Archive for October, 2008

Milton Friedman Caused The Great Depression

October 18th, 2008 Comments off

Yes, yes, I know he was only 17 when the market crashed.

But still.

As Friedman pointed out quite accurately, inept (excessively tight) monetary policy caused the downturn to go much deeper and last much longer than it should have. Pretty much everyone will stipulate to that.

And hence–here's his logical non sequitur–government and the Fed are at fault, and should be eradicated.

Wrong. Bad monetary policy was at fault. Good monetary policy–according to Friedman–would have resulted in the recession ending by '31.

All he really demonstrates is that bad government is bad, and good government is good. Hardly a profound insight.

The real irony, though: the Fed kept money tight why? Because they clung to an almost theologically orthodox belief in the value of Friedman's beloved free markets and "creative destruction."

Friedman's belief system is what caused the government ineptitude/failure that he so bemoans.

Update 10/19: In a WSJ interview, Anna Schwartz, Friedman's co-author, says that we should hew to the very "creative destruction" philosophy that justified the inept monetary policy that she and Friedman so effectively disparaged. Because this time it's different. Really.

The dizzying depth of these nested ironies is approaching the level of clinical schizophrenia.

How to Avoid Regulation: Smart Regulation

October 17th, 2008 1 comment

Every economist agrees that regulation has the potential to stifle economic growth. But every economist also agrees that we need regulation to make markets efficient (and relatively stable).

Given those two givens, free-market advocates should be jumping into the fray, proposing smart, targeted, easily manageable, surgical regulation, that obviates the need for heavy-handed, clunky, hard-to-manage regulation.

My favorite example is regulation of ratings agencies–making it illegal for them to accept money from issuers of the securities they're rating, or at least requiring a cigarette-type warning on each bought-and-paid-for, collusively prepared rating.

It's relatively easy to administer and enforce, and while it blows a hole in today's ratings-agency business model (as it should), it creates a market for objective, accurate ratings that actually have some value.

The effect of accurate ratings would ripple and amplify up the food chain, making it difficult or impossible for mortgage sellers to profit by pawning off mis-rated risk.

One type of regulation that this might preclude: federal rules for mortgage factories, who are currently regulated only (and only lightly and erratically) by the states. Even those who believe in the (potential) efficacy of government regulation should blanch at the prospect of such a federal regulatory bureaucracy.

Government is not the problem. Bad government is the problem. Good government is the answer.

Pro-Growth Republicans III: Yeah, Right.

October 15th, 2008 Comments off

Following up on previous posts here, here, and here, yet some more debunking of this myth (Update: yet more here and here):

Various have shot spitballs at this chart, but add it to all the others in previous posts—showing that over the long haul, Democrats deliver prosperity and Republicans don’t—and the notion that Republican policies promote growth is nothing short of lunacy. The idea is just completely contrary to “the facts on the ground.”

Fareed Zakaria for President

October 14th, 2008 Comments off

I just came across Fareed Zakaria's The Future of Freedom: Illiberal Democracy at Home and Abroad at my mother's house, read it, and came away wildly impressed. His basic thesis is that what we want is constitutional liberalism (classic sense of liberalism, as in Milton Friedman's usage, though not necessarily via his prescriptions)—not a priori, always, greater democracy. Democracy–in the fundamental sense of majority rule–gave power to Hitler and Hamas, both inveterate enemies of constitutional liberalism. It's also, fundamentally, what allows for government-by-lobbyist.

As of this moment he's my nominee for Most Pragmatic Realist, regarding both domestic and foreign affairs.

And I'm happy to see one paragraph in his latest Newsweek column that could almost be substituted, wholesale, for the description of this blog, above.

In a world of competitive capitalism, you need not big government or no government but smart government. We are not in a race to the bottom, on wages, regulations, or anything else. But we are competing against other countries to come up with the government policies that most effectively foster growth, innovation, and productivity. It's a time to figure out what works, not what ideological mantras to keep repeating. It's the age of Michael Bloomberg, not Margaret Thatcher.

