overall: either some decent but in my opinion not central to the current situation, observations on policy uncertainty, plus some mush; or worrisome code for some dubious partisan points.

In the March 8th New Yorker, John Cassidy has a long piece about Tim Geithner.  While presenting various points of view, it gives a lot of space, fairly persuasively, to the view that Geithner and other adminstration officials like Lawrence Summers’ policy of not taking over shaky financial institutions was the right way to handle the financial crisis.  The “stress tests”, forcing those institutions whose financial position was deemed risky to raise new capital, is said to have been the key component.

Some key points, which I’m not expert enough to evaluate decisively off the cuff, but which need to be singled out, are:

1) Takeovers and restructuring would have imposed huge costs on the economy, outweighing the potential benefits.  Cassidy does cites some who claim that the bailed-out institutions are still “wounded” and slow to lend, slowing the recovery (”wounded” is Bob Kuttner’s term; Paul Krugman was using the term “zombie banks” back when he was advocating takeovers), but counterbalancing this are the metaphors like “amputating a limb” (from Lawrence Summers) for the takeover-and-restructuring process.  A detailed cost/benefit analysis is missing here, and would be nice to see.

2) Raghuram Rajam of the University of Chicago’s business school is appealed to for the point that bondholders needed to take a hit.  It’s claimed that while equityholders would have been wiped out in a takeover, bondholders might not have been hit hard enough.  Why this is isn’t fleshed out, but I guess it’s because in a bankruptcy proceeding, which probably would have been the legal framework for takeovers, there’s a definite order of precedence for creditors, with bondholders coming before equityholders (who are generally last).  However, in a restructuring-style bankruptcy, where the aim might be not to liquidate, but to get an enterprise running again, it’s not clear to me that such absolute precedence would hold, especially when the government might have some pretty strong powers of persuasion over some of the bondholders (many of whom were presumably in difficult straits themselves).  Perhaps this mainly boils down to the possibility of protracted legal battles…a “special feature” of our system that might make this option more difficult than in other countries where it’s succeeded?

As Cassidy says, “Bondholders are supposed to monitor risk-taking at firms they lend to. If they know they can rely on a government bailout, they have little incentive to do so. “  Just what hit the bondholders took under the bailout as it unfolded, isn’t clear in the article, though.

3) Cassidy also recognizes that takeovers would have had the advantage of punishing the executives and shareholders of some of these institutions.  A big question is whether they got off too lightly.  That seems to be the public perception.  It is true that existing shareholders may have been diluted when companies were forced to raise capital under the stress test, if this was done by issuing new stock.  But if they didn’t pay a high enough price, the take-home lesson for future financial managers is that this kind of mismanagement is profitable for them.  This is a recipe for repetition, unless strengthened financial regulation can help prevent managers from taking these opportunities to profit by risking the stability of the financial system, next time they present themselves.

In light of all this, one should note that Mike Konczal, guest-blogging on Ezra Klein’s blog at the Washington Post, claims that Geithner is arguing hard to keep explicit caps on leverage out of the financial reform bill.   He quotes a January letter from Geithner to Rep. Keith Ellison (cc: The Honorable Ben S. Bernanke) opposing fixed numerical caps.  Konczal’s a bit over the top in the spin he puts on some of what he quotes.  Geithner’s point that “The statutory leverage constraint and detailed statutory risk-based capital requirements for Fannie Mae and Freddie Mac proved to be inadequate to the task of ensuring the safety and soundness of the firms.” should hardly be paraphrased as “If you put this in the bill you will be responsible for another Fannie and Freddie”—rather, a good point that *even* numerical caps can’t do the whole job in the absence of a serious, committed, regulatory authority analyzing the actual situation.  But the point that statutory limits can help keep things from getting out of control, even if they’re not a guarantee, is a good one.  It puts some weight on the right side of the scales when irrational exuberance about leverage is sweeping the financial markets.

The American Enterprise Institute has fired David Frum.  Presumably this is retribution for publishing his views on the passage of the health care bill—though Frum is a conservative, he thinks it a disaster for American conservatives that they refused to deal with the Democrats on healthcare.  Bruce Bartlett now reports that Frum privately told him several months ago that AEI scholars—Bartlett puts the word “scholar” in quotes, but I won’t go that far on a blanket basis—”had been ordered not to speak to the media because they agreed with too much of what Obama was trying to do.”

