Wednesday, December 24, 2008

Happy Christmas to all, and to all a good night! has free Christmas music for download here and here. Considering donating to charity this holiday season? Here's some advice for the generous. I'll be on vacation for the next week. Merry Christmas and happy New Year.

Growing protectionism could make the global recession much worse

The Economist warns of the danger:
For the first time in more than a generation, two of the engines of global integration—trade and capital flows—are simultaneously shifting into reverse. The World Bank says that net private capital flows to emerging economies in 2009 are likely to be only half the record $1 trillion of 2007, while global trade volumes will shrink for the first time since 1982.

This twin shift will force wrenching adjustments. Countries that have relied on exports to drive growth, from China to Germany, will slump unless they can boost domestic demand quickly. The flight of private capital means emerging economies with current-account deficits face a drought of financing as well as export earnings. There is a risk that in their discomfort governments turn to an old, but false, friend: protectionism. Integration has less appeal when pain rather than prosperity is ricocheting across borders. It will be tempting to prop up domestic jobs and incomes by diverting demand from abroad with export subsidies, tariffs and cheaper currencies.

The lessons of history, though, are clear. The economic isolationism of the 1930s, epitomised by America’s Smoot-Hawley tariff, cruelly intensified the Depression. To be sure, the World Trade Organisation (WTO) and its multilateral trading rules are a bulwark against protection on that scale. But today’s globalised economy, with far-flung supply chains and just-in-time delivery, could be disrupted by policies much less dramatic than the Smoot-Hawley act. A modest shift away from openness—well within the WTO’s rules—would be enough to turn the recession of 2009 much nastier. ...

As economies weaken, popular scepticism of open markets will surely grow. Among rich countries, that danger is greatest in America, where grumbles were heard long before recession set in. The new Congress, with bigger Democratic majorities, has a decidedly less trade-friendly hue. Barack Obama’s campaign rhetoric left an impression of a man in two minds about trade, which he has since done nothing to dispel.

Tuesday, December 23, 2008

60 Minutes examines airline safety

For more on Bruce Schneier's criticism of TSA, click here.

You can also listen to a 10-minute podcast interview with former FBI agent Mike German, discussing counterterrorism, here.

Monday, December 22, 2008

How will the global recession affect China and India?

The Economist examines the possibilities:
THE speed with which clouds of economic gloom and even despair have gathered over the global economy has been startling everywhere. But the change has been especially sudden in the world’s two most populous countries: China and India. Until quite recently, the world’s fastest-growing big economies both felt themselves largely immune from the contagion afflicting the rich world. Optimists even hoped that these huge emerging markets might provide the engines that could pull the world out of recession. Now some fear the reverse: that the global downturn is going to drag China and India down with it, bringing massive unemployment to two countries that are, for all their success, still poor—India is home to some two-fifths of the world’s malnourished children.

Tuesday, December 16, 2008

Short-sellers caused bank panics

CNBC's Jim Cramer argues that the recent panics in financial stocks was caused by short-sellers:
You have to remember that banking is a business built entirely on trust. When shareholders and customers see these stocks plummeting virtually without a bottom, then they pull their money, further exacerbating the problem. And you can see that play out in these financials right up to the Friday before the Citigroup bailout.

On four days in November – the 6th, 10th, 12th and 19th – the shorts accounted for at least 50% of Citi’s trading volume. On one day it was as high as 71%. In that time, the stock cut in half to $6.40. By then panic had set it, and regular investors started selling Citi en masse. In just one day – Nov. 20 to Nov. 21 – the amount of shares sold jumped 1.5 million and the stock finished its near month-long decline at $3.77.

See the pattern? Lack of proper regulation allows short-sellers to hammer down a stock, causing fear among regular investors and customers. These regular investors then continue the selling, further damaging the stock and making the short-sellers a lot of money. Citigroup wasn’t alone, either. This same game played out with JPMorgan, Bank of America and almost all the other big banks. Imagine what would have happened if the government didn’t step in on Monday, Nov. 24.

Cramer didn’t hesitate to point fingers at SEC Chairman Christopher Cox. It was Cox who repealed the uptick rule, which is exactly what’s allowed bear raiders to annihilate stocks. Until there’s a return to regulation on Wall Street, this kind of thing will continue to happen.
With ordinary companies, a plunging stock price wouldn't matter in the long run. With financial companies, on the other hand, a plunging stock price can scare customers into withdrawing their money, thus causing a classic bank run. Apparently, that is what caused Wachovia to go collapse.

Saturday, December 13, 2008

Republican Mankiw endorses a Democrat

Harvard economist Greg Mankiw, who was George W. Bush's Chairman of the Council of Economic Advisors, endorses a Democrat for Congress.

Thursday, December 11, 2008

Martin Feldstein opposes the automaker bailout

Video: Harvard economist Martin Feldstein says a managed bankruptcy is preferable to the current bailout proposal.

Wednesday, December 10, 2008

Mortgage modifications failing

CNBC's Diana Olick says loan modification programs are failing:
According to the Comptroller of the Currency, John Dugan, who gave a preview of his latest Mortgage Metrics report:

“After three months, nearly 36 percent of the borrowers had re-defaulted by being more than 30 days past due. After six months, the rate was nearly 53 percent, and after eight months, 58 percent.” ...

I realize that there are a lot of public and private sector programs really trying to help troubled borrowers, but the fact of the matter is that a lot of troubled borrowers are beyond help. And instead of spending so much time focusing on trying to modify these loans, perhaps we need to look at the problem from a different perspective. ...

Unless the lenders or investors or government officials are willing to simply throw the loan out and give away an awful lot of house to an awful lot of borrowers, modifications, and certainly "mass modifications" which a lot of government types are pushing, are just exacerbating the problem.
Diana Olick promotes a fantastic alternative at the end of this video: Let the properties go into foreclosure, sell them to people who can afford them (i.e. renters), and let the free market work. What a novel idea! There's no way politicians will go for it.

The whole "prevent irresponsible homeowners from losing their homes" effort is by definition a "prevent responsible renters from buying homes" effort.

Tuesday, December 9, 2008

Paul Krugman: Worst recession since Great Depression

Video: Paul Krugman, interviewed on MSNBC's Hardball, compares the current recession to the Great Depression.

Monday, December 8, 2008

Krugman: Detroit auto industry will likely disappear

Nobel Prize–winning economist Paul Krugman says the U.S. Detroit auto industry will likely disappear:
Nobel economics prize winner Paul Krugman said Sunday that the beleaguered U.S. auto industry will likely disappear.

"It will do so because of the geographical forces that me and my colleagues have discussed," the Princeton University professor and New York Times columnist told reporters in Stockholm. "It is no longer sustained by the current economy."

Krugman won the 10 million kronor (US$1.4 million) Nobel Memorial Prize in economics for his work on international trade patterns. Some of his research on economic geography seeks to explain why production resources are concentrated in certain locations.

Speaking to reporters three days ahead of the Nobel Prize ceremony, Krugman said plans by U.S. lawmakers to bail out the Big Three automakers were a short-term solution, resulting from a "lack of willingness to accept the failure of a large industry in the midst of an economic crisis."
I'd say that's only true if you don't count the foreign-owned auto manufacturing plants in the southern U.S. to be part of the U.S. auto industry. This raises the question: If they employ 113,000 workers, does it really matter if the auto plants are foreign owned?

Krugman's comments also raise another question: If the big three automakers are going to go away anyhow, should politicians really be handing them tens of billions of your tax dollars?

Hat tip: Greg Mankiw.

Update: Paul Krugman says his words were misreported. It's the Detroit auto industry that will disappear, not the U.S. auto industry. This makes much more sense.

Saturday, December 6, 2008

Will Americans lose their appetite for risk?

