My Kernel, My Null

Cochrane on the state of macro and finance

2009-09-14T00:14:00.002-04:00

As was to be expected, Greg Mankiw didn't stop at posting Eichengreen's link (see my previous entry), but found a different and, from some angles, much better one, this one written by John Cochrane. Here is a link to his post, here is a link to Cochrane's essay (NB: it is an MS Word document, .doc format and all), and here is a link to Cochrane's news page, which includes the essay (and where he asks readers to link to as he may edit it and change its location).

Cochrane's article is simply beautiful. It reminded me why I went into econ to start with. For real. If you are interested in understanding where econ stands and have not been exposed to a doctorate in it, but are willing to spend the time trying to get some nuance (as opposed to Krugman's caricatures), read it.

It is much more detailed about the state of macro and finance than Eichengreen's, while lacking the healthy level of mea-culpa in the latter. I see it as follows: the state of econ, including macro and finance, is fine, thank you (Cochrane), but given incentives, some economists were not introspective enough and joined other agents who, given their incentives, contributed to the bubble and the current crisis.

Together, they are what the NYT should have published.

Barry Eichengreen as counterweight to Paul Krugman's NYT piece?

2009-09-10T15:33:00.005-04:00

No, I'm not dead nor have I been spirited away. And no, I didn't give up blogging. Instead, I've been blogging quite frequently about current economic issues in the US (ironically, being a micro econ, mostly about macro... well, it used to be my job a long, long time ago) here. Warning: it is in Spanish... and a tribute to "they all return to their roots" cliche: the blog is hosted by the think tank / consulting group I used to work for in Peru (yes, Peruvians are interested in the economic comings and goings of the US).

'Nough said.

Point of this entry is to have a place to keep handy a link.

You see, I'm sure y'all have heard about the article / shock-piece Paul Krugman recently published on the NYT, a rather lengthy piece of... well, to call things what they are: a rather selective and I dare say inaccurate re-writing of the history of ideas of economics, in line with his agenda to... what? Re-interpret and resurrect Keynesianism? Settle old scores? Gain popularity among the wide, non-econ public, and political points in some camps?

Just like the Bush admin tried to do about everything, just like it is happening now with the causes of the crisis and health care reform, Paul has fallen into the game of finding evildoers to explain away the problems of the world. It is worrisome, coming from such a smart guy.

C'mon people: policy issues are nuanced, the causes (and ways out) of the crisis are nuanced, health-care reform is nuanced... What isn't that is interesting and worth pondering? The infantile effort to reduce everything to a search for evildoers was stoopid then and it is not any smarter today. It does a disservice to our effort to understand how we got somewhere and how to prevent it from happening again.

We will lynch economists or financiers or insurers or pharma researchers or... And, with all the incentives still in the wrong place, it will all happen again.

So the popularity of Paul's piece was rather depressing. And that is why, when I remembered this little piece, I couldn't stop myself from linking to it.

It is old (end of April), but it is well-written and much more accurate (and, yes, nuanced) than Paul's. Rather than looking for bugbears in the dark, it... well, I'll let you read it. It is written by Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley. Here it goes:

The Last Temptation of Risk

This trully scares me

2009-03-26T13:36:00.004-04:00

Source.

True, Obama cheekily dismissed budget projections (and hence, implicitly, budgets in general) last Tuesday night, but for those of us who think that some sort of educated guesswork is more useful than walking blindly into the future a la Bush, the CBO is a pretty respectable, non-partisan source of such stuff.

With output at potential starting in 2015, the CBO's baseline projection is a 2% structural deficit from then on... and a 4% and worsening deficit under the President's Budget.

So true, as Obama said, there will be deficits with or without his budget... it's only that, with it, they are worse and keep getting worse.

Can't tell anymore...

2009-03-09T15:18:00.002-04:00

Source.

On Summers

2009-02-26T12:36:00.004-05:00

Newsweek (!!!) has a cute little piece on Larry Summers. Here's my favorite, non-policy relevant part:

Summers is generally said to suffer from smartest-kid-in-the-class syndrome. He has heard the criticism so many times he has a slightly wounded, misunderstood air. Unlike some people who pretend to listen, Summers says he actually does listen—but he admits to an unfortunate tendency to look bored or impatient, which he acknowledges can seem rude. Summers can be playful and charmingly irreverent. But he can also just be rude.
Everyone has a Larry story, it seems. Princeton economist Alan Blinder recalls head-on collisions with Summers in the '90s. "As everybody knows, Larry is very smart and he likes to show it," says Blinder, who served on Clinton's Council of Economic Advisers and later as Fed vice chair.