I’m Patriotic: I Pay Taxes

October 11th, 2008 Comments off

Don Pedro says it better than anyone else I’ve heard, with this woulda-coulda-said-it response for Biden:

“Governor Palin, if paying taxes is not considered patriotic in your neighborhood, who is going to pay for the body armor that will protect your son in Iraq? Who is going to pay for the bailout you endorsed? If it isn’t from tax revenues, there are only two ways to pay for those big projects — printing more money or borrowing more money. Do you think borrowing money from China is more patriotic than raising it in taxes from Americans?” That is not putting America first. That is selling America first.

McCain’s Big Stick

October 8th, 2008 Comments off

Sad. What a missed setup:

Senator McCain, I’m glad you mentioned that line from Teddy Roosevelt. Because that’s exactly the point. The reason we can’t address the problems in Afghanistan, the reason we can’t act in desperate moral situations like Darfur and Congo, is because, quite simply:

The big stick is in use.

And because of all the big loud talk of the last eight years, those countries simply don’t trust us when we want to send in troops to help. And our allies aren’t willing to join in with us. They’ve seen what happened in Iraq, and a lot of the people in those countries think we’re just trying to grab territory—and oil.

Everyday Americans don’t want that territory. But with a Halliburton CEO running our presidency, it’s easy to understand why people in Sudan don’t think they can trust our government.

We’ve had eight years of ‘talk really loud, swagger, and swing the stick around.’ It’s time to take Teddy’s advice.

Teddy Roosevelt on “the true conservative”

October 8th, 2008 Comments off

From his “New Nationalism” speech. 1910.

The true friend of property, the true conservative, is he who insists that property shall be the servant and not the master of the commonwealth; who insists that the creature of man’s making shall be the servant and not the master of the man who made it. The citizens of the United States must effectively control the mighty commercial forces which they have called into being.

See also what Lincoln and Obama have to say about true conservatives.

Seeking “Conservative Polling”

October 6th, 2008 1 comment

I am astounded—well actually, not really—that I'm now getting a bunch of visitors to my site who arrive after searching for some variation of "conservative polls."

The frantic efforts at self-delusion out there really shouldn't surprise me, but they do.

“Pro-Growth” Republicans. Debunked. Again. Some More.

October 4th, 2008 Comments off

A while back I posted some comparative numbers for postwar economic indicators, Dems versus Pubs. Clear results for the clear-eyed.

Brad Delong has even more.

Just one here, for your delectation:

How dare these people call themselves conservatives?

The Problem Was Not Deregulating. The Problem Was Not Regulating.

October 2nd, 2008 Comments off

Most economists agree: deregulation is not what caused today’s problem. (The repeal of Glass-Steagal, for instance—the Gramm-Leach-Bliley Act allowing commercial banks to act as investments banks, and vice-versa—wasn’t the cause. It might even be one of the reasons things aren’t worse than they are.)

What’ they’re not saying: not regulating is what caused the problem.

Everyone agrees: today’s regulatory structure is not designed or sufficient for today’s financial markets. A modern regulatory structure would, for instance, impose capital/leveraging limits on issuers of complex derivatives, such as credit default swaps—just as commercial bankers and insurers are required to maintain sufficient reserves to cover losses.

But that’s illegal, thanks to the Commodity Futures Modernization Act, snuck through by Phil Gramm during Clinton’s waning days.

That regulation specifically banned regulation of credit default swaps.

I follow all the major econoblogs via Google Reader—it’s easy for me to search them all.

None of them has discussed the Commodity Futures Modernization Act (aside from passing mentions and—from Tyler Cowen—promises of future posts).

One exception: Justin Fox, who offers this brief pithy history:

Its provisions were slipped into an appropriations bill in conference committee and passed the House and Senate the very next day.

It was never debated in committee or on the floor.

Lame-duck President Bill Clinton signed it into law six days later. And they say Paulson and Bernanke are trying to move too fast!

When we have to rely on Daily Kos and The Huffington Post to get analysis of recent economic history, it’s time to take a hard look at the econoblogosphere.

Here are all the search results, going back to July 15.