The Wall Street Journal worries that this economic crisis will cause Americans to lose their frontier spirit:
The greatest danger in the current economic crisis is that the United States will lose its historic appetite for risk. The mood now is that risk-taking got us into this mess. Risk, though, is the quintessential American trait that built the nation — from the Battle of Bunker Hill to the rise of the microchip. If we let risk give way to a new ethos of commercial reserve and regulatory restriction, the upward arc of the U.S. ascendancy will flatten.
The willingness of people to take risks is essential for entrepreneurship and a thriving free enterprise system. That said, I don't think a short-term slump will have a long-term effect on the essential character of the American people.

Friday, December 5, 2008

5 physics lessons for politicians

Foreign Policy lists five physics lessons for politicians and policymakers:
  • Terrorism — Making a nuclear bomb is excruciatingly difficult. ... Many people may worry most about the drama of nuclear terrorism, but as 9/11 showed, it’s far easier for terrorists to inflict massive damage with commercially available explosives such as jet fuel or gasoline.
  • Energy — The biggest source of clean, cheap energy is energy not used. And conservation doesn’t have to be uncomfortable. Tell people they can turn up their thermostats to any temperature they like, but encourage them to make sure there is some good (and it can be cheap) insulation in the walls of their homes.
  • Nuclear Energy — Politicians believe the problem with nuclear waste is technical in nature. The scientists and engineers believe the problem is political. ... Nuclear waste storage really is a solved problem.
  • Space — Manned space flight might be a great adventure, but don’t fool yourself into thinking that the presence of humans helps advance science. The greatest scientific achievements of the space program have been the unmanned missions to the planets and the use of remotely controlled instruments to measure the cosmos. All of our greatest space science has come from robots.
  • Global Warming — Yes, it is true that the United States is responsible for one fourth of past global warming. However, U.S. emissions are growing relatively slowly today. So why are we so worried? It’s the rapidly growing greenhouse gas emissions of the developing world. China has already surpassed the United States in annual emissions. ... Soon it will far outpace the United States as a contributor to global warming. The rest of the developing world is following. ... If we want to stop global warming, then our focus must be on the developing world. Wealthy countries could start by financing clean coal in China.

Thursday, December 4, 2008

Americans oppose automaker bailout

Hopefully the politicians will listen to the people:
A national poll suggests that six in 10 Americans oppose using taxpayer money to help the ailing major U.S. auto companies.

Sixty-one percent of those questioned in a CNN/Opinion Research Corp. survey out Wednesday are dead set against the federal government providing billions of dollars in assistance the the auto makers, with 36 percent favoring such a bailout.

The poll, conducted Monday and Tuesday, also indicates that a majority of Americans, 53 percent, don't think government assistance for the auto makers will help the U.S. economy. ...

Opposition to the bailout of the auto industry is widespread across the country, even the Midwest, where the domestic auto makers have their headquarters and many of their assembly plants.

The poll indicates that most opposition to the bailout comes from the West, where opposition reaches 67 percent. Sixty-one percent of those polled in the Northeast, 64 percent in the South and 53 percent in the Midwest oppose using federal dollars to help the auto makers.

The poll also suggests that a vast majority of Republicans, 70 percent, oppose the bailout, with 62 percent of independents and 55 percent of Democrats also opposed.
Again, Nobel Prize–winning economist Gary Becker says bankruptcy, not a bailout, is best for the American automakers in the long run.

Wednesday, December 3, 2008

India terrorist attack lessons learned

Security expert Bruce Schneier lists four lessons learned from the Mumbai terrorist attacks:
  • Low-tech is very effective. Movie-plot threats — terrorists with crop dusters, terrorists with biological agents, terrorists targeting our water supplies — might be what people worry about, but a bunch of trained ... men with guns and grenades is all they needed.
  • At the same time, the attacks were surprisingly ineffective. I can't find exact numbers, but it seems there were about 18 terrorists. The latest toll is 195 dead, 235 wounded. That's 11 dead, 13 wounded, per terrorist. As horrible as the reality is, that's much less than you might have thought if you imagined the movie in your head. Reality is different from the movies.
  • Even so, terrorism is rare. If a bunch of men with guns and grenades is all they really need, then why isn't this sort of terrorism more common? Why not in the U.S., where it's easy to get hold of weapons? It's because terrorism is very, very rare.
  • Specific countermeasures don't help against these attacks. None of the high-priced countermeasures that defend against specific tactics and specific targets made, or would have made, any difference: photo ID checks, confiscating liquids at airports, fingerprinting foreigners at the border, bag screening on public transportation, anything. Even metal detectors and threat warnings didn't do any good.

Tuesday, December 2, 2008

The United States is now officially in a recession

I'm sure you've all heard this by now: The United States is officially in a recession.
The National Bureau of Economic Research—a private, nonprofit research organization—said its group of academic economists who determine business cycles decided that the US recession began last December.

The news pushed US stocks lower and renewed calls for another economic stimulus program.

The current recession, which many economists expect to persist through the middle of next year, is already the third-longest since the Great Depression, behind only the 16-month slumps of the mid-1970s and early 1980s.

"I think that we've got a ways to go, that this is going to be probably a deep and long recession," Jeffrey Frankel, a Harvard University economist who sits on the NBER's committee, told CNBC. "It could be the worst post-War recession. We don't know yet." ...

Many Wall Street financial institutions already had declared that the US recession began in December 2007, when there was a sharp increase in the US unemployment rate.

The last two recessions have been so short—about eight months—that the NBER's official prenouncement came after the downturn had actually ended. ...

What's been confusing for economists this time around is that a contraction in gross domestic product—what laymen consider a key recession indicator—did not happen until the third quarter of this year.

Other key barometers, such as payrolls and the jobless rate, have clearly been in a recessionary trend for most, if not all, of the year, economists say. ...

A senior adviser to U.S. President-elect Barack Obama said news that the United States has been in a recession for a year underscored the need for an economic stimulus package.

Lawrence Summers, tapped by Obama to become director of the White House National Economic Council, said the slump may be worsening.
Based on the currently available numbers, it does not (yet) look like this recession is deeper than the early 1980s recession, but it will almost certainly be longer—possibly much longer. What should the government do in response to this extended recession? See here.

To my readers: I hope you will do your patriotic duty and buy your family lots of presents this holiday season—And buy a few gifts for yourself too. This doesn't mean you just go out and buy a bunch of junk. Instead, think of things you would likely buy at some point in the future, and simply move the purchases forward in time. Your nation's economy is depending on you.

Ignoring the housing bubble—What a great idea you guys had, Messrs. Greenspan and Bernanke!

Monday, December 1, 2008

What the Great Depression can teach us about fixing today's economy

George Mason University economist Tyler Cowen gives us lessons from the New Deal for today's economic problems:
MANY people are looking back to the Great Depression and the New Deal for answers to our problems. ... If I were preparing a “New Deal crib sheet,” I would start with the following lessons:

MONETARY POLICY IS KEY As Milton Friedman and Anna Jacobson Schwartz argued in a classic book, “A Monetary History of the United States,” the single biggest cause of the Great Depression was that the Federal Reserve let the money supply fall by one-third, causing deflation. Furthermore, banks were allowed to fail, causing a credit crisis. Roosevelt’s best policies were those designed to increase the money supply, get the banking system back on its feet and restore trust in financial institutions. ...

GET THE SMALL THINGS RIGHT ... Roosevelt instituted a disastrous legacy of agricultural subsidies and sought to cartelize industry, backed by force of law. Neither policy helped the economy recover.

He also took steps to strengthen unions and to keep real wages high. This helped workers who had jobs, but made it much harder for the unemployed to get back to work. One result was unemployment rates that remained high throughout the New Deal period. ...

DON’T RAISE TAXES IN A SLUMP The New Deal’s legacy of public works programs has given many people the impression that it was a time of expansionary fiscal policy, but that isn’t quite right. Government spending went up considerably, but taxes rose, too. Under President Herbert Hoover and continuing with Roosevelt, the federal government increased income taxes, excise taxes, inheritance taxes, corporate income taxes, holding company taxes and “excess profits” taxes.

