Stiglitz explains how financial “innovations” caused the fall of Lehman Bros.

Nobel Laureate Joseph Stiglitz explains in this 6-minute video the ongoing financial system meltdown that buried Lehman Brothers 2 days ago. There have been huge gobs of money available at low interest rates, but it wasn't being invested in the real economy where it would have increased middle class incomes and led to sustainable growth. Instead, it was invested in financial "innovations" that were nothing more or less than evasions of prudential lending standards and controls. Highly dubious mortgage loans were transformed, the financial industry claimed, into investment grade securities and sold on the rationale that "there's another fool born every minute." Housing and other asset prices were bid up to unsustainable levels.

I had previously exposed the ugly truth about "financial innovation" here and how manic activity in the financial economy pulled investment away from the real economy here.

Holy time warp, Batman! Kissinger and Feldstein are urging adoption of Carter’s energy policies!

Henry Kissinger and Martin Feldstein today urged the US and G-7 to adopt the security threat analysis and the energy policies of the Carter Administration.  We'd be in a better place now if they had done these things 3 decades ago when they were in charge. 

Kissinger was National Security Advisor and Secretary of State during the Nixon/Ford Administration, when we had the first oil crisis. Federal policies arising out of that included Corporate Average Fuel Economy standards and creation of the Strategic Petroleum Reserve, plus some trivial and/or counterproductive measures like crude oil price controls, gasoline rationing, the 55 MPH speed limit, right turns on red, year round daylight savings time, and the "Don't be fuelish" PR campaign.

When Jimmy Carter was elected, he pushed through all of the most significant energy policy initiatives and legislation that were intended to put the US on the road to energy independence. But President Reagan undid, or failed to fund and advance, most of those policies. Feldstein was Reagan's chief economic policy advisor.

Say No to Palin and McCain (Guest Blogger)

Sarah Palin's cynical audacity challenges our nation to stand against her.

– Her sequestration from the press for coaching belies her readiness and makes a mockery of our political process.

– Her scorn for the works of others (e.g., "community organizer") reveals her ignorance – or her cynicism.

– Her apparent unwillingness (and McCain's) to deal accurately with the "Bridge" and earmarks belies her honesty and rant that she will be a reformer.

– Her unwillingness to grant girls or women who have been raped the right to choose abortion belies her religious tenets, i.e., "Do unto others...."

These are dangerous times, times that require more than a moose-hunting, tooth-grinding, unblinking hockey mom. It's not the fact that she is a woman that matters. It's the fact that she is the wrong candidate – for women, for men, for our children, for our future.

Nancy F. (age 68)

How you campaign is how you govern.

Underlying most reporting and discussion of the current and past Presidential campaigns seems to be an assumption that campaigning is different from governing. During the campaign—the horse race—you gotta be tough and remember that politics ain't beanbag and that character assassination works. While campaigning, repetitive and bald-faced lies, ad hominem attacks, dirty money, secret commitments to special interests, expedient flip-flops, evasion of responsibility for what you and your staff have done, dirty tricks, etc. seem to be regarded as situation-appropriate ethics.

I don't understand why anybody would believe that once the campaign is over the winner will stop all that nasty stuff and play by Marquis of Queensbury rules while governing. First, campaigns are never over; it's now accepted that there are "permanent campaigns" while in office. Second, Richard Nixon and George W. Bush were the two nastiest campaigners since WWII, and neither of them reformed a bit in office. Indeed, they were our lyingest, cheatingest, concealingest, law-defyingest, and most partisan Presidents of the era. Third, because candidates are subject to much more media scrutiny and accountability than are Presidents, a President can much more easily get away with the nasty stuff than can a candidate. If his conscience lets a candidate do something in the campaign, there is no restraint on going at least that deeply into the dark side when in power.

How he campaigns is the "character issue" I would like to see discussed more in the mainstream media, but I guess that's just me.

Update on Saturday, September 13, 2008 at 06:32PM by Skeptic

Former McCain supporter, Andrew Sullivan, now declares him unfit to be President because of the way he is campaigning.  Thanks to Christa for the link. 

Update on Saturday, September 13, 2008 at 09:44PM by Skeptic

The Obama campaign and NBC News are both using the L word in connection with McCain campaign statements.  Other MSM reports aggregated here prefer euphemisms, such as the Washington Post's award of "4 Pinnochios" to McCain for statements he made on The View.  Now let's take the next step and talk about whether it's a good idea or a bad idea to put our lives and fortunes in the hands of somebody who will look us in the eye and lie to us. 