Truth be told, he sounds just like any econ academic I've met worth his/her salt. Whether that's good or not, who knows? Not me, but there you have it, that's how we were re-socialized.

And nope, I do not have a Summers story. Which is for sure not uncorrelated in deep, multi-layered, symbolic ways to why I'm blogging about this little article instead of doing meaningful work on policy issues.

(But I do have an Ed Glaeser story.)

p.s. "cute" and "Summers" in the same sentence? My, oh me, I need to re-re-socialize myself ASAP!

The dark side of econblogging (one of them)

2009-02-09T01:45:00.006-05:00

Clive Crook:

Economics outside the academy has become the continuation of politics by other means. If you wish to know what Mr Krugman thinks on any policy question, do not read his scholarly writings; see which policies are advocated by the progressive wing of the Democratic party... Politics and economics are always difficult to keep apart... Consensus economics does exist. The Obama administration and the Federal Reserve are trying to apply it. The economics professoriate has an obligation to criticise and improve those policies. But if politics is allowed to split the discipline, and communication across that divide continues to break down, the science of economics will forfeit what little respect it still commands.

Experts from whatever discipline may become the worse kind of hacks when it comes to politics. Economists are certainly not above that. What sets economists apart is that, with so much of politics being about economic policy, economics becomes one with politics with an ease that, say, physics or English Lit lack.

If only it were possible to tell when the same people are playing the role of propagandists and when that of thoughtful experts (who may, with all sincerity and after their best efforts at rigorous analysis, still disagree). But it is not and, unfortunately, some call themselves "economists" indiscriminately under both guises.

Night of the Living Dead

2008-12-18T16:20:00.009-05:00

Graph time! Two of my favorites this week!

First one: as of 1/21/09, US commercial bank capitalization is less than the second tranche of TARP funds (less than $350 bn).

(Source, but hurry! The content of the page is frequently updated.)

Of course, this is not the same as "just go ahead and buy the damned things!" as purchasing common stock is not the same as injecting new capital. But it does give an uncomfortable sense, bordering on schadenfreude, of how the mighty have fallen (check out Citi and BoA, ex "largest bank in the US") and also of how insignificant commercial bank capital has become (was always but for incorrect valuations and off-balance items?) with respect to their liabilities.

The second graph hardly needs any words beyond "who's your daddy/main shareholder?" and "click on the source link to see a larger version":

Meta-markets (second quote of the day)

2008-12-18T14:09:00.007-05:00

"I've abandoned free-market principles to save the free-market system." G. W. Bush, Dec. 16, 2008
Source.

Quote of the day

2008-12-18T14:06:00.002-05:00

"Bankruptcy is not the same as liquidation."
Source.

Reanimator: US automaker rescue package

2008-12-15T13:21:00.013-05:00

This is at least the third time since the early 80s that the US automakers have asked (and in now seems, received) some form of Federal bailout (or change in the regulatory framework), threatening with the end of Western civilization if they didn't get what they ask for.

First they needed help because the oil shocks would never let anyone drive ever again, then because the Japanese automakers were exploiting their workers with inhumanly low wages, and now that expensive oil and commodities can't be blamed, it's because of the financial crisis.

But this is not (mainly) a labor or finance cost issue, which is where most of the political "debate" seems focused on: the share of US automakers within the US market has been plummeting for some 30 years. That trend might have something, but not a lot to do with labor costs, something, but not a lot to do with the end of the securitization of 0% financing loans, and something, but not a lot to do with the operational costs imposed by the byzantine and anticompetitive contracts signed between the automakers and their autodealers.

The reason is much sadder and more terminal: terrible management and even worse innovation and quality policies have led growing numbers of US consumers to prefer "foreign" cars assembled in the US. And this despite American cars being $2,600 cheaper than the comparable foreign car (obviously not cheaper enough and inferior along some hedonic dimension not measured in the price comparisons). [See here for an excellent summary of the labor cost side of the equation and for the source of that number].

At the end of the day, automakers and unions negotiated brilliantly with the Feds; they didn't blink and ended up twisting the Treasury's arm when they failed with the Senate, though the White House will surely push back somewhat. Now TARP funds will be used to prop them up for a few months until they require more funds for more propping up.