When all of these tax increases are taken into account, New Deal fiscal policy didn’t do much to promote recovery. ...

WAR ISN’T THE WEAPON World War II did help the American economy, but the gains came in the early stages, when America was still just selling war-related goods to Europe and was not yet a combatant. ... The war years were generally not prosperous ones. As for today, we shouldn’t think that fighting a war is the way to restore economic health.

YOU CAN’T TURN BAD TO GOOD The good New Deal policies, like constructing a basic social safety net, made sense on their own terms and would have been desirable in the boom years of the 1920s as well. The bad policies made things worse. Today, that means we should restrict extraordinary measures to the financial sector as much as possible and resist the temptation to “do something” for its own sake.

Sunday, November 30, 2008

Schneier "cautiously optimistic" about Napolitano as possible head of DHS

Security expert Bruce Schneier likes what he hears from Obama's potential head of the Department of Homeland Security:

New DHS Head Understands Security. This quote impresses me:

Gov. Janet Napolitano, D-Ariz., is smashing the idea of a border wall, stating it would be too expensive, take too long to construct, and be ineffective once completed.

"You show me a 50-foot wall and I'll show you a 51-foot ladder at the border. That's the way the border works," Napolitano told the Associated Press.

Instead of a wall, she said funds would be better utilized on beefing up Border Patrol manpower, technology sensors and unmanned aerial vehicles.

I am cautiously optimistic.

Saturday, November 29, 2008

Government uses scare tactics in recent terrorist attack warning

Security expert Bruce Schneier is critical of the recent warning that terrorists might target the New York City subway system:
An internal memo obtained by The Associated Press says the FBI has received a "plausible but unsubstantiated" report that al-Qaida terrorists in late September may have discussed attacking the subway system. ...

"We have no specific details to confirm that this plot has developed beyond aspirational planning, but we are issuing this warning out of concern that such an attack could possibly be conducted during the forthcoming holiday season," according to the warning dated Tuesday.
Got that: "plausible but unsubstantiated," "may have discussed attacking the subway system," "specific details to confirm that this plot has developed beyond aspirational planning," "attack could possibly be conducted," "it's plausible, but there's no evidence yet that it's in the process of being carried out."

I have no specific details, but I want to warn everybody today that fiery rain might fall from the sky. Terrorists may have discussed this sort of tactic, possibly at one of their tequila-fueled aspirational planning sessions. While there is no evidence yet that the plan in the process of being carried out, I want to be extra-cautious this holiday season. Ho ho ho.
What I find deeply troubling is that the government issued this warning about this "plausible but unsubstantiated" threat, while at the same time they were oblivious of the upcoming terrorist attack that occurred the very next day in India. It reminds me of just prior to September 11, 2001, when the government warned of possible terrorist attacks somewhere in Asia, but completely missed the actual attack that would occur days later in the U.S.

Tuesday, November 25, 2008

Fiscal stimulus badly needed yesterday!

Congress is fiddling while the economy is quickly getting worse:
As The Economist went to press, a Democrat-backed plan for a $100 billion fiscal boost, which included a modest rise in infrastructure spending and some aid to the states as well as a misguided bail-out for Detroit’s carmakers, seemed doomed in the Senate. The lame-duck Congress looks set to deliver nothing more than an extension of unemployment benefits. Serious debate about a broader stimulus has been put off until the new president and legislature take over in January.

That may not seem long. But given the deterioration of America’s economy in recent weeks, the delay is dangerous. ...

Normally spending splurges are to be distrusted, but the scale of this downturn argues for bold budgetary action. Large sums will be needed: at least $300 billion, or more than 2% of GDP. And with so swift a decline, speed is of the essence...

Cushioning America’s downturn will demand fiscal boldness, but that does not mean eschewing simple, speedy solutions. Quick and plentiful aid to the states is one of the best.

Barack Obama weak on (Internet) security

From The Register:
A cursory look at and MyBarackObama reveal enough amateur mistakes to make even the most ardent supporters wonder just who in the heck is in charge of security. For one, the content management system for both of the sites is easily accessible to anyone. And as far as we can tell, neither page is protected by secure sockets layer — the "s" following a web address's "http" that assures you the connection is encrypted.

Security 101 would dictate that pages this sensitive should be restricted to select internet protocol addresses, or at the very least, encrypted to prevent so-called man-in-the-middle attacks. There are no such protections on or MyBarackObama, the latter suggesting that this lack of attention to security has been allowed to persist for some time now.

Even more troubling is the discovery that administrative pages for both sites are linked to Google Analytics. This is a hard configuration to make sense of. It means that Google, a private company with important business before the US government, has complete administrative access to one of the government's most important websites. It would also appear to run contrary to this privacy policy pledging "not to make Personal Information available to anyone other than our employees, staff, and agents."

The failure of Obama's webmasters to follow anything remotely like best practices is more than a little troubling because it suggests they don't fully grasp the security realities of living in a Web 2.0 world.

Monday, November 24, 2008

The case for an automaker bailout

Video: While I oppose an automaker bailout, here Morningstar analysts make the case in favor of an automaker bailout.

Nobel Laureate Paul Krugman makes his case:

The case against a bailout is here.

100 companies may not qualify for continued inclusion in S&P 500

24/7 Wall Street says 10% of DJIA stocks may get the boot. Even worse:
It looks on the surface like the S&P 500 has some dilemmas of its own. Based upon market caps and prices, something to the tune of almost 100 companies might not qualify. The good news is that there might not be enough replacements for them to get the boot.
With good news like that, who needs bad news?

Hat tip: Tastylunch's CAPS Blog

Sunday, November 23, 2008

Barack Obama: School choice hypocrite

Like the Clintons before them, the Obamas prove to be school choice hypocrites, favoring school choice for wealthy people like themselves but favoring underperforming public school monopolies for the poor and middle class:
The Associated Press is reporting that the Obamas have chosen the Sidwell Friends School in Washington for daughters Sasha, seven years old, and Malia, 10. The private Quaker school’s alumni include former presidential offspring Chelsea Clinton and Tricia Nixon Cox, as well as a former princess of Japan.

Sidwell Friends beat out another elite school, Georgetown Day School. Michelle Obama and her daughters reportedly visited both schools on Tuesday. Sidwell, with campuses in Northwest Washington and Bethesda, Md., is home to nearly 1,100 students from pre-Kindergarten to 12th grade. Tuition at the lower school is $28,442 and $29,442 at the middle and upper schools.

A spokeswoman for Michelle Obama was quoted by AP as saying the Obamas feel Sidwell provides “the best fit for what their daughters need now,” including being able to accommodate security and privacy concerns. The Obama girls have also become good friends with Vice President-elect Joe Biden’s grandchildren, who attend the school.

The Obama family also discussed public school options for the girls, according to Washington Mayor Adrian Fenty. The girls currently attend the private University of Chicago Laboratory Schools located in Chicago’s South Side.
Cato @ Liberty points out the hypocrisy:
A few months ago, Barack Obama told a gathering of the American Federation of Teachers that he opposes private school choice programs, adding: “We need to focus on fixing and improving our public schools; not throwing our hands up and walking away from them.”

It’s not clear whether or not the president-elect will be able to fix our public schools, and I don’t know if he’s thrown up his hands, but he and his two daughters have just walked away from the public schools. Again. When they move from Chicago to D.C., Malia and Sasha Obama will be moving from the prestigious private Lab School to the prestigious private Sidwell Friends school — Chelsea Clinton’s old stomping ground.

Not that there’s anything wrong with that. In fact, it’s wonderful that the Obamas had such a broad range of public and private school choices available to them. What’s puzzling is that the president-elect opposes programs that would bring that same easy choice of schools within reach of families who lack his personal wealth.
The reason one should favor school choice is that our public school system is a monopoly and monopolies tend to be inefficient. Competition forces institutions to improve or die. Monopoly allows them to stagnate.