Update on Monday, September 15, 2008 at 09:47AM by Skeptic

Biden's back (where's he been?) and he's saying on the stump this morning, "The campaign a person runs says everything about the way they'll govern." 

Update on Monday, September 15, 2008 at 01:01PM by Skeptic

ABC News weighs in, not using the L word but posting a copy of the letter from Gov. Palin to Sen. Stevens in which she makes her earmark requests.  Correspondent Jake Tapper says in his open letter to John McCain, "Will you please stop telling the American people that she never asked for or received any pork barrel projects?" 

Update on Monday, September 15, 2008 at 10:05PM by Skeptic

Claire McCaskill frames the right message, and Joe Romm writes it up here. 

Foreign trade agreements are not about trade.

Buried in this nerdy post refuting US Chamber of Commerce contentions that free trade agreements will reduce the US current account deficit are these gems. The US Trade Representative has recently stated that prior trade agreements have resulted in increased trade surpluses for our trading partners and increased trade deficits for the US and that the same should be expected in future trade agreements. The real purpose of "trade agreements" is to serve as delivery mechanisms for deregulation abroad and at home.

The Republican Party needs an overwhelming rejection November 4 in order to modernize itself. We can help.

"The main impediment to Republican modernization" is that Republican doctrine is hobbled by the belief that we all are, and all need to be, "rugged individualists fighting the collectivist foe," according to conservative columnist David Brooks today. Brooks argues that "this individualist description of human nature seems to be wrong," and concludes that "if Republicans are going to fully modernize, they're probably going to have to . . . project a conservatism that emphasizes society as well as individuals, security as well as freedom, a social revival and not just an economic one and the community as opposed to the state." Based on his other writings, it seems Brooks doesn't expect any such fundamental change unless/until devastating electoral losses cause big changes in the Republican Party leadership and thinkers.

Another stake through the heart of the Supply Side zombie

An analysis of 27 years of data from the "supply side economics" era, shows there has been no positive effect on growth that can be attributed to tax cuts for the wealthy, according to this report released today by Center for American Progress and the Economic Policy Institute. Indeed, growth was stronger during the Clinton years when taxes on the wealthy were increased (but the report does not contend the increase caused the growth).

The core belief of supply siders is that if tax rates are lowered and kept low on high earners and on capital gains, the beneficiaries will save more and invest more and the increased investment will stimulate growth. As far as I know, nobody argues that that's crazy or that it could never work, but there are many reasons to believe that it would not work under all circumstances and that it would not be as stimulative as other government interventions. So to have CAP and EPI economists go back and see what actually happened is extremely useful.

The key findings of the study, that both investment and growth were stronger after taxes were increased in the Clinton Administration than when they were lower in the Reagan/Bush and Bush Administrations, are presented graphically here on Matt Yglesias' blog. Commenter fostert (#3) makes the point that the tax cuts were not stimulative because there actually was no shortage of capital that needed augmenting, but that there was instead a shortage of attractive domestic investment opportunities. I agree. Investment was starting to be steered offshore, especially since 2000. My comment (#12), reproduced below, argues that the tax cuts probably impaired US growth by distorting allocations of capital between the "real economy" and the "financial engineering economy."

Agreeing with and expanding on fostert's comment, too much liquidity can result in less investment in the real economy. As asset values get bid up, creating short-term trading gains and apparent momentum, additional cash that might have gone into plant and equipment or R&D is diverted into the asset plays, further inflating the bubbles. George Soros describes part of the process as it relates to commodities investments here. This shift in emphasis over about 3 decades from earning share price gains by organic growth and improving the income statement to "creating shareholder value" by balance sheet transactions has contributed, IMHO, to serial bubbles and rising inequality.

Unless there is a real shortage of liquidity, there will always be a strong pressure to invest in asset classes that seem likely to increase in price and to engage in capital transactions that yield overnight increases in perceptions of value. Add in excess liquidity and that pressure becomes manic and dangerous. Isn't excess liquidity what fueled the junk bond and portfolio insurance crazes of the 1980s, the dot-com bubble of the 1990s, and the CDO/housing bubble and commodities bubbles in this decade?

During this same time frame, compensation of executives and professionals has been largely cut adrift from managerial performance and the income statement and, instead, has been largely linked to deal-making, transaction size, and balance sheet enhancements. This has enabled households in the top 1 percent and especially the top 0.1 percent to enjoy rapidly growing incomes, while incomes for the bottom 80 percent or so—those whose incomes are derived from the real economy—have stagnated or declined.

Update on Friday, October 10, 2008 at 01:37PM by Skeptic

A tenet of supply side economics is that tax cuts boost growth by boosting investment by businesses.  However, actual data from the supply side era show that business investment has consistently moved in the opposite direction from that prediction.  The following graph is from this post in Mark Thoma's blog (actually from a post by Uwe Reinhardt quoted by Thoma. 