Thus, Q: if what we want is to avoid putting workers and suppliers on the street and keep household expenditure going, wouldn't a more cost-effective use of taxpayers funds be to subsidize the transition of these companies' workers and suppliers into new jobs and contracts (or, more broadly and fairly, simply return money to taxpayers) and let the carmakers file for bankruptcy, instead of re-rescuing these dinosaurs who have shown themselves unable to face competitive challenges for decades?

It's a pity that a problem which could mostly be dealt with through restructuring under bankruptcy protection has become a political issue in which public funds will be used to raise zombies. There're too many vested interests against doing the right thing: executives would lose, union leaders would lose, current creditors would lose... and some politicians would lose face. It's only the other 300 million Americans who would benefit if things were done right.

Car bubble

2008-12-12T10:26:00.008-05:00

Yet another failed attempt to pass the rescue package for US automakers. How long before they try again? February? (Aside: Will GM's, Ford's, Chrysler's CEOs now bring their private jets to fly back home to spite the Senate?)

Here's one I haven't heard before (though maybe that's because I haven't been able to follow the blogosphere that much lately):

Over the years, we had been hearing that US automakers were not making a good return (to say the least) on their auto-making side, but were making some profit on the financial side. This is taken today to mean that consumers didn't really want the cars they made if it wasn't for their very convenient, easily obtained financing. (Remember all those "0% financing" ads?)
Now we are all painfully aware that credit was so preposterously cheap in the last many years thanks to (lay-the-blame-where-you-will) set of circumstances which led to the non-pricing of risk.
So was the strategy US automakers used to survive this far just another side-show in the (market-failure induced) Cheap Credit main attraction?

(Keep in mind that "US cars" are, controlling for characteristics, already cheaper than "foreign" ones; and that more-expensive labor, for all it's blamed, has but a small effect on the final price of a car; see here, for example.)

In other words, now that the credit bubble popped, is there really a place left under the wintry sun for all three of GM, Chrysler, and Ford?

POTUS, the chef of soulful chicken soup

2008-12-10T12:09:00.007-05:00

After reading GWB's interview in the National Review Online , I've become convinced he missed his true call in life: author of self-help books (ok: of audiobooks in his case).

From the Mouth of POTUS:

This [compassionate conservatism] is a philosophy that most people adhere to... It wasn’t very well defended, but most people adhere to it. Compassionate conservatism basically says that if you implement this philosophy, your life would become better. That’s what it says. And that’s what it’s all about. It’s saying to the average person, this philosophy will help you make your life better. It’s the proper use of government to enable a hopeful society to develop based upon your talents and your success.

I can see a franchise in the making.

My Kernel, My Null Revisited

2008-12-10T11:48:00.019-05:00

The lonely tree in the Amazon rainforest that is this blog, it will attempt a return. Of sorts. Emphasis on "attempt."

Many things have happened since I stopped blogging. Work, for one, shifted up a gear or two (and I'm a ten-hour-day workaholic to begin with, so I'm not kidding here). But that's not the main reason.

Instead, it was a truly happy one, and this blog was sacrificed to the cause of my higher utility: I got married!

As an event, it was a true child of the global era, with receptions here, there, and everywhere; and then there was the most-god-awesomest honeymoon I could have ever wished/hoped/dreamed for/of.

In the meantime, I did achieve a couple of media victories: I now, once in a while (once in a long while), publish articles in the leading econ/business weekly magazine in Perú. And I was invited to blog for it too, although the whole guest-blogger thing is still very experimental for this publication, so we'll see how that one works.

Hopefully, this time around, there will be some economies of scope (or, as the kids say these days, "synergies") between those media efforts and this blog (though, unfortunately, none has still a thing to do with my day job); but that is yet to be seen.

(Sadly, both articles and blog are gated (the blogs are not even open to subscribers yet), so I cannot link to them from here. Anyway, my analysis there is, of course, written for readers in good 'ol Perú, so it wouldn't necessarily be that wow-inducing to readers outside.)

Returning to topic: while the dust did begin to settle at some point with the descent from the heavens above after the honeymoon, re-starting was forever postponed, never quite feeling I had managed to catch up with the edge of econ affairs at a time when everyone and their dog's uncle were talking about the same two things: global financial collapse and US elections.

