James Pethokoukis

It was at this point during the president’s Ohio speech to GM workers today that I thought he was going to talk about card check: “And yes, just in case you were wondering …”

But instead he talked about this:

… we are fighting for an America where no American should have to worry about going without health insurance or fear that one illness could cost them everything. “

Me: Not a good sign for card check, or unionism in general, I would think. I mean, he doesn’t even mention the word “union” — at least in his prepared text.

John Taylor has maintained that it was the government’s reaction to Lehman that freaked out financial markets. Now Luigi Zingales and John Cochrane make a similar pitch in the WSJ:

On Sept. 22, bank credit-default swap (CDS) spreads were at the same level as on Sept. 12. (CDS spreads are the cost of buying insurance against default.) On Sept. 19, the S&P 500 closed above its Sept. 12 level. The Libor-OIS spread—which captures the perceived riskiness of short-term interbank lending—rose only 18 points the day of Lehman’s collapse, while it shot up more than 60 points from Sept. 23 to Sept. 25, after the TARP testimony. (Libor—the London Interbank Offer Rate—is the rate at which banks can borrow unsecured for three months.)

Why? In effect, these speeches amounted to “The financial system is about to collapse. We can’t tell you why. We need $700 billion. We can’t tell you what we’re going to do with it.” That’s a pretty good way to start a financial crisis.

First, the great Stan Collender:

But the real purpose of the speech was to refocus the financial services reform debate in Washington.  The president may have been speaking to Wall Street executives, but the real audience was members of Congress, especially Democrats, some of who in the next few weeks will be marking up various pieces of financial services regulation legislation.  He had to show that the general issue hasn’t gotten lost in the health care debate and to say that the effort is still needed even if things seem to be better (“Normalcy cannot lead to complacency”).

Me: I also found it interesting that he focused first and foremost on the consumer financial products reform aspect of all of this. I think that is a way of keeping the public engaged on the issue, though I am not sure the administration necessarily feels it is a crucial aspect of reform in and off itself. Kind of like fighting the last war.

Ed Yardeni gets it right, again:

Central banks, including the Fed, caused the housing bubble. Now they are once again conspiring to inflate the next bubble, i.e., the US Government Bubble. Over the past 12 months through August, they purchased $868.9bn of US Treasuries. Over this same period, the federal deficit totaled $1332.6bn and publicly-held federal debt soared $2005.0bn. This helps to explain the most recent conundrum in the bond market, i.e., why yields remain so low despite huge current and projected federal budget deficits.

The question is how much longer will foreign central banks be willing to fund so much of the US government’s deficit? By funding the housing bubble in the US, they were benefitting their exporters. Now, they are increasingly funding the expansion of the social welfare state in America. How will we ever be able to repay their generosity?

Barry Ritholtz responds to my previous post:

While I love the idea of Free Market Day, I have to disagree with the typical post-mortem assessment of Lehman. This was not a binary choice; The Lehman decision was not an either/or situation, limited to a gladiatorial thumbs up/thumbs down.

In the real world,  there are shades of grey.

I have said — and I am still saying — that the best option would have been a more Bear Stearns approach (w/o the Fed’s $29B) — essentially, a prepackaged, orderly bankruptcy sale/liquidation. The problem with Lehman wsn’t that it was allow to suffer for its own sins –t he problem was they were allowed to do a header onto the sidewalk and splatter everyone else around. They should have been gently euthanized, their body parts sold off.

The Rescue them” or “Let them die” choice is really a false dichotomy.  When reviewing how the Fed and Treasury behaved, discussing what was done, and analyzing the possible impact of the alternatives, we need not be limited to simple Yes or No choices.

Me:  Yeah, but that is the real-world dichotomy that Paulson and Bernanke created for themselves by wasting the five months or so between Bear and Lehman.

At a House Financial Services Committee hearing just after Lehman Brothers filed for bankruptcy protection a year ago, the committee chairman, Barney Frank, suggested that September 15, 2008 be commemorated as Free Market Day, since Lehman was allowed to fail and free markets allowed to work. Frank then added that because AIG was bailed out the next day, “the national commitment to the free market lasted one day.”

Funny guy, the chairman — but probably not to Ben Bernanke, Hank Paulson, or Timothy Geithner. They’re the folks, obviously, who get the blame for not ginning up some way — any way — to bail out the investment bank and avoid a dangerous escalation of the financial crisis.

At last check, both Bernanke and Paulson steadfastly maintain that legally their hands were tied, thus the need for expanded authority to take over and wind down failing financial firms. If such authority had existed, Bernanke said a month after Lehman’s implosion, “we could have saved it. We would have saved it.”

Of course, that explanation seems to have evolved a bit over time. There are plenty of hints that a way would have been found to save Lehman, had Bernanke and Paulson anticipated the breaking of the buck by the Reserve Primary Fund and the flabbergasted reaction by international investors who had expected a repeat of the Bear Stearns bailout.

Yet in the year since the Lehman collapse, the consensus that it was an unmitigated disaster may be starting to shift. Free Market Day may be worth celebrating after all.

There are a couple of main arguments here. Call one of them the No Real Harm Theory. This has two aspects. First, economist and former Treasury official John Taylor argues that credit spreads didn’t really blow out until the market got a look at the government’s reaction to Lehman’s demise — the hasty construction and apocalyptic selling of the TARP.

At the same time, others argue that given the fragile state of the market, saving Lehman would merely have shifted the spotlight to some other endangered firm.

