Monthly Archives: September 2008

Best case?

The bad banks continue to be bought up, there is no run on hedge funds next Tuesday, only mid-sized European banks fail, money market funds keep on buying commercial paper, and the Fed and Treasury continue to operate on a case-by-case basis.  Since Congress doesn’t have to vote for something called “a bailout,” it can give Paulson and Bernanke more operational freedom than they would have otherwise had.  The American economy is in recession for two years and unemployment does not rise above eight or nine percent.

That’s Tyler Cowen’s best case scenario. Not very good, is it?

Quote of the day

Larry Summers:

A family that goes on a $500,000 vacation is $500,000 poorer but a family that buys a $500,000 home is only poorer if it overpays.

Now, the so-called bailout package has just failed in the House, which is an astounding development. I hope and expect that something similar will be cobbled together and passed later this week. But the sober assessment by Summers needs to be understood by more people.

In Friday’s presidential debate the generally excellent moderator, Jim Lehrer, pressed both candidates on what the $700 billion would mean for their fiscal plans (see, by the way, Felix Salmon on McCain’s apparent lack of understanding on the difference between fiscal and financial). That line of thinking has become a new trope in conventional wisdom. It needn’t be so.

Update Alex Tabarrok thinks Summers is playing the role of a smooth-talking salesman.

What's the matter with the FT?

The Financial Times is, to my mind, still the best English-language newspaper in the world. But something has been seriously awry in its coverage of US politics for some time.

Consider this front page headline from today: Obama targets greed of Wall St to open up poll lead over McCain (on the website this is abbreviated to “Obama targets Wall Street greed”). Now, which candidate has been banging the populist drum over the last few days? It isn’t Obama. In fact in the very same section, columnist Clive Crook (more on him later) writes: “Mr McCain, likewise playing to stereotype, sounded loud populist notes about greed on Wall Street.”

It’s worse inside. In a news analysis, the FT’s man in Washington, Andrew Ward, has a piece on a sensible topic — what will be the impact of the proposed toxic assets fund on the candidates’ economic plans, should they take office. But Ward claims that it is Obama’s plans in particular that come into question “because his carry the higher price tag”. Even The New York Times reckons McCain’s plans are $200-300 billion more costly than Obama’s. On what basis did Ward figure out that Obama’s plans are more expensive?

Lets look at the “experts” Ward consulted. Norm Ornstein at th American Enterprise Institute, for one. I suspect many FT readers know that the AEI is closely connected to the Bush administration and is decidedly on the right-wing, Republican side of any debate. Ward doesn’t, however, provide any pointers for unsuspecting readers that Ornstein may have a dog in this hunt.

The other “expert” is Nachama Soloveichik of the Club for Growth, which is described as “a free-market advocacy group”. That’s a curiously neutral way to describe a group explicitly dedicated to electing tax hating Republicans. Here’s the Club for Growth’s top four policy goals according to its website: making the Bush tax cuts permanent, “death tax” repeal, cutting and limiting government spending, and Social Security reform with personal retirement accounts. Are you surprised that Soloveichik tells the FT, “We did not think Obama could afford all his programmes even before the crisis and it’s even less likely now.”

To be fair, Ward does also quote Newsweek’s Jonathan Alter, who is left of center. But Alter, who wrote a book on FDR’s response to the Great Depression, is called upon purely to state that we’re not going to have a “new New Deal” because “there’s not going to be any money to pay for it”.

I really can’t trust anything Andrew Ward writes about US politics. Sorry.

Oh, and back to that Clive Crook column. Crook is generally a member of the sensible center-right, and he has been leaning Obama for a few months now. But he does seem to have a bug that he has to slap both sides from time to time. Today’s column criticizes both candidates for indulging in playground politics when the financial crisis demands a serious response. I thought there was a huge difference in tone between Obama’s response and McCain’s populist ravings. And it isn’t true to say that neither candidate was aware of the impending problems.

Hilzoy on Political Animal has done the legwork that Crook neglected. He cites Obama’s September 2007 speech at Nasdaq, where he said:

Markets can’t thrive without the trust of investors and the public. At a most basic level, capital markets work by steering capital to the place where it is most productive. Without transparency, that cannot happen. If the information is flawed, if there is fraud, or if the risks facing financial institutions are not fully disclosed, people stop investing because they fear they’re being had. When the public trust is abused badly enough, it can bring financial markets to their knees.

Hilzoy also references a March 2008 speech by Obama where he states six principles of regulatory reform that stand up very well to the extraordinary events of the last week. In many ways, Obama did in March exactly what Crook is calling for in his column. Creating an equivalence between McCain and Obama on this crisis, as Crook does, just doesn’t pass the smell test.

Guide to cryptics for Americans, part I

As I wrote yesterday, I’m mystified why more American word aficianados don’t fall in love with British-style cryptic crosswords. It may be a lack of familiarity. On a somewhat irregular schedule The New York Times does a “cryptic” as its second Sunday puzzle, but it’s so easy and badly composed that it wouldn’t make a fan out of anyone. The web, of course, opens up a whole new territory for Americans. I can claim a modicum of timeliness with my planned series because The Guardian website had a change of policy at the beginning of the month, and its puzzles — non pareil, in my opinion — can now be accessed for free.

What makes cryptics so compelling? In the hands of a good setter (the person who creates the crossword), cryptics are a test of your ingenuity with words, your general (and sometimes abstruse) knowledge and your linguistic agility. The best British puzzles adhere to the standards established decades ago by D S Macnutt, who set absolutely devilish puzzles for The Observer under the pseudonym Ximenes. His book, The Art of the Crossword, establishes the rules of good sportsmanship in cruciverbalism. Boiled to essentials, Ximenes’ cardinal rule is that the clue must make sense and not contain superfluous elements (both notions are regularly violated in the NYT cryptic). As I explain how to solve a cryptic in future installments, the importance of elegant clue construction will, I hope, become clear.