What may have happened is good old fashioned "crowding out."  When the Republicans were in charge, they did not just lower tax rates, they increased deficit spending and government debt.  Up until about the time the Bretton Woods agreement (requiring international settlements in gold) was abandoned, economists were concerned that there was fixed national borrowing capacity and that if government borrowed more, private borrowing would be "crowded out."  The end of Bretton Woods seemed to free up the creation of enough money to satisfy all borrowers, and crowding out is seldom discussed anymore.  But maybe the effect is still real. 

What Republicans would sound like if they talked about the economy?

Hannity suffers a TKO, on his own show, when he tries to talk over economist Bob Kuttner in this video.  The video clip is from News Hounds (We watch FOX so you don't have to)--what a great service!

Georgia is a “little loudmouth dude.”

Adam Serwer explicitly opposes bringing Georgia into NATO on very practical grounds.

I don't think people should go hyperventilating about ABC News reporting that Sarah Palin said "war may be necessary" if Russia invades another country. For one thing, Obama's own (irresponsible, in my view) position that Georgia should be let into NATO implies a military obligation to preserve Georgia's security. Personally, I don't think NATO should be in the habit of letting in little countries that have a habit of starting wars with bigger countries that they can't finish without assistance, but that's just my childhood in D.C. talking. In my experience, the last person you want to be friends with is the little loudmouth dude who likes to start fights.

Adam's street-smart analysis is as sophisticated (and correct) as mine, but I have video here.

The bailout of Fannie and Freddie was in part a response to pressure from foreign creditors, who will have growing influence over US financial policies.

Foreign central banks, which had been among the biggest holders of Fannie and Freddie debt securities, were reducing their holdings and "advising" US government officials that they wanted something done to make their investments more secure, according to the Wall Street Journal and other sources. Like Russia, Indonesia, South Korea, Thailand, Brazil, and others before, US financial policy flexibility is now significantly constrained by the need to maintain the support of foreign creditors. We got into this spot by borrowing from them in order to run huge trade deficits year after year. Perhaps they will lend us more if we follow their "advice" and if that continues to meet their domestic needs and geopolitical aspirations. Or maybe they will cut our credit cards into little pieces. These are uncertain and not very hopeful times. Mark Thoma collects commentary and analyses and provides useful links here.

Update on Thursday, September 11, 2008 at 12:41PM by Skeptic

The Roger Cohen piece Christine mentioned is here. 

The enemy in Iraq is not terrorism but political fragmentation.

This summary of a longer paper points out that seemingly intractable internal political divisions stand between the status quo and a peaceful Iraq.  The author argues that the "surge" was counterproductive politically.

The surge has frozen into place the accelerated fragmentation that Iraq underwent in 2006 and 2007 and has created disincentives to bridge central divisions between Iraqi factions. . . .

The reductions in violence in 2007 and 2008 have, in fact, made true political accommodation in Iraq more elusive, contrary to the central theory of the surge.

Rather than advancing Iraq's political transition and facilitating power-sharing deals among Iraq's factions, the surge has produced an oil revenue-fueled, Shia dominated national government with close ties to Iran. This national government has shown few signs of seeking to compromise and share meaningful power with other frustrated political factions. The surge has set up a political house of cards.

The report does not say that political accommodation cannot be achieved without a decisive civil war, but it is pregnant with that possibility after George Bush leaves office. So, as part of his personal exit strategy, the surge was completely successful.

Update on Wednesday, September 10, 2008 at 11:27AM by Skeptic

To the same effect is a memo from one of Gen. David Petraeus' counter-insurgency experts quoted in Bob Woodward's new book The War Within.  This LATimes review of the book summarizes the memo as

"musing that the troop surge has had the opposite effect from the one intended, which was to give the Maliki government a safe space into which it could extend it influence as a national regime.  Instead, the memo argues, the presence of additional U.S. troops has allowed the tribal leaders to assert themselves and their influence not only locally but also on the Baghdad government in an evolving but specifically Iraqi expression of civil society."

Not enough Republican experts?

David Brooks worries that there are not enough Republican experts to staff a McCain/Palin administration. I don't understand why he thinks there is such a talent shortage. Aren't there at least 100,000 Republicans as expert as Sarah Palin?

Actual greenhouse gas emissions increases graphed against targeted reductions

This post at The Energy Collective has an interesting graph in 2 versions comparing reported greenhouse gas emissions since 1990 against Kyoto and other prominent GHG reduction targets. There is also a link to the Nature blog where it first appeared and a discussion about what, if anything, it means. Emissions have stabilized in the developed world (despite increases in the US) but are increasing apace in the developing world. 