I have long viewed a writer’s AEI affiliation as grounds for deep skepticism about even a sensible-sounding argument, because of corporate and political meddling of this sort with their supposedly scholarly programs, but the details had faded over time.  The latest news seriously damages the position of any genuine scholars who still work there, putting guys like Roger Scruton, who has done superb work (The Aesthetics of Architecture, and Art and Imagination are among the best things I’ve encountered by way of recent philosophy of art, and I certainly read Arthur Danto and Richard Wollheim back in the day) in a difficult position.

I wasn’t planning another post in the “Smash” series for awhile, but this just had to be titled so.  When I followed this up from Matt Leifer’s site, I just had to draw attention to it.   British science writer Simon Singh is being sued for libel by the British Chiropractic association for calling some of their treatments bogus.  Part of a broader problem of British libel laws chilling free speech, including discussion of so-called Islamist extremism in Britain, as discussed in this Daily Mail article.  More links at “sense about science“.  Matt’s post is from last August, so hopefully something strong has been done about this by now; I’ll have to look into it.  This could seriously damage Britain if something isn’t done about it.

Kokopelli, described as a biodiversity-promoting nonprofit association and seedbank that sells seeds of traditional varieties, loses a suit against a big seed company because their varieties aren’t—and perhaps can’t be, due to the genetic inhomogeneity associated with traditional varieties and that is part of their contribution to biodiversity—on the EU’s official catalogue of seeds that can be sold.  In French at Kokopelli’s site here, summarized (read down past the Iraq stuff) in English here.  One can see how this might be in part a case of well-intended regulation gone awry…regulation perhaps even intended in part to keep new technologically developed seed varieties from running amok or genetically influencing other varieties…but one can also imagine that the regulations that big agribusiness is exploiting were likely influenced by them toward such results.  Hopefully over the next few decades this kind of outrage, and similar ones like the “patenting” of existing varieties by agribusiness, will be curbed, but I have my doubts.  Even more hopefully, some resolution will be found by modifying the existing EU regulations, but there too I have my doubts.

Oh yeah, I learned of this at Wine Terroirs.

A must-read article by Kevin Drum at Mother Jones on the power of the finance lobby.  He cites figures from (but doesn’t link) this page at the politics-’n-money tracking website opensecrets.org on how the finance lobby, at $475 million in political spending, dwarfs even the healthcare sector, the next relatively specific sector at $167 million.  There are four categories inbetween, however, comprising one and a quarter million dollars, so clearly a lot of the action is there, in “Other, Ideology/Single-issue, Misc Business, and Lawyers and Lobbyists”.  Finance, in this way of slicing things, is actually finance, real estate, and insurance, so it includes other activities than strictly financial ones although the role of real estate and insurance in the financial sector, and the recent meltdown, is well known.  Still, this is a big wad.

The article has lots of details about how they’ve used that power, and what they got for their money.  Kinda makes you want to revisit more sympathetically the kind of attitude represented by the headlines of the minute left-sectarian fringe newspapers that used to be (and must still be—some things will never change) hawked at demonstrations, and by the title of this post.  Or by this quote (also via Kevin Drum) from a rabble-rousing Thirties radical:

We had to struggle with the old enemies of peace — business and financial monopoly, speculation, reckless banking, class antagonism, sectionalism, war profiteering.

Drum is quite a good writer, sprinkling his piece with to-the-point metaphors (Long Term Capital Management was “a relative minnow”, and “leverage is a harsh mistress“), and I’m going to add him to my RSS feed if I ever get one set up.  FDR (the rabble-rousing radical quoted above) wasn’t too bad with the quotable one-liners either—the remainder of the quote includes the line “We know now that Government by organized money is just as dangerous as Government by organized mob”.  Okay, he had good speechwriters.

“The real size of the bailout“, also at MoJo, is interesting but really needs a lot more analysis and explanation.  They peg it at $14 trillion, calling it “the price of the bailout” at one point, but I’m not convinced that everything in the graph is money down the tubes for the government, rather than pay-ins to funds for subsidized loans and asset purchases some of which will turn out to be repaid, or worth something.