America's colleges have to compete with each other, so it is not surprising that our college system is widely considered the best in the world. Our local public school monopolies face almost no competition, so it should not be surprising that America's public school students generally rank quite low on international tests.

With regards to different standards for the rich and powerful, Barack Obama is not change we can believe in. Instead, he's just more of the same.

Buffett says Detroit automakers must change

Warren Buffett gave his thoughts on the automakers in a recent interview:
Billionaire investor Warren Buffett said U.S. automakers need a new business model to better compete, whether it takes bankruptcy or a government bailout to achieve.

Buffett said any automaker bailout package should include a business solution and be negotiated by the president, not Congress.

The government should insist top executives at Ford Motor Co., General Motors Corp. and Chrysler LLC invest a significant percentage of their own net worth in the Detroit-based companies, Buffett said, ensuring both executives and taxpayers would share in any profits or losses.

Buffett said the government should be able to drive a deal like one of the ones he makes when Berkshire buys businesses, because automakers appear on the brink of bankruptcy.

Buffett said he'd tell the auto executives, "'We'll give you more upside [than bankruptcy], but you're going to lose if we lose."'

Bankruptcy would be a poor solution for the auto industry, Buffett said, so he hopes a better way can be found to work out the union contracts and other issues the companies face.

Saturday, November 22, 2008

Barack Obama and counter-terrorism

The Foreign Policy Association's terrorism blog critiques Barack Obama's anti-terrorism stances:
Here is what I know of Obama’s view of the ‘War on Terror’ and International Conflict.
  1. He has opposed the War in Iraq from the on-set, yet now hails the surge as a success and will defer further judgments on troop deployment to ‘commanders on the ground’.
  2. While opposing the War in Iraq, he has frequently advocated intervention of some sort in troubled Darfur.
  3. He opposes the torture or mistreatment of military detainees.
  4. Obama would like to see an increased American presence in Afghanistan.
  5. He is willing to launch military strikes within other nations should they be unable or unwilling to respond to terror-specific intelligence.
  6. He views an unstable Pakistan and a nuclear-armed Iran as grave dangers to the international community and the United States.
  7. In broad terms he views terror as an issue of law enforcement, not military engagement, although some military intervention is necessary.
All of this is sensible, rational, and pragmatic. However, like the Clinton years, it lacks a cohesiveness and clarity that is beneficial when launching a renewed terror strategy. Clinton’s biggest flaw was his lack of an over-arching principle. Bush the elder had his ‘new world order’, yet Clinton took every issue on a case-by-case basis. Engage in Africa for one conflict, yet ignore the other. Attack bin Laden for one bombing, yet ignore other atrocities. For better or worse, the Bush administration understood their position and was able to execute their policy with effectiveness. The American people too, understood the actions taken by their leaders.

Obama runs the very real risk of having to explain every single action he takes, defend each and every decision, and waste time explaining to a weary world why America has gone down her specific path.

Friday, November 21, 2008

An FDIC seizure of Citigroup could doom the financial system

Morningstar explains how nationalization of Citigroup could make things very bad for Bank of America and JPMorgan Chase:

And the Bronte Capital blog has this to say:
If Sheila Bair was to confiscate a really big bank and cancel all the parent company liabilities then no other bank in America would be able to raise parent company debt. Indeed I think that has been the case ever since Sheila Bair did the reckless and irresponsible takeover of Washington Mutual… but it would certainly be the case if the parent company liabilities of Citigroup were cancelled.

And that would be a huge decision indeed because then every bank with parent company liabilities (meaning almost every bank in North America) would fail.
Update to the video: It turns out to be a $20 billion dollar check.

More stocks down 85% than up at all this year

Floyd Norris points out how bad the stock market is:
There are only a handful of stocks that are up this year. I just checked the Russell 3,000, which now has 2,938 stocks in it. There are more stocks in it (218) that are down more than 85 percent this year than there are stocks (179) that are up for the year.
He also provides three possible explanations for the huge decline:
There are three reasons that come to mind as possible explanations for such an overwhelming bear market.

1. The world financial system is in deep trouble, and it is integrated, so that the credit crunch is virtually universal.

2. The world recession is hitting everywhere. Even China is now worried, and with good reason, as unemployment rises.

3. In an integrated global financial system, all asset prices were pumped up by excessive leverage, and all are now falling amid urgent deleveraging. The widely feared selling by over-indebted hedge funds is part of this, but not all of it.

I think all of them help to explain what is happening.

If you believe the third one is important, and that we are not entering into Great Depression II, then that should be creating bargains for wide investors who can wait out the recovery without worrying about margin calls.
Hat tip: Tastylunch's CAPS Blog

Suggested human rights goals for the Obama administration

Human Rights Watch suggests a "Human Rights Agenda for the New Administration":
  1. Ensure that US Counterterrorism Efforts Comply with International Human Rights and Humanitarian Law
  2. Make Human Rights a Central Pillar of US Foreign Policy
  3. Rejoin the International Human Rights Community
  4. Demonstrate Leadership on Human Rights Issues at Home

Thursday, November 20, 2008

Don't panic about the stock market...

Paul Krugman says don't panic about the stock market, because there are worse things to panic about—like the bond market!

Is deflation a threat to the economy?

Video: Morningstar analysts discuss the possibility of deflation and whether it is a threat to the U.S. economy.

Advice for the president-elect

Harvard economist Greg Mankiw has advice for President-Elect Obama:
Listen to your economists. During the campaign you assembled an impressive team of economic advisers from the nation’s top universities, including Austan Goolsbee from University of Chicago and David Cutler and Jeff Liebman from Harvard. ... Pay close attention to what they have to say. They will often give you advice quite different from what you will hear from congressional leaders Nancy Pelosi and Harry Reid. ...

Embrace some Republican ideas. No party has a monopoly on truth. Be ready to take the best Republican policy proposals and make them your own, as Bill Clinton did with welfare reform in 1996. ...

Pay attention to the government’s budget constraint. The nation faces a long-term imbalance between government spending and tax revenue. The fundamental problem is that the federal government has promised the elderly more benefits than the tax system can support. This fiscal imbalance will become acute as more baby boomers retire and start collecting Social Security and Medicare. ...

Recognize your past mistakes. As a new senator, you voted along predictable left-wing lines. As president, you will need a more eclectic, nuanced approach.

Wednesday, November 19, 2008

Middle class economic stagnation is a myth

A new study by the Minneapolis Fed says the myth of long-term middle class economic stagnation is due to flaws in measurement:
  • The U.S. Census Bureau reports that median household income stagnated from 1976 to 2006, growing by only 18 percent. In contrast, data from the Bureau of Economic Analysis indicate that income per person was up 80 percent.
  • Three data issues adversely impact reported median household income gains: the choice of price index, a change in the mix of household types and the measure of income used.
  • After adjusting the Census data for these three issues, inflation-adjusted median household income for most household types is seen to have increased by 44 percent to 62 percent from 1976 to 2006.

The claim that the standard of living of middle Americans has stagnated over the past generation is common. An accompanying assertion is that virtually all income growth over the past three decades bypassed middle America and accrued almost entirely to the rich.

The findings reported here...refute those claims. Careful analysis shows that the incomes of most types of middle American households have increased substantially over the past three decades. These results are consistent with recent research showing that the largest income increases occurred at the top end of the income distribution. But the outsized gains of the rich do not mean that middle America stagnated.
Hat tip: Greg Mankiw.

Tuesday, November 18, 2008

Automaker bankruptcy will lead to streamlined operations

Nobel Laureate Gary Becker opposes an automaker bailout:
The big three American auto producers General Motors, Ford, and Chrysler, are in terrible financial shape. They have asked the government for a bailout, and the Democratic leadership in Congress is eager to give them one. The United Auto Workers union was a strong supporter of President-elect Obama and of Democratic candidates.