People wholly focused 24/7 on these topics where writing all day, everyday about them. So why add echo?

And was there anything else to write about?

But publishing again made me nostalgic for my littlest Kernel, my beloved Null. Plainly sentimental reasons, then, to return.

And the repeat-optimizer than I am, I might reinvent this blog. We'll see how it goes.

I even changed the subtitle. Subtle, huh?

Just for the heck of it

2008-10-07T13:39:00.006-04:00

Agree or disagree, it's a conversation starter.

Source: Peter Brookes, TimesOnline

Commodity fundamentals, commodity speculation

2008-05-01T13:18:00.003-04:00

The Economist is ceding (at last!) that loose monetary policy in the US may have something to do with the acceleration of commodity-price inflation, going as far as dropping the b-word!

There is no doubt that commodities have become an increasingly popular investment category — in fact they bear many of the hallmarks of a speculative bubble... The most recent circumstantial evidence also suggests that the Fed may bear some responsibility for the commodities boom. The dollar slipped after the Fed’s rate-cut decision as investors reacted to its doveish tone, though at $1.56 per euro, it was still up 2.6% from its low of $1.60 on April 22nd. The price of oil, after hitting a record high of almost $120 a barrel on Monday, had tumbled to $113 on Wednesday. But the price of crude and other commodities rose afterwards. If those reactions persist, America’s central bankers may have to reflect carefully.

I think that the conflict in this speculation-vs-fundamentals debate lies in (a) the overlap of the (possible) speculative price-increases we've seen over the last few months (sp. since the interest rate cuts in January) on top of a long-term trade driven by fundamentals and which has been in play for several years already; and (b) Jeff Frankel's attribution of the long-term trade to low interest rates also, rather than to fundamentals (as briefly explained in The Economist's article).

Clearly defining the time-horizon one's referring to should deal with most of the confusion arising to the first item. I doubt that most "fundamentalists" can deny that there's been an acceleration over trends over the last few months at the same time as some major economies have been slowing down. And most of us "bubble-heads" agree that there are long-term trades at play and that the really sharp drops in interest rates are fairly recent.

On the other hand, Frankel's arguments will fuel disagreement for as long as there is more than one sentient being willing to have an opinion on the issue. As usual, outside the realm of formal modeling, in which at most one explanation is admissible, reality is likely to be a combination of fundamentals and interest-driven investment/speculative reasons. The question is how much of each.

But since there's more than one sentient being still willing to have an opinion...

Busy econ day

2008-04-30T10:11:00.004-04:00

We're waiting for the Fed to say something about interest rates.
Commodity traders "realized profits" yesterday (read: "commodity prices fell a little yesterday"), perhaps to do something while they wait for the Fed's decision. Will the "low US interest rates have lead to speculation on commodities" crowd have more or less ammo if prices bounce back up/ the Fed does something different than cutting 25 basis points? (Full disclosure: for whatever it's worth, I'm part of the bubble-crowd. For a brief, but comprehensive discussion of the different explanations for the rise in commodity prices, see here. The bubble crowd tries to distinguish the continuous, fundamentals-led growth of the last few years from the vertiginous phenomenon of the last few months.)
Growing business inventories kept the US's GDP from contracting (it grew by 0.6% in the first quarter). While this is obviously better than a falling GDP, could there a less encouraging reason (looking forward) to have avoided the fall?
Thanks to Hillary Clinton, the mainstream media is awakening to the idea (ripped from McCain in a deepening of her mind-bogglingly bizarro attempt to contrast herself from Obama in the primaries by looking more and more... Republican?) of the gas-tax holiday. Can there a more idiotic, nonsensical policy proposal this campaign? Even Robert Reich's against it! The founder of the Pigou Club (and no Obama fan himself) says "Score one for Obama."
We're still waiting for Ben...

Subscribe/Share button

2008-04-17T00:41:00.002-04:00

And now, for even greater excitement and enhanced user experience, a Share / Bookmark button has been added to each post. HT to Diego.

Gas prices rise, McCain sinks deeper.