Update:  There’s now some more explanation here.

Today’s press release from CDMS, who maintain a stack of germanium and silicon detectors in a mine in Minnesota in hopes of detecting Weakly Interacting Massive Particles (WIMPs) that are candidates for dark matter.  2 events passed their cuts, 0.8 expected; they estimated an ex ante chance of 1 in 4 chance of getting 2 events.  So, not strong evidence for WIMPs, but not strong evidence against them either.  More and better detectors are being installed.

Niall Ferguson is on about deficits. The Newsweek piece is full of fearmongering and frank imperialism—his biggest worry is that “economic weakness is endangering our global power”.  Well, I guess US global power, despite plenty of abuses, is more benign than most other varieties I could imagine becoming more prominent as it ebbed (except perhaps EU global power)…and could conceivably become more benign if Obama’s election ushered in an extended era of sensible, moderately liberal, multilateral policies with the world’s wellbeing among their major goals.  But the deficit fearmongering borders on the ludicrous, and while he brings in some reasonable points, the quantitative evidence is often missing and the economic reasoning slipshod or missing too.  What is perhaps most seriously lacking is a reasonable degree of balance between long-term deficit concerns and the need for deficits in the short term.

Let’s take the seriously misleading stuff first.  The US economic stimulus is described as “muted” because:

what makes a stimulus actually work is the change in borrowing by the whole public sector. Since the federal government was already running deficits, and since the states are actually raising taxes and cutting spending, the actual size of the stimulus is closer to 4 percent of GDP spread over the years 2007 to 2010—a lot less than that headline 11.2 percent deficit.

This verges on incomprehensible.  First, what is he doing with “spread over the years 2007 to 2010″?  The stimulus bill was passed in early 2009; spreading it over 2007 and 2008, years in which it was not being spent, to get an apparent lower percentage of GDP, is hogwash.  On the other hand, if we take .787 trillion as the size of the stimulus package, and spread it over 2009 and 2010, estimating 2009 GDP at 14.2 trillion and 2010 GDP at 14.697 trillion (a 3.5% growth rate, based on not much but faster than the current pace of recovery; it makes little difference to this calculation), you get a stimulus of about 2.7% of GDP.  That’s actually quite a bit less than the 4% Ferguson uses.  But that’s a big boost to aggregate demand. Not as big as it should be given the magnitude of the economic shock we’ve been hit with, but far from negligible.

I have no idea why Ferguson feels the need to start with the size of the deficit as a candidate for the size of the stimulus, and then cut it down because “we were already running deficits” and because “state and local governments are cutting taxes and raising spending”.  What matters is the change in the amount of government spending, relative to no stimulus policy.  Ferguson would appear to be overestimating the stimulus, perhaps because he’s focusing on the idea that “the deficit is the stimulus” and then “correcting” it—but a recession usually increases deficits automatically by decreasing tax receipts, without (usually) a corresponding cut in spending.  (Many states, though, now do cut spending in response to recession, often because of balanced budget laws.)  So perhaps by doing this he is including some of that recession-induced deficit in his estimate of “the stimulus”…and then reducing his overestimate by spreading it over the two prior years, as well.