Hale “Bonddad” Stewart: Who’s To Blame For the Mess We’re In?
…Financial Services Modernization Act repealed Glass-Steagall, a law that had separated the commercial-banking industry from Wall Street, and the two industries, plus insurance, came together again. Banks became bigger, clumsier, and hard to manage. Apparently, risk-management became all but impossible, even as banks had greater access to larger …
The Huffington Post Full Blog Feed – Sep 28, 2008 (4 days ago)

Open Thread and Diary Rescue
…How the Commodity Futures Modernization Act Was Moved Through Congress. (ybruti) In this continuing series, LivingOxyMoron describes and defines some of the “basic” concepts underlying the sub-prime economic crisis in Understanding the Crisis, Part 2: The Borrower and Loan Originator. (vcmvo2) Eddie C relates his own traumatic experience with mo…
Daily Kos – Sep 25, 2008 9:17 pm

Robert Scheer: A Fox to Protect the Henhouse?
…and the Commodity Futures Modernization Act of 2000. By preventing mergers between the various branches of Wall Street, the former act reversed basic Depression-era legislation passed to prevent the sort of collapse we are now experiencing. The latter legitimized the “swap agreements” and other “hybrid instruments” that are at the core of the cr…
The Huffington Post Full Blog Feed – Sep 24, 2008 2:26 am

Chris Cox, American hero
…of the Commodity Futures Trading Commission–which regulates exchange-traded derivatives–campaigned for the authority to oversee the OTC kind as well, but was batted down by Congress and the Clinton Treasury Department. (I wrote about this a few days ago.) And on December 14, 2000, Phil Gramm, Jim Leach, Richard Lugar, Thomas Ewing and a few ot…
TIME: The Curious Capitalist – Sep 23, 2008 6:29 pm

Deborah Senn: Fifty Chimpanzees or One Toothless Gorilla
…is the Commodity Futures Modernization Act of 2000. The act specifically banned regulation of something called “credit default swaps.” And it is precisely the creation and trading of these unregulated CDS’s that led to AIG’s downfall. In a nutshell, here is how a CDS works. Imagine lending money to your brother-in-law whose creditworthiness is …
The Huffington Post Full Blog Feed – Sep 23, 2008 9:06 am

Howard Schweber: Paulson’s Plan – Annotated
…2000 Commodities Futures Modernization Act. That act was added to the budget by Phil Gramm — two days after the Court’s decision in Bush v. Gore when no one was paying very much attention. “Nobody in either chamber had any knowledge of what was going on or what was in it,” says a congressional aide familiar with the bill’s history (quoted in …
The Huffington Post Full Blog Feed – Sep 22, 2008 3:06 pm

The regulation of derivatives
…commodity, weather and freight derivatives.”  Here is one overview of MiFID.  Implementation and enforcement is on a country-by-country basis and of course the UK is the big player.  Read pp.27-29 in the very first link above and you’ll see that overall the UK has a looser regulatory approach than does the United States, though not on…
Marginal Revolution – Sep 22, 2008 6:06 am

Three Times is Enemy Action
…with the Commodity Futures Modernization Act, which was slipped into a “must pass” spending bill on the last day of the 106th Congress. This Act greatly expanded the scope of futures trading, created new vehicles for speculation, and sheltered several investments from regulation. As with both Gramm-Leach-Bliley and Garn-St. Germain, large parts…
Daily Kos – Sep 21, 2008 7:19 am

Did the Gramm-Leach-Bliley Act cause the housing bubble?
…cover the Commodity Futures Modernization Act as well.
Marginal Revolution – Sep 19, 2008 4:57 am

Arianna Huffington: How Obama Can Demonstrate Real Leadership on the Economic Crisis
…the Financial Modernization Act, which obliterated Glass-Steagall; and the Commodity Futures Modernization act, which gave us unregulated trading of derivatives and the kind of credit default swaps that threaten our economy — both signed into law by Bill Clinton. Speaking at a large rally in Las Vegas on Wednesday, Obama declared: “we can’t st…
The Huffington Post Full Blog Feed – Sep 18, 2008 4:03 pm

James Moore: A Nation of Village Idiots
…called the Commodity Futures Modernization Act into the budget bill. Nobody knew that the Texas senator was slipping America a 262 page poison pill. The Gramm Guts America Act was designed to keep regulators from controlling new financial tools described as credit “swaps.” These are instruments like sub-prime mortgages bundled up and sold as …
The Huffington Post Full Blog Feed – Sep 17, 2008 11:02 pm