2008-04-17T00:12:00.005-04:00

It's such an ad-hoc corollary to my last post that I couldn't resist the temptation to blog about it even a day late. As you must know by now if you bother to keep up with the US's presidential campaign, John McCain has asked for a "gas tax holiday:"

[McCain] said he would push Congress to suspend the 18.4 cents a gallon tax on gasoline and 24.4 cents a gallon tax on diesel between May and September – a move his advisers said would cost $8bn-10bn in revenues.
He also reiterated his call for the government to stop adding to the US Strategic Petroleum Reserve so as to ease pressure on supplies. US crude oil prices rose to a fresh record high of $113.93 on Tuesday.
Mr McCain has become increasingly populist in tone over recent weeks as he competes with Barack Obama and Hillary Clinton, the Democratic presidential hopefuls, to appear most responsive to economic concerns.
Source

At least Senator McCain is true when boasting (?) about not understanding much economics and incentives. Either that or we have to question his campaign's claim that global warming is one of his main concerns, up there with education, health, and national security.

Industrial policy by any other name

2008-04-15T00:47:00.011-04:00

In ancient times (a week ago), I went to a presentation at the Urban Institute by Douglas J. Holtz-Eakin, ex-Director of the CBO and currently John McCain's senior policy adviser. The purpose of the talk: to find out what that campaign had to say about tax policy.

Unfortunately, what I found out (and in quite the dramatic fashion as it came at the very, very end of the talk, which was otherwise going nicely given what can be expected from such an exercise) was a textbook example of a policy disaster waiting to happen: an instrument labeled as a global-warming-busting environmental policy whose implementation is unfortunately designed in such a way that it begs to be hijacked by special-interests and converted into the Mother of All Industrial Policies (and Granny to One Huge Redistribution). Very sad.

DHE is undoubtedly a smart economist, but above all he now is a political operator; as such, he handled the couple-of-hours worth of questions with outstanding professionalism, seamlessly mixing sound economics with political obfuscation... which made it oh-so-very-frustrating as it meant that each time we began to scratch the surface enough to know there was something interesting there, we veered into some politically-safe generic statement.

(Having said that, one could sort of tell, by the shifts in his tone and body language, when he was talking as DHE, the economist, and as DHE, the Candidate's Senior Policy Adviser.)

But what really gave me the evil goosebumps was when I asked him about the environmental policy. As you might know, McCain has declared that doing something to stop global warming is among his top priorities; as you might also know, he has chosen tradeable carbon permits over Pigouvian taxes. Oh well, nevermind: at least an argument can be made for their equivalence if the former are auctioned off. At least in principle (god knows how car-drivers would be equivalently-taxed, for example, but nevermind).

Now, what I wanted to know was this: since most of the discussion had been about balancing the budget, but the tax and expenditure measures discussed had not included any revenues from internalizing pollution externalities, was this revealing the campaign's true expectations about passing this reform?

The answer that I got came as a disappointment: it started well, presenting tradeable permits as the constrained-efficient option given all sorts of real-world implementation problems, including much more working knowledge on permit markets... and a greater ease to achieve political support (suspicion alarms warming up)... through transitional issues (alarms starting to fire as this is the time where special interests lay waste to the best laid plans)... which would all have still been fair and square within the realm of "they're still serious about it, they're just trying to also be realistic," until we find out that this will mean that not all permits will be auctioned off, but rather that what sounds like a sizable amount (most of them? it hasn't been decided) will be allocated based on... OMG: on issues such as trade competitiveness, strategic interests, etc!

And since giving out permits = subsidizing, this is, pure and simple, an undercover industrial policy waiting to happen.

Now, I'm not remotely trying to suggest that McCain (or DHE) are themselves planning to create a system they can then game for personal gain, but just think of the opportunity for all policy-makers involved to add a clause here and a special consideration there to end up with a Mutant Morphing Monster that achieves little-to-non of the intended environmental purposes, but instead acts as yet another channel to redistribute fiscal resources back to pet sectors while increasing economic distortions to a whole new level.

Another reason, methinks, to prefer a uniform, across-the-board, carbon-emissions tax. When will the Pigou club become a party?

The Evil That Men Do: Housing Secretary Alphonso Jackson

2008-04-15T00:20:00.006-04:00

The guy in charge of the Department of Housing and Urban Development (HUD), the "Housing Czar," if you wish, has quit. And if even a fraction of what the Washigton Post reports is correct... let's just say a lot is explained on the political econ side.