The main thing that is misleading, though, is that then he estimates “the cost of this muted stimulus” by using the full deficit.  A recession is going to have a fiscal cost even without stimulus—chalking up the full 11.2% of GDP deficit as the cost of a stimulus, whether 2.7% or 4%, is either dishonest or a mistake that is really hard to excuse in an article for a national publication like Newsweek.  The fact that he uses 4% as the stimulus figure perhaps results from some mixed-up attempt to be a little less than dumb about this while still using the full deficit as the cost—perhaps this can be thought of as a way of including “automatic stabilizers” in federal spending as “stimulus”…but then arbitrarily damping it down by dividing by the extra years.  Anyway, the bottom line is that the variable spending under control of the federal government was increased by 2.7% of GDP, and roughly speaking that 2.7% is the additional cost in current dollars of the additional fiscal stimulus.  Actually, the cost is slightly less, for reasons I’ll explain shortly.  11.2% reflects the “fiscal” cost of the recession including, but not limited to, the additional stimulus spending.  A serious macroeconomic estimate of the fiscal cost of stimulus actually needs to take into account that, if you believe the economic models used to justify the stimulus itself, the stimulus increases GDP and so increases tax revenues, and so partially pays for itself.  I haven’t done this calculation—lots of people were doing it this spring, and with reasonable figures for multipliers and tax rates—say 20% for taxes and a somewhat generous 1.4 for the spending multiplier—you’d get around a 28% reduction in the total fiscal cost of the stimulus, to around 2% of GDP.  And let’s not forget that this fiscal cost is incurred in order to obtain an increase in GDP—with this multiplier, of 3.78% of GDP.  Let’s also not forget that this fiscal cost is not a loss of GDP—it is just an increase in government debt.  The GDP gain should be around a full 3.78%—perhaps less, if the stimulus is spread out longer, or the multiplier a bit lower (which it might be because some determinants of spending, like the propensity of businesses to invest, and perhaps of households to consume, may be lower than usual in the current climate of fear), but not less by the fiscal cost.

So, the 11.2% of GDP estimated federal deficit for 2009 (I should check that this is the change in net, rather than gross, public debt) is just not the cost of the “muted” stimulus, in any sense.  The “muting” of the stimulus by state budget cuts, etc., is of course argument for more short-term stimulus—for example, aid to states so they don’t have to make those budget cuts.

“We are, it seems, having the fiscal policy of a war, without the war.”  Well, hurrah for that, I say.  Better to avert a potential depression, and mitigate a serious recession, with war-footing fiscal policy than to get out of a depression the way we did in the 1940s—with the fiscal policy of an actual world war.  Of course we have the Afghan war, and had the Iraq war.  Ferguson pooh-poohs these as contributors to the fiscal situation—and here’s the second highly misleading bit of his article.

these are trivial conflicts compared with the world wars, and their contribution to the gathering fiscal storm has in fact been quite modest (little more than 1.8 percent of GDP, even if you accept the estimated cumulative cost of $3.2 trillion published by Columbia economist Joseph Stiglitz in February 2008).

Since, despite the “even if” which suggests he doubts these estimates, no other estimates are offered, let’s with Ferguson accept Stiglitz’ ones, which seem in line with what I recall hearing.  Where the heck does he come up with “little more than 1.8 percent of GDP”?  Recall that (based on three quarters of official government estimates) I estimated 209 GDP at $14.2 trillion; the total cost of the war comes to 22.5% of this year’s GDP!  (Just to clarify: this is not the yearly rate of war spending as a percentage of GDP; but Ferguson is comparing national debt to GDP, so we are looking at war debt on the same footing he’s using for total debt.) More to the point, the Nov. 25th, 2009 net federal public debt was $7.612 trillion; the estimated cost of the wars thus comes to 42%—nearly half—of the current public debt!!!  If you take at face value the CBO deficit estimates for 2019 that Ferguson cites (I have not evaluated them myself), those 3.2 trillion are still 22.4% of the projected 2019 debt of $14.3 trillion—hardly negligible (and they’d look like a higher percentage, if debt service on them were included).  I’m guessing the 1.8 percent Ferguson refers to must mean the debt service on the Stiglitz estimate of the cost of the war.  But then, since the entire rest of the public debt is less than one and a half times this war cost estimate, why doesn’t Ferguson tell us that the cost of servicing it is currently modest, too?

Now, I haven’t looked carefully, recently, into the contribution of the tax cuts of the Bush years to the deficits.  Early in the administration, they probably helped stimulate the economy out of the post-9/11 recession; but on balance they’ve added plenty to the deficit and the national debt.  By the “radical fiscal reform” we need to forestall the “fatal arithmetic of imperial decline”, does Ferguson mean things like the repeal of these tax cuts, and maybe even some modest tax hikes?  And could the current low rates private investors afford the US treasury even on long term borrowing, suggest that just maybe, these investors are pretty confident that the US will, eventually, through some combination of health care reform, tax cut repeal, tax increases, and other measures possibly including non-draconian social security adjustments, bring things into reasonable shape in the medium term, averting Ferguson’s calamitous projections?  Perhaps these low rates are a vote of confidence in a Democratic administration, as Democratic administrations have added to the national debt at a substantially lower rate than Republican ones in the past few decades. Numbers along these lines, and more on Ferguson’s article, to come.

