August break

August 4, 2011

I’m spending this week relaxing in Sweden, taking advantage of the fact that the debt ceiling got raised to drop off the grid for a bit. So here are some things I’ve run across, in no particular order; they’re all worthy of being blogged in more detail.

First, that debt-ceiling bill. Count me in with Larry Summers on this one — it’s the worst of both worlds. Not only are its austerity measures bad for the economy, but they also fail to implement a credible long-term fiscal straitjacket. It’s almost impossible to imagine something messier than this:

Remarkably for a matter so consequential the agreement that the Supercommittee will seek to reduce the deficit by $1.5 trillion comes without any agreement on what the baseline is from which the $1.5 trillion is to be subtracted. Is the $1.5 trillion from a baseline that includes or excludes the Bush tax cuts? Includes or excludes tax extenders and the annual AMT fix? These and other similar questions are unresolved at this moment.

Before the debt-ceiling debacle, we lived in a gruesome a fiscal world characterized by what you might call a permanent temporary tax system. Things like the AMT and the Bush Tax cuts were all implemented with built-in expiry dates — something almost designed to minimize the predictability of the future tax regime. It’s hard to make investments when you don’t know what future taxes are going to be, and the US has the least predictable future taxes in the world.

Now, we’ve made matters substantially worse by adding to that mix an extremely powerful and unpredictable dose of legislative mischief which is certain to come into play every time the debt ceiling is reached. No good can come of this — and no honest credit-rating agency can really have the US on triple-A when this mechanism is going to come up so frequently as a possible means by which the debt will be defaulted on.

What else?

Jeffrey Ely finds a provocative passage by Robert Parker, suggesting that the high prices of 2009 and 2010 Bordeaux might be related to market manipulation by the French. Yes, there’s strong demand from China — but no one really knows how much demand there is, and the chateaux are being extremely quiet about how much of their production they’ve actually sold at the current stratospheric levels. Says Parker:

If much of the 2009s, as well as the 2010s, are not sold through to wine consumers, who are the true marketplace since they actually drink these wines, and then tend to replenish their stock, buttressing the marketplace, then this is a bubble. Despite huge warehouses filled with reserve stocks of great vintages, prices could be set for a major adjustment, just as we have seen in the United States with the real estate market.

Of course, the thing about wine futures is that you can go long, by buying them, but there’s no way of going short. So don’t expect this bubble to burst any time soon, even if it does exist.

Then there’s Andrew Ross Sorkin, who found that one of the chief legal architects of the notorious Abacus deal is now co-chief counsel at the SEC. TED sees no problem here, but I do — while it’s entirely possible that Adam Glass is now on the side of the angels and doing his utmost to close the kind of loopholes that he used to take advantage of, he’s not saying anything and neither is the SEC, which makes it seem that they’ve got something to hide. More transparency, please! If poachers are going to become gamekeepers, they should come out into the sunlight and publicly renounce what they used to do.

I also like this short paper arguing that there comes a point at which more lending and a bigger financial sector is bad for growth, contra the arguments of bankers who always say that restrictions on their activities will hurt the broader the economy.

And Ken Rogoff is fed up with the “Great Recession” meme, saying it obscures the crucial point that we just experienced a financial crisis, and makes it seem that instead it was a large and natural cyclical phenomenon.

Finally, it’s worth revisiting this 2008 column from Charlie Gasparino. In it, he said that stock prices (the Dow was at 8,176, the S&P 500 was at 845) were depressed because markets were rightly convinced Barack Obama was going to raise taxes.

Since then, of course, there have been no tax hikes, but stocks are up about 50%, meaning anybody who bought into Gasparino’s pessimism has lost a lot of money.

I’m only saying this because Gasparino has taken to Twitter to declare that the column was right, that it somehow predicted the 1.3% GDP figure for the second quarter of 2011, and that I was a moron for criticizing the column at the time. It’s also worth noting that since the column was published, Gasparino has moved from CNBC to Fox. That’s all. I report, you decide.


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