Why Pres. Bush didn’t take the advice of his commanders on the ground in Iraq and Central Command

The distilled version of Bob Woodward's reporting on this is here on Tapped.

Joseph Stiglitz on the criteria economic growth strategies should meet

This piece by Nobel laureate Joseph Stiglitz suggests the criteria by which we should measure the prospects of success, and the actual success, of an economic growth strategy, and it's not just steady increases in GDP.

There are, indeed, big differences in growth strategies, which make different outcomes highly likely. The first difference concerns how growth itself is conceived. Growth is not just a matter of increasing GDP. It must be sustainable: growth based on environmental degradation, a debt-financed consumption binge, or the exploitation of scarce natural resources, without reinvesting the proceeds, is not sustainable.

Growth also must be inclusive; at least a majority of citizens must benefit. Trickle-down economics does not work: an increase in GDP can actually leave most citizens worse off. America's recent growth was neither economically sustainable nor inclusive. Most Americans are worse off today than they were seven years ago.

But there need not be a trade-off between inequality and growth. Governments can enhance growth by increasing inclusiveness. A country's most valuable resource is its people. So it is essential to ensure that everyone can live up to their potential, which requires educational opportunities for all.

Stiglitz goes on to leave no doubt that the strategies of the Right, and especially the Bush/Cheney era, have failed by these criteria—and that they were not intended to succeed by these criteria. Despite the free market fundamentalism rhetoric from the Right, it is the Left that has been trying to make markets work, while what the Right has actually done is to protect established corporate interests from markets.

Gay war hero awarded posthumous dishonorable discharge at White House ceremony.

The Onion has the story here.  Thanks to Ezra Klein's blog for the find. 

Still more scientific evidence that we are cooking ourselves

The National Academy of Sciences published in June 2008 a peer-reviewed study in which a team of climatologists and earth scientists reconstructed average global temperatures over the past 2 millennia using records in tree rings, coral growth rings, ice cores, and other proxies for temperature. The paper concludes that the sharp rise from the late 19th Century to now, in both northern and southern hemispheres, is unprecedented in the interval studied. A good summary of the paper, with its startling graphs, is at Climate Progress, which also links to the NAS paper. The work confirms and extends earlier work based only on tree rings and is further compelling evidence of anthropogenic global warming over the last century.

No change in GOP platform on trade

In adopting its new platform, the Republican Party reiterates a policy on trade promotion that is indistinguishable in my eyes from policies that the Bush Administration has been following.  Although it speaks of exports of products and commodities, it gives equal prominence to sale of services and increased protections for intellectual property in foreign nations.  It specifically calls for an "aggressive trade strategy" with respect to agriculture.  This appears to be a continuation of the Bush Administration policy of favoring the traders of agricultural commodities (e.g., Cargill and ADM), for whom all trade is good, over growers, whose US subsidies will be bargained away.  There is no recognition in the platform that globalization is different from trade, or that the US is suffering any ill effects at all from trade or globalization. 

The financial economy ceding control of crude oil prices back to the real economy?

This Bloomberg piece reports a growing sentiment among energy traders that further price declines are likely because, as one analyst described it, "commodities have fallen out of fashion with investors." Nate Hagens over at The Oil Drum reports here that Ospraie, a $4 billion commodities hedge fund run by Lehman Brothers, lost 26% of its value in August alone and is closing its doors. His long post also describes the "animal spirits" of the energy futures markets and how relatively cheap it is for investors to take positions that dwarf the quantity of underlying commodities to which the futures contracts nominally relate. If several big investors fail, or otherwise greatly reduce their exposure to energy futures, it may become as hard to see a bottom for crude oil prices as it was to see a top two months ago.

Update on Wednesday, September 3, 2008 at 07:48AM by Skeptic

One analyst quoted in this LATimes article says, "I do not think oil in the triple digits is safe."  Another says he wouldn't be surprised to see prices drop to $50 to $60, where they were a year ago. 

Update on Thursday, September 4, 2008 at 10:54AM by Skeptic

Here is another report that financial players are disinvesting in crude oil and other commodities, and another prediction that crude oil prices are headed below $100. 

Update on Monday, September 15, 2008 at 03:51PM by Skeptic

Lehman Brothers filed bankruptcy yesterday (Sunday) and is liquidating its positions to pay creditors.  Today crude oil prices have fallen off a cliff, trading under $94 on NYMEX at 18:09 EDT. 

McCain’s veep choice narrows celebrity gap.