In late 2006, as economists warned of an imminent housing market collapse, housing Secretary Alphonso Jackson repeatedly insisted that the mounting wave of mortgage failures was a short-term "correction."
...
Jackson, who declined to be interviewed, will be remembered as a Cabinet secretary so committed to carrying out President Bush's goal of increasing homeownership that he encouraged policies that threatened to exacerbate the mortgage crisis, according to interviews with more than 30 current and former HUD officials and housing experts, and a review of numerous HUD documents and audits.
In speeches, he urged loosening some rules to spur more home buying and borrowing. "I'm convinced this spring we will see the market again begin to soar," Jackson said in a June 2007 speech at the National Press Club to kick off what HUD dubbed "National Homeownership Month." He also told the audience that he had no specific laws to recommend to prevent a repeat of the lending abuses that caused the mortgage crisis.
...
Jackson had insisted he would stay in office until the end of Bush's term. But last month, several Democratic senators who hold HUD's purse strings called for his resignation. He had refused to answer their questions about allegations that he was engaged in political favoritism and cronyism. A federal grand jury is investigating whether Jackson lied to Congress about his involvement in contracts and whether he steered millions of dollars in government work at the Virgin Islands and New Orleans housing authorities to his friends.

Read the whole thing here; the quotes above are just the tip of the indignation iceberg.

(HT to Tanta at Calculated Risk.)

Stronger

2008-04-15T00:14:00.002-04:00

Way... too... funny... Must... share...

Stronger from ticoneva on Vimeo.

HT to Chris Blattman.

Recovery? Shyeah, right!

2008-04-08T01:31:00.009-04:00

Have you also been sent into hysterical giggling by the US markets' ability to rally at the sound of any news, good or bad?

Optimism, hope, faith when unexpected good news come out is endearing. But the current favorite rationale to buy, buy, buy when unexpected bad news come out, "it must mean we're near the bottom," is as intellectually satisfying as explaining price drops in "normal" markets as "profit taking." (Are price gains then the result of "loss taking"?)

Anyway, I digress. I read two weeks ago this nice little piece by John Authers in the FT. Now, I know two weeks is unbearably old for a blog, but there you go; it seems an appropriate snippet to have around the next time, the umpteenth time, that analysts come out to tell us that we must have touched bottom because stocks have gone up two days in a row (notice the prediction of a "bear market rally in the next few weeks"):

Perhaps the most convincing argument that we are not yet at the bottom is that so many people think that we are. The clamour to call an end to the crisis in recent weeks in itself shows that optimism has not been extinguished. History’s worst bear markets have been punctuated by many rallies when people thought the worst was over.

The collapse of the Dow Jones Industrial Average after 1929, and of the Nasdaq Composite after 2000, saw falls of about 80 per cent over three years. And yet both saw several “bear market rallies” when the index recovered by 20 per cent or more. Hope springs almost eternal.

In both cases the declines ended with the markets bumping along for a while, and then making advances that went unremarked at first. As Ian Harnett of Absolute Strategy puts it: “We’ll know we’ve hit the bottom when we look and see that share prices are a lot higher than they were a few months ago – we won’t know at the time.”

The case for a bear market rally in the next few weeks looks strong, provided the market can avoid more bad news on the credit front. But it looks hard to call a bottom. One sceptical analyst says: “The bottom will come when everyone at last gives up ever trying to find it.” That moment, unfortunately, is not yet in sight.

Source.

More on the US's Productivity-Growth Slowdown.

2008-03-31T16:38:00.008-04:00

I had been looking at some education data, when just by chance, Clive Crook led me to new study, The Accelerating Decline in America's High-Skilled Workforce: Implications for Immigration Policy, by Jacob Kirkegaard of the Peterson Institute for International Economics. Pretty graph, which I re-reproduce here.

Source [pdf]

Loose thoughts:

Since the quality of (tertiary) education varies from country to country, static comparisons across countries might not be altogether that revealing.

And this graph does not reveal by itself when differences are statistically significant, so perhaps some within-country comparisons are not what they seem to be.

But having said that, within-country, unless you get (from top to bottom) a triangle, followed by a little black square, a black dot, and then a big, gray square, that country is likely headed for a productivity growth slowdown, conditional on education quality within that country and a level of impact of human capital on productivity. (34 years old is old enough to rule out the "they just take longer to get a college degree there" argument.) Germany seems particularly troublesome, although their restricted university/ widespread on-the-job training system of higher education might explain some of this inversion in a more optimistic way.