These companies have lost tens of billions of dollars during the past few years, and they will shortly run out of cash. ... All three companies were heavily into producing trucks and SUV's when the sharp run up in gas prices induced consumers to shift away from these gas-guzzlers and toward smaller and more fuel-efficient cars. ...

If GM is not bailed out, the company claims it will be forced into bankruptcy within a few months, and Ford's situation is only slightly better. ...

Nevertheless, I believe bankruptcy is better than a bailout for American consumers and taxpayers. The main problem with American auto companies is that during the good times of the 1970s, 1980s and 1990s, they made overly generous settlements with the United Auto workers (UAW) on wages, pensions, and health benefits. ...

It is not that cars cannot be produced profitably with American workers: the American plants of Toyota and other Japanese companies, and of German auto manufacturers, have been profitable for many years. The foreign companies have achieved this mainly by setting up their factories in Southern and border states where they could avoid the UAW, and thereby introduce efficient methods of production. Their workers have been paid well but not excessively...while still maintaining good morale among their employees. ... As a result of lower costs, better management, and less hindrance from work rules imposed by the UAW, about 1/3 of all cars produced in the US now come from foreign owned plants.

Bankruptcy would help GM and Ford become more competitive by abrogating significant parts of their labor contracts with the UAW. ... Bankruptcy should also help bring the wage rates of GM and Ford in line with those of foreign producers in the US. ...

Bankruptcy may also force out the current management of GM and Ford. ... When a company consistently does badly while some of its competitors (like Toyota) are doing well, its time to fire the management team, and see if another team can do better.
Much of why the Big Three can't compete, summed up in a single graph courtesy of Mark J. Perry:

Felix Salmon is critical of Mark Perry's graph.

Update #2: Megan McArdle criticizes Felix Salmon's reasoning.

Monday, November 17, 2008

Auto manufacturing in the South remains strong

From what you hear in the press, you'd think automobile manufacturing was dying in the U.S. However, only the traditional Detroit automakers are in trouble. The foreign-owned auto manufacturing plants in the South are still going strong.
Activity in the Southern Automotive Corridor was surprisingly strong in September and October as several new suppliers announced new and expanded projects. Almost all of the deals announced in the South over the last 45-60 days were made by foreign-owned companies and only a handful were related to the three new assembly plants currently being built in Mississippi, Georgia and Tennessee.

While auto sales may be soft in the South as they are everywhere, you wouldn't know it by what is taking place in the region. New suppliers are breaking ground on new facilities and it should be noted that there hasn't been a time in Southern Automotive Corridor history when three automotive assembly plants were under construction at the same time, which is the case today. Kia and Toyota continue to complete their plants in Georgia and Mississippi and Volkswagen's construction of its plant near Chattanooga has begun.

There are other clues that automotive related companies are readying for an industry recovery in 2009 and 2010. Of the top 10 deals announced in the South during the summer 2008 quarter — one of the worst quarters ever experienced by the auto industry — three were automotive industry projects (Integrity Automotive/Zap – 4,000 new jobs in Kentucky; Volkswagen – 2,000 new jobs in Tennessee; and Glovis – 600 new jobs in Georgia). In fact, those three projects alone will account for over 6,500 new jobs in the region. And with this October 31 report, we have found almost 20 new or expanded automotive-related deals in the region over the last month or so. That, by the way, is only about 10 percent below the norm for a 45-day period in the Southern Automotive Corridor.

General Wesley Clark's bailout argument is fallacious

General Wesley Clark makes a sweet-sounding, but fallacious, argument in favor of bailing out Detroit automakers:
AMERICA’S automobile industry is in desperate trouble. Financial instability, the credit squeeze and closed capital markets are hurting domestic automakers, while decades of competition from foreign producers have eroded market share and consumer loyalty. Some economists question the wisdom of Washington’s intervening to help the Big Three, arguing that the automakers should pay the price for their own mistakes or that the market will correct itself. But we must act: aiding the American automobile industry is not only an economic imperative, but also a national security imperative.

When President Dwight Eisenhower observed that America’s greatest strength wasn’t its military, but its economy, he must have had companies like General Motors and Ford in mind. Sitting atop a vast pyramid of tool makers, steel producers, fabricators and component manufacturers, these companies not only produced the tanks and trucks that helped win World War II, but also lent their technology to aircraft and ship manufacturing. The United States truly became the arsenal of democracy.

During the 1950s, advances in aviation, missiles, satellites and electronics made Detroit seem a little old-fashioned in dealing with the threat of the Soviet Union. The Army’s requests for new trucks and other basic transportation usually came out a loser in budget battles against missile technology and new modifications for the latest supersonic jet fighter. Not only were airplanes far sexier but they also counted as part of our military “tooth,” while much of the land forces’ needs were “tail.” And in those days, “more teeth, less tail” had become a key concept in military spending.

But in 1991, the Persian Gulf war demonstrated the awesome utility of American land power, and the Humvee (and its civilian version, the Hummer) became a star. Likewise, the ubiquitous homemade bombs of the current Iraq insurgency have led to the development of innovative armor-protected wheeled vehicles for American forces, as well as improvements in our fleets of Humvees, tanks, armored fighting vehicles, trucks and cargo carriers.

In a little more than a year, the Army has procured and fielded in Iraq more than a thousand so-called mine-resistant ambush-protected vehicles. The lives of hundreds of soldiers and marines have been saved, and their tasks made more achievable, by the efforts of the American automotive industry. And unlike in World War II, America didn’t have to divert much civilian capacity to meet these military needs. Without a vigorous automotive sector, those needs could not have been quickly met.

More challenges lie ahead for our military, and to meet them we need a strong industrial base.
Bankruptcy does not mean ceasing operations. Chapter 11 bankruptcy is designed to help companies streamline operations and become profitable again. GM, Ford, and Chrysler want bailout money so they can avoid bankruptcy.

If any one of the Big Three did cease operations it would reduce competition, thus increasing revenues for the remaining two.

Furthermore, General Wesley Clark doesn't seem to realize that there are plenty of automobile manufacturing plants in the United States owned by companies like Toyota, Nissan, Kia, Volkswagen, BMW, etc. If all of the Big Three go under, foreign automakers will gain larger market share and that will require them to build more automobile plants in the Mississippi River Valley.

Finally, Japan buys their air force tanker aircraft from the United States (Boeing). Why can't we buy military automobiles from Japan and our NATO allies?

Sunday, November 16, 2008

An automaker bailout is harmful in the long run

Daniel J. Mitchell asks us to say "no" to an automaker bailout:
General Motors, Ford, Chrysler and the United Auto Workers union are pouring millions of dollars into a lobbying campaign for a taxpayer bailout. ...

A taxpayer bailout would be a terrible mistake. It would subsidize the shoddy management practices of the corporate bureaucrats at General Motors, Ford and Chrysler, and it would reward the intransigent union bosses who have made [them] synonymous with inflexible and anti-competitive work rules.

Perhaps most important, though, is that a bailout would be bad for the long-term health of the American auto industry. It would discriminate against the 113,000 Americans who have highly-coveted jobs building cars for Nissan, BMW and other auto companies that happen to be headquartered in other nations.

These companies demonstrate that it is possible to build cars in America and make money. Putting them at a competitive disadvantage with handouts for the U.S.-headquartered companies would be highly unjust.

A bailout also would be bad for General Motors, Ford and Chrysler. The so-called Big Three desperately need to fundamentally restructure their practices. More specifically, the car companies need to endure some short-term pain in order to restore long-term viability. But that won't happen if politicians raid the treasury. ...
  • A bailout will hurt the overall economy by misallocating resources. ...
  • A bailout will encourage other industries to seek taxpayer handouts. ...
  • A bailout is a perverse transfer from poor taxpayers to rich taxpayers. ...
Chapter 11 protection may be precisely what is needed to put American auto companies back on the path to profitability. Bankruptcy laws specifically are designed to give companies an opportunity — under court supervision — to reduce costs and streamline operations.