One caution for American readers. Solving Guardian (or Times — of London — or Telegraph) crosswords requires a modicum of knowledge about specifically British things. Clues that assume you know places in London are common, as are clues that require a passing knowledge of cricket terminology. In thinking about writing my guide, I’ve wondered whether this is a crippling fault. After all, I lived in England for over 25 years and was able to pick up that knowledge over time. For the adventurous, I don’t think it should be a disqualification. I’ve found, since I moved back to the US three years ago, that The New York Times assumes the same familiarity with things American. I regularly have to fill in for my wife OTT (NY Giants baseball player) or ORR (Boston Bruins hockey player) or — from today’s NYT puzzle — STARR (Green Bay Packers QB). And that’s just the sports clues. There’s clearly a national bias that’s only to be expected in crosswords. Deal with it.

Now that people have calmed down…

About the election, I mean. For the last couple of weeks I have thought of setting up as an election grief counselor, as I have been assailed on all sides by people wanted me to assure them that Obama was still on course to be elected. I stayed calm, wasn’t distracted by the noise, and remained firm in my conviction that we will be inaugurating Barack Obama on January 20, 2009. I don’t think I was just offering easy nostrums — my analysis of the likely result is increasingly being justified by the post-bounce polls.

But now, in addition to my addiction to election news, I am being consumed by torrents of information about the financial crisis. I was a business magazine editor during 1987’s Black Monday, and then again during the East Asian financial crisis of 1997, and then again when Long-Term Capital Management went belly up. None of these events, to my mind, compared in severity to what we’re experiencing now, and — more troubling — none of them were so difficult to figure out.

As Obama said in Elko, Nevada yesterday, there isn’t great difficulty in figuring out how we got here. No need for a commission, which is a proposal I’m sure even John McCain now regrets. What’s difficult is figuring out what happens next. It’s one of the cliches of blogging to quote William Goldman on Hollywood, “Nobody knows anything.” In this case it’s true. Should I believe doomster Noriel Roubini that it’s the worst crisis since the Great Depression? Or the more cautious pessimism of Martin Wolf? It’s too soon to tell.

What I have decided, however, is to offer a regular distraction for Davos Newbies readers. We all need a break from politics and market ructions. I’ve long been an addict of cryptic crossword puzzles, particularly those published in The Guardian and The Observer. I’ve been disappointed that even word maven friends in the US don’t see the clear superiority of these puzzles over feeble efforts like The New York Times crosswords (not helped, to my mind, by the bumptious Will Shortz). So, starting tomorrow, I’m going to write a series on cryptic crosswords for Americans. Stay tuned.

Whatever happened to we're all Georgians?

OK. There have been other developments in the news, and the original statement was always absurd. But my go-to blog on the Caucasus, A Fistful of Euros, has some sobering analysis of the future course of the region:

Russia has no interest in Abkhazia and South Ossetia being prosperous developing liberal economies with access to World Bank technical assistance and IMF loans. Russia likes having economically shaky gangster states for clients. Look at the last ten years in the North Caucasus. Or, for that matter, 1945-89 in Eastern Europe. Russian armies have installed and supported lot of regimes in various places over the last couple of centuries, and there is a pretty consistent trend.

What’s interesting — and sort of depressing — is that the war seems to have damaged the prospects for liberal democracy for all four parties. Not that those prospects were bright in Russia or South Ossetia anyhow, but still: all the participants are seeing a tightening of press controls, a strengthening of the nationalist line, and a general boost to the authoritarian pretensions of the current ruling class. And this is likely to get worse before it gets better… if it ever does get better.

We need to listen more to economic historians

Brad DeLong:

Put it this way: we have just finished the first American business cycle ever, the first since British settlers landed at Jamestown and promptly began dying of malaria, the first ever in which median household incomes did not grow from peak to peak.

How much of the blame for poor performance in this century can be laid at the door of the George W. Bush administration is an active research question. Government surpluses rather than the Bush deficits would have given us a lower dollar, more exports, faster growth of production in sectors which may well have powerful external benefits, and a more equal income distribution. Median household income would have done better. How much better? Give me a couple weeks to solidify my view.

But I have not found anybody not completely corrupt still willing to say that Bush economic policies have been on net a plus for America.

I wish this mattered

Some of my go-to blogs on foreign policy are aghast that Sarah Palin clearly has no idea what the Bush Doctrine is. See, for example, Ilan Goldenberg:

Clearly Palin did not have the foggiest idea what Gibson meant.  This is absolutely huge.  The Bush doctrine of preemption and the National Security Strategy of 2002 was the central element of debate for almost 2 years in the foreign policy community and in the country during the run up to the invasion of Iraq and in the years after.  It was probably the single greatest shift in U.S. foreign policy in a generation.

There were pages and pages of ink spilled on this and it took up hours of debate.  It was a central issue in the 2004 campaign.  For her to not know what it is, raises serious questions about her experience and preparation to potentially be the leader of the free world.

I’m sure, if any of the mainstream media pick this up, the McCain campaign will say it’s just the kind of thing that foreign policy elitists care about. Most Americans don’t know and don’t care. That’s true. But most Americans shouldn’t be president or vice-president. Yet further evidence, if any were needed, of McCain’s absolute dereliction of duty in picking Palin.