But I can’t end without mentioning Ferguson’s comparisons to he fiscal situation of Habsburg Spain in the 16th-17th century, or prerevolutionary France—well, this sounds fun, and there may even be lessons from this far back in history.  Like, maybe it’s better to ditch the empire than trash your economy to support it?  I’m not ready to argue historical points with a historian, but it does seem like these comparisons just might be stretching it a bit, as far as the political economy of the situation and the economic and financial policy tools and knowledge available.  I do think the Habsburg Spain analogy might have fit better under Bush and Cheney.

I get annoyed by blogs that are mostly just links to other people’s stuff… but I had to link this great post from Brad DeLong on his inside view of the 1994 debacle in health care…

I”ve been wondering for the last few weeks or months… why can’t Obama be more like LBJ?  Still, everyone has to operate from their own strengths… he may yet pull off health care reform in his own style, and for those who care about the horse-race aspect of this (and I certainly do inasmuch as it affects the Democrats’ chances in the next two elections): by now, anything decent (or even apparently decent) by way of a health care bill will be viewed as a victory for Obama.

I’m worried, though, that although there are apparently European models for well-functioning healthcare that don’t involve a public option, they involve nongovernmental nonprofit entities, or high levels of regulation.   Such models may be very difficult to replicate in this country where they may be easily co-opted or weakened by the money and influence big insurance can put behind things, and by the continual possibility of politically motivated medldling/sabotage.  Ironically, I fear our politics and culture may make a public option more workable than a semiprivate one.

2005 was a superb year, in surprisingly similar ways, in many of the most important winegrowing areas around the world.  California and South Australia certainly did well, and I’m told 2005 Bordeaux were excellent too.  (I haven’t swilled enough of the latter to know without consulting my tasting notes…)  So I’ve gotten into a project of checking out Aussie Shiraz, especially from the Barossa and McClaren Vale…so many of them are just delicious, and some are truly great wines.  So I’ve just realized what others have probably known for more than a century…that this is one of the great grape/wine region combinations of the world.

What we may have here is a chance to benefit from the McCain campaign flameout last year… I don’t know for sure that this wine was named and released with an eye to becoming the high-end swill of Republican conventioneers in St. Paul—indeed, perhaps the subtitle “Above the Law” was intended to underline the Obama campaign’s theme (”more of the same”).   But whatever the reason (the label actually say it’s a tribute to the masive influx of immigrant mavericks to the Australian gold fields in 1851) for the too-cute name and the image of a Colt Navy Model 1851 pistol on the label of this puppy from Pure Love Wines, the wine hits the bullseye.

According to my tasting notes this is a full-bodied, pretty smooth wine with medium finegrained tannins, rich  blueberry and blackberry fruit, some spiciness or tarriness—one of the best “budget” Aussie Shirazes I’ve tasted yet.  Still excellent on the second day (after overnight refrigeration).  My wife liked it too.

I’ve only tasted one or two Aussie Shirazes this year that were better (a Two Dudes Gnarly Hands Two Hands Gnarly Dudes Shiraz) that I tasted at Vino Volo (BWI), which was sold out next time I passed through, at way more expensive, would be one; a 2005 Slipstream as well.)  This partakes of some of their complexity and tight structure, but is definitely not as full of smokiness, tarriness, and such.  In exchange, it veers toward lush, delicious fruitiness but without getting sloppy.

On further investigation the origin of the wine is described here.

The $15 price targeted is a great deal for this wine.  Major kudos to Pure Love’s Jayson Woodbridge for this one, and I’ll be on the lookout for its siblings at the same target price:  Barossa Jack, Desert Eagle, and Layer Cake.   What, no Community Organizer?  No matter, just buy this wine, get out your corkscrews, and drill… whoops, it has a Stelvin closure.  Unscrew, baby, unscrew!