Then there’s what we’ll call the Worse the Better Theory. It holds that the severe market reaction to Lehman is what persuaded Congress and the Fed that it was time to do whatever it took to stabilize the financial system through bailing out AIG and passing the TARP.

Without Lehman, a continuation of piecemeal fixes would have allowed the financial system to erode further, heightening the chance of depression. What’s more, Lehman exposed the dangerous fragility of our interconnected financial system, serving as a catalyst for reform.

So is the case for letting Lehman die a clear-cut one? No. But it is a reasonable one, and even more so if the government had spent the time between March’s Bear Stearn rescue and Lehman’s chaotic bankruptcy creating a predictable and transparent resolution protocol.

So celebrate Free Market Day? You bet, but make it a quiet dinner rather than a wild party.

As Bruce Bartlett correct observes:

Although it is thought that inflation is an effective way of
reducing the burden of debt, this is no longer true. For one thing, a
declining portion of the debt is financed with long-term securities.
Today, just 3% of the debt consists of bonds with maturities of 20
years or more; 10 years ago, the proportion was four times greater. To
the extent that the debt consists of short-term securities that must
constantly be rolled over, inflation does nothing to erode its value
because interest rates just rise to compensate, raising interest
payments and borrowing, thus maintaining the real value of the debt.

Inflation
will also cause the dollar to fall on international markets, which will
cause foreigners to dump their bonds. With foreigners now owning more
than 50% of the privately held debt, this may force the Treasury to
issue foreign currency denominated bonds. At this point, our finances
will effectively be controlled by foreigners and the International
Monetary Fund (IMF), just like Third World countries.

No one knows the point at which debt becomes unsustainable. According to an IMF report,
the critical point is when a government is borrowing just to pay
interest on the debt. According to the CBO, we will reach that point in
2019 when the federal government is expected to borrow $722 billion and
its net interest expense will also be $722 billion.

My new favorite blog, New Geography, does a fine piece of analysis that reveals why 80 percent cuts in climate change emissions are a fantasy without a radical technology breakthrough:

According to a recent poll by Rasmussen, slightly more than one-third of respondents (who provided an answer) are willing to spend $100 or more per year to reduce greenhouse gas emissions. About 2 percent would spend more than $1,000. … If we do a rough, weighted average of the Rasmussen numbers, it appears that Americans are willing to spend about $100 per household per year.  … At $100 per household, it appears that Americans are willing to spend on the order of $12 billion annually.

At $100 per household, Americans are prepared to pay just $2 per greenhouse gas ton removed. All of this is in a policy context in which the United Nations Intergovernmental Panel on Climate Change suggests that $20-$50 per greenhouse gas ton is the maximum that should be spent per ton. The often quoted McKinsey/Conference Board study says that huge reductions in greenhouse gas emissions can be achieved at $50 or less, with an average cost per ton of $17. International markets now value a ton of greenhouse gas emissions at around $20. At $2 per ton, American households are simply not on the same “planet” with the radical climate change lobby as to how much they wish to spend on reducing greenhouse gases.

A fantastic article by Joshua Cooper Ramo looking at whether the US is doomed to years of high unemployment. Read the whole thing, but this a key bit:

Many of the ideas Summers developed were codified in a 1986 article titled “Hysteresis and the European Unemployment Problem.” Even today it’s a piece he’s proud of: “Ah, yeah, the hysteresis article,” he interjects when it’s mentioned. Hysteresis is a word that you (and the rest of us) should hope we don’t hear too much of in the coming months. It comes from the Greek husteros, which means late. It refers to what happens when something snaps in such a way that it can never be put back together. Bend a plastic ruler too far, drop that lightbulb — that cracking sound you hear is the marker of hysteresis. There’s no way to restore what has just been smashed.

The idea that hysteresis happens to economies is one that economists don’t like to think about. They prefer to consider economies as yo-yos tethered to the sturdy string of the business cycle, moving up and down from growth to slowdown and back. But from time to time, things do snap. And Summers’ argument in 1986 was that unemployment in Europe, the sort that might persist in the face of growth, was an expression of an economy that had snapped. Europe’s economy was hit not only by shocks like an oil-price spike, a productivity collapse and rocketing tax rates but also by stubborn unions that made hiring, firing and adjusting payrolls near impossible.

Hysteresis, Summers explained, could come from all sorts of shocks like this. And that may be what is playing out in the U.S. If you look at the three great job busts of the past 100 years — the 1930s, the early 1980s and today — you find an important difference. The Reagan recession ended with workers returning to jobs that were the same as or similar to the ones they had lost. But 1930s joblessness was structural. The jobs people lost — largely in agriculture — never came back. Workers had to move to the industrial sector, a transition helped by the demands of a war. It was massive national hysteresis. Sound familiar?

Barry Ritholtz ticks off ten technologies:

My top 10 list (in order of biggest near term potential):

1. Nano Technology (Think of the line “Plastics” in The Graduate).

2. Green (low carbon) Energy  (generation)

3. Battery technology  (storage)

4. Genomics/Stem Cell Research

5. Web 2.0/3.0 — smaller, niche companies using increased bandwidth

6. Robotics — the continued replacement of humans by machine, for both labor and judgement

7. Life extension Technologies (not disease cures, but actual extension technology)

8. Bio-Agriculture (GMF, etc.)  Feeding 15 billion people will require some technological breakthroughs.

9. Atmospheric Engineering — modifying Earth’s biosphere to keep it hospitable to Humans in the face of an ice age or global warming;

10. Terra forming/Extra Planetary Colonization (uh-oh, time to go)