Bankruptcy would not be popular in some quarters, to be sure. The bloated management structure would be streamlined and many overpaid executives would be unhappy about having to find new jobs.

The UAW would be equally upset, particularly since bankruptcy might force an end to extravagant pension benefits and inefficient workplace practices. But bankruptcy is akin to getting an alcoholic to put down the bottle. There clearly will be short-term discomfort, but compassionate people recognize that this is the best approach.

Retail sales will get worse

Economist Rebecca Wilder says retail sales will get worse.

Saturday, November 15, 2008

Treasury's proposed bailout of credit cards is not helpful

James Surowiecki criticizes the now proposed Treasury bailout of consumer debt:
There is no way that having the U.S. government subsidize credit-card lending makes sense. But yesterday Henry Paulson seemed to suggest that that’s what TARP funds would, among other things, now be used for. ...

What, exactly, is the harm that we’re trying to remedy by making it easier for people to use credit cards? That people aren’t shelling out enough of their money to cover exorbitant interest payments? Are we really saying that the wellbeing of the U.S. economy depends so much on people borrowing money at fifteen to nineteen per cent that we’re willing to spend taxpayer money subsidizing that market? I’m sorry, but there’s no way that’s true. ...

There are lots of things the government can and should be spending its money on to get the economy moving again. But on any list of those things, subsidizing credit-card issuance has to be right near the bottom.

A humorous example of international diplomacy

From Chris Blattman's blog:
"I am going to hang Saakashvili by the balls," Putin told Sarkozy, referring to Georgian President Mikheil Saakashvili.

Mr Sarkozy responded: "Hang him?"

"Why not? The Americans hanged Saddam Hussein," said Mr Putin.

Mr Sarkozy replied, using the familiar "tu": "Yes but do you want to end up like [President] Bush?"

Mr Putin was briefly lost for words, then replied: "Ah, you have scored a point there."

Friday, November 14, 2008

The Israeli settlements must go

Israeli President and former Prime Minister Shimon Peres says the settlements must go.

Those in government still don't get it!

Tim Duy writes:
From the wires:
Such comments always leave me with a sick feeling in my stomach — if policymakers are waiting for the housing market to rebound, they had better be prepared for a long wait. Sort of liking waiting for the NASDAQ to revisit the 5,000 mark. I think the biggest potential for policy error lies in maintaining the delusion that preventing housing, and by extension, consumer spending, from adjusting is central to fixing the nation’s economy. Policy would be best focused on supporting the inevitable transition away from debt-supported consumer dependent growth dynamic.

Housing prices are falling because fundamentally the price of housing became unaffordable. The stream of expected household income necessary to repay the loans exceeded the capacity of household budgets. It is that simple – there is no sense in paying $3,000 a month in mortgage payments on property with the rental equivalent of $1,000. To be sure, a homeowner could justify such a purchase as long as they thought they were guaranteed a 15% annual risk free return. But who, other than realtors and mortgage brokers, remain under that delusion?

Similarly, I find programs that purport to “help” homeowners by reducing their mortgage payments of questionable value. Lowering your mortgage payment to 38% of income might sound like a good deal – but if you have no equity, you do not really own anything. You are just a renter by another name. So if your final mortgage payment significantly exceeds the rental equivalent, has the government really made you better off? And if, as I suspect, homeowner bailouts will not stem price declines, the program recipient could soon find themselves with negative equity again in a matter of months. If you really wanted to help underwater homeowners, you would bring their payments in line with the rental equivalent. I suspect this would be extremely costly.
Again, price and affordability are inversely related. Those who want to prop up home prices essentially want unaffordable housing.

Thursday, November 13, 2008

Terrorist behavior

How terrorists prepare and where they strike, by Prof. Brent Smith of the University of Arkansas:
Research has shown that traditional criminals are spontaneous, but terrorists seem to go to great lengths preparing for their attacks — and may commit other crimes while doing so. How long does this planning take? And do different types of terrorist groups vary in preparation time? ...

According to our analysis, almost half (44 percent) of all terrorists examined lived within 30 miles of their targets. ... When the types of terrorist groups are examined separately, however, the findings are much different.

International terrorists lived relatively near their targets, whereas right-wing terrorists lived in rural areas but selected targets reflecting the “pollutants of urban life” in nearby cities. Terrorists most commonly prepared for their attacks with surveillance and intelligence gathering, robberies and thefts to raise funding for the group, weapons violations, and bomb manufacturing. ...

Although the terrorists studied committed most of their preparatory offenses near their homes, they conducted robberies, burglaries and thefts much farther away — an average of 429 miles from home. This suggests that most environmental and international terrorists live near the selected target and conduct surveillance and other general preparation near their homes and the eventual location of the attack. Major crimes to procure funding for the group — like thefts, robberies and burglaries — however, are intentionally committed many miles away to avoid drawing attention to the group’s location and target choice. ...

We found that preparations generally began less than six months before the attack and ended with a flurry of actions a day or so before. This pattern varied by group type. Single-issue and right-wing terrorists engaged in substantially less preparatory crime over a shorter period... The planning cycle of international terrorists tended to be longer. ...

International terrorists, on the other hand, engaged in nearly three times as many preparatory acts per incident as their environmental counterparts. This may be due to the larger number of people usually involved in international incidents, the size and scope of the planned incident or simply a longer planning cycle. Comparing the 10 international terrorist incidents that occurred on American soil, we found that the average planning cycle for international terrorists was 92 days, as opposed to 14 days for environmental terrorists. Averages can be misleading, however, because of significant outliers...

For law enforcement agencies, the implications of these patterns are significant. Committing an act of terrorism will usually involve local preparations. Although much of this conduct will not necessarily be criminal, early intelligence may give law enforcement the opportunity to stop the terrorists before an incident occurs. Knowledge of the threat — for example, understanding how long environmental or international terrorists prepare for their attacks — will affect the manner in which local officials respond. Identifying preparatory actions by environmental extremists may signal that an attack is imminent, whereas similar behavior by an international group might suggest that an attack is still several months away.

Understanding that most terrorists “act locally” can be important to know as investigative agencies seek to prevent terrorism and arrest perpetrators. These local patterns may be used by agencies to more efficiently patrol known, high-risk target areas and gather intelligence on suspected actions within a specific distance from potential targets.

Wednesday, November 12, 2008

America's two auto industries

Via Barry Ritholtz:
Fantastic article in the WSJ today about the pending bailout plan to GM, Ford and Chrysler.
America has two auto industries. The one represented by GM, Ford and Chrysler is Midwestern, unionized, burdened with massive obligations to retirees, and shackled to marketing and product strategies that have roots reaching back to the early 1900s.

The other American auto industry is largely Southern and non-union, owes relatively little to the few retirees it has, and enjoys a variety of advantages because its Japanese, European and Korean owners launched operations in this country relatively recently. Their factories are newer, their brand images and marketing strategies are more coherent — Toyota uses three brands in the U.S. to GM’s eight — and they have cars designed for the competitive global market that exists today. ...

The New American auto industry employs about 113,000 people... The Detroit Three employ more than 200,000 people directly, and sustain nearly 3 million more indirectly.

Tuesday, November 11, 2008

Election of Obama reduces flag burning abroad

Johann Hari paints a picture of how the election of Barack Obama has changed the world's view of the United States:
I spent yesterday trawling the shops in here in London for Stars and Stripes to decorate my apartment for my Presidential election party — and across the city they were all sold out. One shopkeeper in the East End told me: "For the past eight years we've done a big trade in American flags because people buy them to burn them. This is the first time I can remember people buying them because they actually want to wave them."

Monday, November 10, 2008

Sarah Palin correctly blames Bush for election loss

Sarah Palin is not as dumb as some Republican political weasels claim. She knows why she lost:
“I think the Republican ticket represented too much of the status quo, too much of what had gone on in these last eight years, that Americans were kind of shaking their heads like going, wait a minute, how did we run up a $10 trillion debt in a Republican administration?” Palin told the Anchorage Daily News and Alaska’s KTUU Channel 2.