Within-country and given that desirable order of symbols, a greater spread suggests good prospects of human-capital driven growth. Korea, in particular, might be a happening place to watch.

Is the US headed for productivity-growth stagnation? (See here and here.) So let those H1B visas flow like rivers of honey! (And I'm being selfless here: having one already, restrictions are what's in my narrow, myopic self-interest.)

Peruvians have reasons to feel within-country hopeful.

BS, the story so far

2008-03-27T15:22:00.002-04:00

The fog seems to be lifting. The blurry profile starting to be seen is this one:

BS went to the Fed asking for a bailout.
The Fed considered that contagion and meltdown would likely result. But it declined to open the doors to moral hazard and looked for alternatives.
It might have considered nationalization, but rejected it for several reasons, sp. legal. It might have considered opening the discount window to BS, but decided it would be useless for it, pouring money into an already tainted business and boosting moral hazard in the process. (The window was later opened to other investment banks to stop contagion, specially in the case of Lehman Brothers.)
Instead, it helped engineer a buyout via JP, which had access to the discount window and a solid balance sheet. While this amounts to what is now being called the "socialization of losses/risk", it would prevent contagion.
JP would benefit enormously, but what was important was (a) preventing contagion and (b) that BS shareholders were publicly punished. Thus the $2 price ($0 would have delayed the deal as BS shareholders kicked and screamed all the way to the bankruptcy window, even if they'd get nothing through it).
But JP was not entirely happy because it wanted to keep BS's "talent" pool and keep it happy. These employees would have fled in disgust at $2 per share.
So JP pretended shock at a terrible glitch in the contract it signed, though it might have even included that glitch on purpose (at the very least, it seems to have been aware of it at the signing of the contract). This gave them the excuse to renegotiate with the aim of keeping BS employees, while the Fed could only watch since it couldn't afford to let the deal fail.

Conclusion: the Fed had the right idea given the constraints it faced, but got stiffed during the implementation. In the end, it's been duped into bailing out the JP/BS combo (it "socialized losses while keeping profits private"; I like that new catchphrase) and, perhaps, into fanning the moral-hazard fire.

My bad: The Economist shows me why I was wrong about Bear Stearns.

2008-03-27T13:50:00.012-04:00

Yet another post on the BS anti-saga. This time, to remind me that I should keep up to date with my reading before posting stuff.

The Economist's Free Exchange blog has a wonderful post that shoots down my main alternative-universe proposal for what-the-Fed-missed-to-do. They get the mix of outrage (at the retelling of the story by Sorkin in the NYT) vs cool-headedness just right. And brevity. Definitely a good read.

First, two additional pieces of info:

The week this all got started, "a complacent Bear Stearns went to the feds cap in hand, saying it would be gone by last Monday if help wasn't forthcoming." Dude! Could they be this cheeky? After what they did (didn't do) with LTCM in 1998?
There's no need to speculate about how much BS's shareholders would have received had they gone to bankruptcy: $0. So even $2 was mana from the skies (or, more technically, $2 is infinitely more than $0). Quoting naked capitalism:
It was going to declare bankruptcy Monday if there was no deal; its shareholders would have been wiped out. Why am I so confident of this view? If bondholders, as rumored, were buying shares to make sure the JPM deal went through (and thus would take losses on their stock purchases when the deal closed), that meant that they thought their bonds were worth well under 100 cents on the dollar in a bankruptcy. Shareholders are subordinate to bondholders, so equity owners would have gotten zilch.

So why am I doing a mea culpa here? Because of my suggestion that BS should have been nationalized. Quoting naked capitalism again:

I can think of a host of reasons, however, why the Fed did not go the nationalization route, the biggest being that it lacked clear authority (it couldn't declare Bear to be insolvent, as it could a member bank). And letting Bear fail (and having acsounts [sic] frozen) was what the Fed was trying to avoid, so letting it fail and then seizing control (even assuming it could do that) was never an option. No doubt, the central bank also did not want to assume administrative control of an entity that it had never regulated (ie, its supervisors had never kicked its tires) that dealt actively in markets in which the Fed has little expertise. Even in an orderly liquidation scenario, that it a lot to take on.

Doh! What was I thinking? The Fed can take over commercial banks, not investment banks without breaking half a million laws, right? (If anyone out there knows what the case is exactly, please drop a comment here.)

So perhaps I owe Bernanke et al and apology. I'm sure they'll be so happy to know that.