The Europe's Woes and the solution

It's stiking how much trouble they are in and how no one says what the obvious solution is and, instead, keeps wringing hands about how this is so very complicated.

There are three possible ways the mess gets resolved:

1. They keep doing what they're doing and Ireland, Greece, Portugal and quite possible Spain and Italy default on their debt, causing a worldwide banking crisis all over again that will be too big to salvage even for the Fed.

2. PIIGS exit the EMU and reinstate their national currencies, which massively devalue, while the reinstated Deutche mark massively appreciates causing no end of trouble for Germany (see here).
3. There is a temporary spike in inflation in the Eurozone - let's say 10% for three years or so, which wipes off the real value of everyone's debt burden and causes some amount of economic distress for the savers and bondholders, but not any kind of massive Depression-scale disaster. German inflation would be especially high given that they are closest to full employment, and the result would be that Germany would be less export competetive vs other EU countries (same result as would happen under deflation in those other countries).

You can see that option 3 is clearly preferrable, from the point of view of economic turmoil and the amount of human suffering. And there are of course ways to achieve it, such as the helicopter drops of Euros that Bernanke wrote about but never got around to actually doing. And you can see why it's the solution that will never be chosen: in it, Germany suffers worse than anyone else, while in Option 1 everyone else suffers more than Germany.

What would a "non-artificial" growth look like

There is a crowd of people out there, generally in the Austrian Economics/Hayek/Austerians/"Conservatives", etc. camp that keep complaining about how any growth that we have now is "Artificial" because of the massive government intervention in the economy. This keeps annoying the crap out of me as the alernative to this alleged Artificiality is never presented. So I'm going to piece together what I think this crowd wants to see. They want the economy to grow:
- Without any deficit government spending
- Without debt-financed consumer spending
- With short term interest rates at fairly high levels (4-5% would probably be good enough)
- With CPI at or near 0%
- With the dollar stable or appreciating against all major currencies


That the above is mathematically impossible and in many instances contradictory is, of course, absolutely beside the point.

The must read cognitive science article of the day

Here. I wonder if one could persuade David Gal and Derek Rucker that they are dead wrong about everything.

Personally, I find the implications not entirely new, but depressing nonetheless. Winning arguments is not really about being right, but about pushing the right emotional buttons. Ugh.

Two brief thoughts on the foreclosure mess

My response to this money quote from a piece in the NY Observer worthy of reading in its entirety:

"The problem is they don't deserve to be in that place. They probably deserve to be there less than they used to," the source continued, referring to incomes lower now than they'd been when the loans were made in the first place. "You do need to foreclose, and you need to go back to people living in houses that are consistent with their income levels."

 - Dontcha love how responsibility is allocated here, without even a second thought of any joint culpability for those who made the loans and those who made the loans possible?
 - That last bit, where the people should live in houses that are consistent with their income levels, might be easier to achieve than before: without a clean title to permit unproblematic future transfers or indeed any purchase with mortgage (because no bank will lend without title insurance, and title insurance are getting out of this mess as fast as they can) the house isn't worth very much at all - and pretty soon the market-clearing price of the homes going through foreclosure will be pretty well in line with the people who are currently living in them.

One other little parting thought: I would encourage those whose houses are going through this messy and lengthy process to stay in their homes until all legal options are exhausted. The amount of time it'll take to sort through the mess, you might just be able to establish a clean title by adverse possession. In Florida, that would be take a mere 7 years.

The politics of it all

I love this paragraph in today's Peter Baker article for the NYTimes Magazine:

The policy criticism of Obama can be confusing and deeply contradictory — he is a liberal zealot, in the view of the right; a weak accommodationist, in the view of the left. He is an anticapitalist socialist who is too cozy with Wall Street, a weak-on-defense apologist for America who adopted Bush’s unrelenting antiterror tactics at the expense of civil liberties.

The whole piece is a worthy read, even if much ink has been spilled on the subject already. And I don't think I have anything new to say on the matter. On the whole, the politics has become deeply depressing  - there is very little intellectual curiosity once you step outside the blogosphere, and feels too much like we've entered a time when zealotry that only belongs to religions rules politics once again. Or is my memory too short and we've simply never left that time?

No ratings - no bonds?

This is a 'shocker'. WSJ reports that the rating agencies stopped slapping AAA on any random bond issuance, because under the FinReg that is about to be signed today, they would be "liable for the quality of their ratings, effective immediately."  This has pretty much stopped securitization dead in its tracks for the time being.

And what of the issuers and the underwriters, who still need to - what's that word - oh, right, "disclose" material information about the issuance? Well, nobody trusts them, obviously. And even if they did, people will need time to get used to the idea of actually reading prospectuses and offering memos as well as doing some digging into the credit quality of the issuer. I say, take your time boys, take your time.

But, sarcasm aside, what is really shocking about this story is this. The fact that people are no longer willing to scoop up some securitized awesomeness because the rating agencies no longer want to rate said awesomeness, leads me to conclude that people were still trusting the rating agencies to do their job, and were willing to buy and price bonds based on ratings.  WHY???

on multipliers

It seems that there Mark Zandi has come to be accepted as gospel truth on fiscal multipliers, at least as far as the left-leaning blogosphere goes. Ok, so according to him the multiplier for extending UI benefits is 1.61. That seems like a pretty clear cut argument to extend unemployment benefits.

Fine. I'm down with that program - do put me in the 'voted yes' column. But I can't get over the short-horizon nature of most of the stimulus programs we've undertaken, and 100% of the additional measures that are being discussed now out-loud. It's all been very deeply unsatisfying. Everything seems to be targeted at the most bang-for-the-buck now - and this applies to the more effective things, like UI insurance, as much as it does to the least efefctive things, like the housing tax credit.  These programs create sharp but short bursts of demand. When the money is gone - we're hitting the brick wall again as the demand has no momentum.  Perhaps in a slump as deep as we have now, you just can't get the economy back into the positive feedback loop of continuous growth with these teaspoons of caffeine - the best you can to is to lift the funk slightly for a few months or weeks, until everyone gets depressed again. Spending accelerates first, but then -  since the deep structural problems aren't fixed, since the consumer is still overleveraged and fundamentally cash strapped and since capacity utilization is still too low to generate business investment - it falls or stagnates like it seems to have now.

And in any event - do we really, and I mean fundamentally, want to drive the economy forward on the back of incessant consumption?  Even ignoring the fiscal impossibility of these credit-financed binges, is the social environment of increasing consumption year in and year out a Good Idea? And why are these questions so rarely asked or talked about?

Suppose, for example, that the relentless drive to give more and more people air conditioners, washers, dryers, dishwashers and cars results in a complete environmental catastrofuck, depriving billions from water and food supplies, creating endless suffering for billions more and wars that last for a few decades?  What do you say then? Do you say that economic growth now and the corresponding low unemployment rate is worth it?

Now, I am not saying "fuck economic growth, we'd be better off just slowly declining back into the stone age." Not me - no thanks: I like me some creature comforts as much as the next guy.  What I am saying is that we need to take a good hard look at the kind of prosperity that we are generating through the choices we make today. And since we happened to be in a situation where the government must play an unusually large economic role to drive growth, perhaps we can kindly ask the powers-that-be to put their philosopher-king hats on for a bit, and think about what it is that we should be spending money on, rather than just relapsing into doling out cash and perpetuating the status-quo of a consumption-driven economy.

But the post is titled "on multipliers." On that, all I have to say is: how short term are those multipliers? I can never believe that over the long haul something like the building of the interstate highway system has a lower multiplier than UI benefits.