“How have there been blunders with war strategy under a Republican administration? If we're talking change, we want to get far away from what it was that the present administration represented and that is to a great degree what the Republican Party at the time had been representing. So people desiring change I think went as far from the administration that is presently seated as they could. It's amazing that we did as well as we did.”

Buffett stocks on sale

Warren Buffett is widely regarded as the world's greatest investor. His basic strategy is to buy great companies at low prices, and then hold them forever. Many investors try to emulate Buffett's investing method when making their own stock picks, but few can match Buffett's success.

However, one investing strategy available to ordinary investors is buying stocks that Buffett actually owns, when they fall below his original purchase price. Luckily, he lists his major holdings in Berkshire Hathaway's annual letter to shareholders. With a little basic math, you can figure out how much he paid for the stocks he bought.

Today, with the recent stock market sell-off, many of Buffett's holdings are selling for less than what he paid for them. This gives you the opportunity to buy them on sale. I have calculated the purchase price for his major holdings. Here are the ones that are currently on sale.

Stocks currently selling below Buffett's purchase price, and the price Buffett paid:
  • ConocoPhillips (COP) — $59.34
  • Kraft Foods (KFT) — $33.38
  • Johnson & Johnson (JNJ) — $61.35
  • Sanofi Aventis (SNY) — $43.21
  • US Bancorp (USB) — $32.80
  • USG Corporation (USG) — $31.40
  • Wells Fargo (WFC) — $34.96
Stocks currently selling slightly above Buffett's purchase price, and the price Buffett paid:
  • Burlington Northern Santa Fe (BNI) — $77.78
  • Procter & Gamble (PG) — $61.14
  • Wal-Mart Stores (WMT) — $47.23
Although this second group is slightly above his purchase price, a single down day in the stock market could push some of them below his purchase price.

Honestly, I don't know what he's doing owning USG. It's a no-growth company, paying no dividends, tied to the housing market. The others, however, would likely serve you well.

While the prices above are what he paid, according to his letters to shareholders, he also just recently bought more BNI at $79.65 per share.

Sunday, November 9, 2008

Saturday, November 8, 2008

What didn't cause the housing bubble

Via EconLog: Two recent popular scapegoats are not responsible for the housing bubble:
Robert Shiller wrote,
Dramatic home price booms since the late 1990s have been in evidence in Australia, Canada, China, France, India, Ireland, Italy, Korea, Russia, Spain, the United Kingdom, and the United States, among other countries.
He has charts suggesting that the Netherlands and Norway experienced greater booms than the United States. In his book The Subprime Solution, he has a chart that shows London house prices rising faster than prices in Boston.

What makes this a difficult fact is that so many explanations of the house price boom are U.S.-specific. It is hard to argue that the Community Reinvestment Act or the repeal of Glass-Steagall are what account for the home price booms in Norway or Spain.

Wednesday, November 5, 2008

Top contenders for U.S. Treasury Secretary

CNBC does some pondering on who may be the next Secretary of the Treasury under President Obama.

Here is my own list of top contenders:
  • Tim Geithner, President of the Federal Reserve Bank of New York; believed to be a Democrat.
  • Larry Summers, Harvard economist, former President of Harvard University, and former U.S. Treasury Secretary under Bill Clinton.
  • Paul Volcker, the best Fed Chairman in history; Alan Greenspan's predecessor; appointed under Carter and reappointed under Reagan. He's the guy who ended the stagflation of the 1970s. Being a decade older than John McCain, his biggest obstacle is his age.
  • Jon Corzine, Democratic Governor of New Jersey, former U.S. Senator, and former CEO of Goldman Sachs.
  • Jamie Dimon, widely-respected CEO of JPMorgan; a financial contributor to many Democratic candidates.

Monday, November 3, 2008

Milton Friedman on the Great Depression

Video: The late Milton Friedman, a Nobel Prize–winning economist, explains a major cause of the Great Depression:

Friday, October 31, 2008

Canadian economists urge action on climate change

Canada's economists have written An Open Letter to the Leaders of Canada’s Federal Political Parties regarding climate change policy.

Here is a summary of their letter:
What Needs to be Done
  1. Canada needs to act on climate change now.
  2. Any substantive action will involve economic costs.
  3. These economic impacts cannot be an excuse for inaction.
  4. Pricing carbon is the best approach from an economic perspective.
    1. Pricing allows each business and family to choose the response that is best and most efficient for them.
    2. Pricing induces innovation.
    3. Carbon is almost certainly under-priced right now.
  5. Regulation tends to be the most expensive way to meet a given climate change goal.
  6. A carbon tax has the advantage of providing certainty in the price of carbon.
  7. A cap and trade system provides certainty on the quantity of carbon emitted, but not on the price of carbon and can be a highly complex policy to implement.
  8. Policies that impose costs on producers (big or small) affect consumers.
  9. Price mechanisms can be regressive and our policy should address this.
  10. A pricing mechanism can allow other taxes to be reduced and provide an opportunity to improve the tax system.

Friday, October 24, 2008

Roubini predicts two-year recession

The US economy is entering a two-year recession that will be longer and deeper than previously feared, said Nouriel Roubini, a well-known economist and professor at New York University.

"I believe we're going to have two years of negative economic growth," Roubini said on CNBC. "The last two recessions lasted only eight months each ... This time around this is going to be three times as long, three times as deep. This is going to be the worst recession the US has experienced since the 1980s."

A slowdown in global economic growth combined with continued problems in credit markets and housing will haunt the economy, Roubini said. ...

"I believe that the worst is still ahead of us. I think that the next few weeks and months are going to be negative surprises on the economy," he said. ...

"But we're going to have a severe recession. If this is going to be a two-year recession, that's not priced by the market. And there are significant downside risks for the stock market and credit markets in my view," he said. "Yes, we're going to avoid the Great Depression, we're going to avoid a 10-year stagnation. That's not going to be the case."
Notice that he predicts the worst recession since the 1980s, not the worst since the Great Depression. When economists say that this is the worst financial crisis since the Great Depression, many economically-challenged journalists incorrectly report that this is the worst economic crisis since the Great Depression. A financial crisis (affecting the financial system) and an economic crisis (affecting the broader economy) are not the same.

Wednesday, October 22, 2008

Deregulation didn't cause the financial crisis

Democrats, and the Democrat-friendly press, have been very eager to blame the financial crisis on deregulation. However, Wharton Business School finance professor Jack Guttentag says deregulation didn't cause the financial crisis.
Deregulation, meaning the scrapping of existing regulations, was not a factor in the crisis. The only significant financial deregulation in the past three decades applied to commercial banks. Restrictions on where they could have branches and on their involvement in investment banking were both removed. Most economists, including me, believe that these actions made the banks stronger than they would have been otherwise.

Regulation in itself is a weak defense against financial crises. One major reason is that it tends to look backward, similar to generals fighting the last war. ...

Regulators have no better foresight than do the firms they regulate. Both use statistical models based on experience. A change in the underlying structure of the economy can make such history irrelevant, which is exactly what has happened. Nobody anticipated the severity of the current crisis because, relative to the past, it is off the chart. ...

Can we prevent this sort of problem from happening again? Yes, but the next crisis will almost certainly be different.
Remember that the next time you see CNN blaming Phil Gramm for this mess, without any hard evidence. I dislike Phil Gramm, but he is not responsible for the current troubles.

S&P's recession forecast

In the current edition of The Outlook, Standard and Poors presents its forecast for the recession (source offline; no link available):
The economy will likely suffer a moderate, but long recession, and a sluggish recovery, according to S&P Economics. From the December 2007 peak to a trough in May 2009, this expected 17-month recession would be longer than the 50-year average of 10.7 months, and near the longest recessions of 1975 and 1982. ...