McCain Adviser Phil Gramm’s Role in Today’s Crisis
…Commodity Futures Modernization Act], he declared, would ensure that neither the sec nor the Commodity Futures Trading Commission (cftc) got into the business of regulating newfangled financial products called swaps—and would thus “protect financial institutions from overregulation” and “position our financial services industries to be world lea…
Economists for Obama – Sep 21, 2008 8:19 pm

Robert Scheer: Earth to McCain: It’s a Crisis
…were the Commodi
ty Futures Modernization Act and the Gramm-Leach-Bliley Act. The Gramm is former Sen. Phil Gramm, who was chair of the Senate Banking Committee when he acted as chief sponsor of both pieces of legislation. The same Gramm that McCain picked to co-chair his presidential campaign. Gramm proved an embarrassment when he cavalierly in…
The Huffington Post Full Blog Feed – Sep 17, 2008 2:58 am

Yet Another Reason to Vote Against John McCain
…behind the Commodity Futures Modernization Act and the Gramm-Leach-Bliley Act. The former made legal “the mortgage swaps distancing the originator of the loan from the ultimate collector,” while the latter “destroyed the Depression-era barrier to the merger of stockbrokers, banks and insurance companies…. CARLY FIORINA…. …
Grasping Reality with Both Hands: The Semi-Daily Journal Economist Brad DeLong – Sep 16, 2008 11:44 am

Krugman: Phil Gramm would be ‘just the guy’ to lead us into a Great Depression.
…pushed the Commodity Futures Modernization Act in 2000, which made legal “the mortgage swaps distancing the originator of the loan from the ultimate collector.” The Nation writes that “those two acts effectively ended significant regulation of the financial community.”
Think Progress – Sep 16, 2008 6:56 am

Robert Scheer: She’s Clueless, He’s Worse
…of the Commodity Futures Modernization Act, which former Sen. Phil Gramm, R-Texas, pushed through Congress just hours before the 2000 Christmas recess. Gramm, until recently co-chair of the McCain campaign, also had co-authored the Gramm-Leach-Bliley Act, which became law in 1999 with President Bill Clinton’s signature. That gem, which Gramm had…
The Huffington Post Full Blog Feed – Sep 10, 2008 12:21 am

Mitchell Bard: McCain’s Claims of “Change” in His Acceptance Speech Are New Standard for Chutzpah
…as the Commodity Futures Modernization Act), which exempted energy trading from regulatory oversight. In other words, speculation was brought to the gas markets. (Keith Olbermann did an in-depth, fact-heavy, flawlessly researched report on this issue, which you can watch here.) Who was the person responsible for the Enron Loophole? Do I have to…
The Huffington Post Full Blog Feed – Sep 5, 2008 9:27 am

Oil Prices and Speculation
…when the Commodity Futures Trading Commission examined Vitol’s books last month, it found that the firm was in fact more of a speculator… Even more surprising … was the massive size of Vitol’s portfolio — at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange. The discovery…
Economist’s View – Aug 21, 2008 2:40 pm

Michael B. Ellis: Fiddling As The Housing Market Burns
…of the Commodity Futures Modernization Act (helping deregulate the lending industry), and his known participation as being one of the framers of McCain’s economic plan, I think it would behoove us to ask McCain, considering Gramm’s past history, are we going to see a complete overhaul of his economic plan, or should we assume Gramm’s “let them …
The Huffington Post Full Blog Feed – Jul 25, 2008 3:53 pm

Robert Scheer: The Real Legacy of the ‘Reagan Revolution’
…sponsored the Commodity Futures Modernization Act of 2000, which allowed Enron’s scamming to happen. As Ken Lay, who was chair of Gramm’s election finance committee, put it quite candidly when asked for the secret of Enron’s success, “basically, we are entering or in markets that are deregulating or have recently deregulated.” Part of that dere…
The Huffington Post Full Blog Feed – Jul 16, 2008 5:12 am

Max Blumenthal: Phil Gramm May Be Gone, But His Porn Lives On
…Commodity Futures Modernization Act” into a omnibus spending bill just as Congress headed off for summer vacation. His amendment instantly enabled the creation of a shadow banking system — “weapons of financial destruction” in the words of Warren Buffet — that directly contributed to the current mortgage foreclosure crisis. Millions of America…
The Huffington Post Full Blog Feed – Jul 15, 2008 7:11 am