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.