We’re forecasting negative gross domestic product (GDP) growth for the fourth quarter of 2008 and the first half of 2009 for a total decline of 0.9%. While business tax credits should likely provide some boost to the fourth quarter, borrowing restrictions will mean that boost will be smaller than we originally thought.

Still, this should be a moderate recession. Unemployment will likely climb to 7.5% by summer 2009 from its March 2007 low of 4.4%. The S&P 500 dropped nearly 40% through October 10, near the historical average decline of 36% during a recession. As stock prices normally lead the economy by three to six months, they should bottom in the fourth quarter.

The Fed chopped the Fed Funds rate to 1.5% from 5.25% last September. We expect the central bank to remain on hold until the recession is over before raising rates in the fall of 2009. The 10-year Treasury yield dropped to 3.8% from a peak of 4.5% last summer. However, the cost of funds for businesses and individuals has risen due to the credit crunch.

The fiscal stimulus package will likely bring the fiscal 2008 federal deficit slightly above the 2004 record of $413 billion. We expect the record to easily be broken next year, with a deficit exceeding $700 billion, depending on how the Troubled Asset Relief Plan is treated.
They also project a 30% average drop in home prices, peak to trough.

Tuesday, October 21, 2008

Investing advice from Uncle Bob

My Uncle Bob* used to work on Wall Street. Twenty-one years ago, he had completely avoided the 1987 stock market crash by pulling completely out of the market months earlier.

Last year, on August 14, 2007, he sent an email to my cousins and me warning about the credit crunch. He warned us to be cautious, conservative, and avoid financials. He rarely sends out investment advice, so his email of warning was a rare and timely event. In retrospect, he wasn't bearish enough.
For the first time since 1987, I've become a bit of a bear, though nowhere near as bearish as I was back then.

The markets continue to be easily rattled, and the Fed has stepped in very significantly because it is worried. So what does one do with one's investment portfolio at a time like this?

Be cautious and conservative. There likely will be a flight to quality: be in large cap, high dividend yielding U.S. and European stocks (but not banks and financial institutions) or mutual funds and money market funds. Bonds and bond funds are a possibility, but at some point interest rates will start going up, at which point the bonds will lose value, so money market funds yielding 4.8% are safer than longer term bonds yielding only slightly more (i.e. 5% to 6%).

I'd ease up on emerging markets, which has been the place to be for the last four and a half years, and small cap stocks or funds (especially small cap with low or no dividends).

Unlike 1987, when I was bearish because of over-valuation in the markets, this time I'm bearish because of an impending credit crunch. So it's okay to remain in the S&P 500 index, which is large cap and will be among the last to fall if things really get ugly. Also, this isn't apt to last a long time, probably only a month or two. As the credit crunch subsides, the markets will strengthen and then one will want to be in equities, which continue to be fairly valued (perhaps even slightly undervalued).

So hang in there, but get rid of the riskier holdings.
A week-and-a-half ago, I got another email from him. Now he is very bullish.
I thought I should let you know that I think we are very near the market bottom. I have been cranking numbers all morning. From the high a year ago, the Dow is off 40.3% and the S&P 500 is off 42.5%. Of the 16 recessions in the last century (since 1920; prior data unreliable), the Dow on average has fallen 31.4%. It has only fallen more than the current 40.3% four times (41.9% after the first World War, 45.1% in the 1973 oil crisis, 49.1% in 1937-8 and 89.2% in the Great Depression), so only once since the second world war.

So, unless we repeat the Great Depression, which seems highly unlikely given the steps the Fed and Treasury are taking in contrast to Hoover's do-nothing policy, we likely are at or very near the bottom for the stock market. I certainly wouldn't sell anything at these low levels, and I very timidly started buying on Friday. The safest move is investing in companies that can finance their own growth without having to access the credit market and are paying a substantial dividend (more than 3% yield).

I'm also a believer in buying TIPs (Treasury Inflation Protected Securities), as the Fed and Treasury actions seem likely to lead to inflation, though not everyone agrees with this. Vanguard has a fund that invests in these.

For you young guys, this is likely the buying opportunity of a lifetime!
* Names have been changed to protect the anonymous.

Anna Schwartz criticizes Greenspan & Bernanke

Anna Schwartz, who along with Milton Friedman, wrote the classic economics book A Monetary History of the United States, is harshly critical of Bernanke, Paulson, and Greenspan.
If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.

The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it's so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.

Now, Alan Greenspan has issued an epilogue to his memoir, "Time of Turbulence," and it's about what's going on in the credit market. And he says, "Well, it's true that monetary policy was expansive. But there was nothing that a central bank could do in those circumstances. The market would have been very much displeased, if the Fed had tightened and crushed the boom. They would have felt that it wasn't just the boom in the assets that was being terminated."

[Greenspan] absolves himself. There was no way you could really terminate the boom because you'd be doing collateral damage to areas of the economy that you don't really want to damage.

I don't think that that's an adequate kind of response to those who argue that absent accommodative monetary policy, you would not have had this asset-price boom.

Bill Gross on the financial crisis

Morningstar recently asked bond king Bill Gross about his thoughts on the financial crisis:
Gross was encouraged that the passage of the Treasury Department's proposed $700 billion Troubled Asset Relief Program would pay off in a few ways. In particular, he was and remains confident that the acquisition of troubled mortgages by the United States government will ultimately produce profits for Uncle Sam. As long as the government picks them up at the right price—and there's a lot of room for error given how cheaply subprime mortgages are currently being marked—returns of 10% or more are well within the range of possibility according to his analysis.

But the main reason for his advocacy of the plan is that he believes it will be critical to avoiding the catastrophic outcomes of inaction that would have included massive job losses, plummeting economic productivity, and waves of bankruptcies. In fact, in the absence of an effective government policy response, Gross has described a "daisy chain" of trouble snowballing from margin calls, disappearing leverage, and institutional failures that would roll through the financial, housing, commercial real-estate, stock and bond markets. Meanwhile, he also sees the TARP as a catalyst that will put banks in a better position to make loans. ...

With the specter of such massive government spending on the horizon, though, we pressed Gross for more thoughts on the future. ... The U.S. has been living on the creation of more and more debt for some time, activity that can cheapen the value of our currency versus those of more fiscally restrained nations, notes Gross. Unless something changes, he argues that we can't expect the U.S. dollar to maintain long-term strength, a point that he and PIMCO have been making for many years.

Saturday, October 18, 2008

Warren Buffett says buy stocks now

Warren Buffett, the world's greatest investor, has a message for people who have become fearful of today's stock market: Buy stocks now!
I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.


A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.

Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over. ...

Over the long term, the stock market news will be good. ... Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset.... Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. ... Today my money and my mouth both say equities.

Friday, October 17, 2008

How bad will the recession be?

Video: Morningstar analysts discuss their expectations for the duration and magnitude of the current recession.

Thursday, October 16, 2008

The effect of lower oil prices on future oil exploration

From CNN Money:

With the price of oil falling below $75 a barrel Wednesday — down about 49% from last summer's highs — the industry's battle cry is sounding less and less convincing.

But falling oil prices are not the only reason why the air is coming out of the drilling balloon. The credit crunch has hampered oil company's ability to fund big-ticket drilling projects. Meanwhile, the prices that producers pay for raw materials and labor remain high.

"Any project that assumed oil would average $100 over the next 10 to 20 years is being seriously reconsidered at this time," said Richard Ward, senior cost analyst at IHS Cambridge Energy Research Associates (CERA).

As recently as July, tapping deep water sources and extracting crude from Canadian oil sands - two very expensive production methods - were seen as economically viable ways to deal with the energy crisis. At that time, the price of oil was above $140 a barrel.

Now that the price has fallen below $75 a barrel, and could go even lower, many experts say the future of these projects is uncertain.

Oil companies are quick to point out that big drilling projects are long-term investments, which are not based on today's oil price, but on what they think the price will be in the future.

Indeed, some deep water projects have a life span of 20 to 30 years. And some producers expect to be mining Canada's oil sands for up to 40 years.