http://voices.washingtonpost.com/the-trail/2008/11/14/clinton_top_contender_for_secr.html?hpid=topnews

HILLARY RODHAM CLINTON

Clinton Top Contender for Secretary of State

Barack Obama and Hillary Clinton at a campaign rally in Orlando in late October. (Jim Young/Reuters)

Updated 1:30 p.m.

By Anne E. Kornblut

After an under-wraps meeting with President-elect Barack Obama in Chicago on Thursday, Sen. Hillary Rodham Clinton is now considered a top contender for the role of Secretary of State in the Obama administration, several people involved in the process said on Friday.

Clinton, in an appearance televised live on Friday, said she would not speculate about Obama’s Cabinet selections. Her aides have referred questions about the process to the Obama transition team, whose officials are not commenting. Advisors warn that only a small handful of officials know for certain where Clinton ranks on Obama’s short list, which also includes Sen. John F. Kerry of Massachusetts.

But one Clinton veteran who is in touch with the transition team called it a “real possibility.” Another said she has a “very good chance” of getting the job. Most notably, Obama advisors have done nothing to tamp down speculation about Clinton, as they did when it became clear she would not be Obama’s running mate — even though letting her name hang in the air holds real risks for Obama if he ultimately does not select her, potentially reopening the Democratic primary’s wounds.

The mere mention of Clinton’s name has set off a frenzy of speculation about the advantages — and disadvantages — of selecting his former Democratic rival and former first lady, whom Obama passed over as his vice presidential running mate.

In an interview on Friday, Sen. Lindsey Graham (R-S.C.), a close confidante of Sen. John McCain’s, said Clinton would be an excellent choice and easily confirmed by the Senate for the post. “I thought she was going to come back to the Senate. Who knows?” Graham said.

“She’ll easily be confirmed if she gets chosen,” Graham said. “That kinda surprised me, but she wouldn’t be a bad choice at all. If she were chosen, she has the portfolio and the skills that would make her uniquely qualified for the job.”

A central question is how Clinton would fare in the vetting process. Another is how well her operation, and her husband’s, would blend into an Obama operation that has been famous for its discipline and collegiality. Although Clinton campaigned hard for Obama in the fall, tensions between the two camps remain.

A third political consideration for Obama is how to handle Kerry, who set Obama’s political career in motion by having him give the keynote address at the Democratic convention in 2004. Kerry is a senior member of th Senate Foreign Relations Committee; Clinton is a member of the Senate Armed Services Committee.

When Obama did not pick Clinton over the summer, her advisors complained that he did not even extend her the courtesy of vetting her. But aides to both also said that, during a private meeting after the primaries ended, Clinton had explicitly asked Obama not to vet her — a process that would involve turning over tax returns and opening up her husband’s library and foundation records — unless he intended to choose her.

At the time, Obama aides said they did not believe Clinton could have survived their rigorous vetting process, in particular because of former president Bill Clinton’s work since leaving office. The question, then, is whether the standards for Secretary of State are lower than for vice president, and whether Clinton is now comfortable turning over her family’s private information.

To be considered for the post, Clinton, like other contenders for high-ranking executive positions, would have to undergo an onerous and far-reaching process that would force her and her husband to disclose detailed personal and financial records.

The Obama transition team is requiring that all candidates for Cabinet and other senior positions complete a 63-question application, in addition to an extensive FBI background check before their Senate confirmation hearings, according to an Obama advisor involved in vetting candidates who spoke only on the condition of anonymity, because of the sensitivity of the personnel process.

The Obama team requires candidates and their spouses to detail their finances and all corporations, partnerships, trusts, business entities, as well as political, civic, social, charitable, educational, professional, fraternal, benevolent or religious organizations they have been involved with during the past 10 years.

It is unclear whether former president Bill Clinton would be forced to disclose the benefactors of the William Jefferson Clinton Foundation, information that has not previously been made public.

The Obama questionnaire includes a request to identify any personal financial records that the candidate or spouse “will not release publicly if necessary,” and to “state the reasons for withholding them.”

Among the other requests demanded of candidates by the Obama team is any e-mail, text message, instant message or diary entry that could “suggest a conflict of interest or be a possible source of embarrassment to you, your family or the president-elect if it were made public.”

Goldman, Bank Executives Tell Congress They Plan to Slash Pay

By Ian Katz and Christine Harper

Nov. 13 (Bloomberg) — Goldman Sachs Group Inc. and the biggest U.S. banks, under pressure from Congress to justify their compensation after receiving cash injections from the government, said employees’ pay would be slashed this year.

Goldman’s payouts to employees will be “dramatically affected” by this year’s financial turmoil, Gregory Palm, a general counsel at Goldman, said today in prepared testimony before the Senate Banking Committee in Washington. JPMorgan Chase & Co. employees will make “substantially less” this year, the bank’s chief risk officer said. Bank of America Corp. said its bonus pool may be cut in half.

Goldman, which received $10 billion from the government’s plan to prop up the financial system, last year paid record bonuses to Chief Executive Officer Lloyd Blankfein and Co- Presidents Gary Cohn and Jon Winkelried, awarding more than $65 million to each after the company reported the biggest profits in Wall Street history. With revenue down 32 percent this year, money set aside for pay has been cut by the same amount.

Committee Chairman Christopher Dodd, a Connecticut Democrat, said banks receiving funds from the Treasury’s $700 billion rescue plan have an obligation to the public to help homeowners and the economy, not bolster compensation.

“Lenders who receive public funds should use those funds to lend,” Dodd said at the hearing, where executives from Charlotte, North Carolina-based Bank of America Corp. also spoke. “Many are failing to do so.”

Spending Limits

Lawmakers are urging greater oversight of the Treasury bailout, and Democrats including Senator Charles Schumer of New York are pressing to limit how banks spend the U.S. investments, including how they apply capital to employee bonuses or the acquisition of weaker institutions. Any mergers resulting from the bailout should be approved by Treasury, Schumer said today.

“The acceptance of public funding carries with it a public obligation,” Dodd said. “Until we solve the foreclosure problem, we will not have any hope of solving larger economic problems.”

Bank of America’s available pool for executive bonuses this year will be reduced by more than 50 percent, said Anne Finucane, global marketing and corporate affairs executive, in testifying to the committee.

JPMorgan’s $25 billion in federal aid is helping “to expand the flow of credit to creditworthy U.S. consumers and businesses on competitive terms and to work diligently to modify the terms of residential mortgages,” said Barry Zubrow, executive vice president and chief risk officer. Although JPMorgan didn’t ask for the U.S. aid, “we believe the program is well-conceived and support it.”

Wells Fargo

Wells Fargo & Co., the nation’s second-biggest bank by market value, won’t spend Treasury money on executive compensation, said Jon Campbell, regional banking president for the San Francisco-based lender. “Wells Fargo doesn’t need the government investment to pay for bonuses or compensation,” he said in prepared testimony.

Nine U.S. banks received $125 billion in government funds last month, and Citigroup Inc., Wells Fargo and JPMorgan Chase each received $25 billion. Bank of America and Merrill Lynch & Co., which is being acquired by Bank of America, also got $25 billion. Morgan Stanley and Goldman Sachs got $10 billion apiece.

Senior executives at the banks that received federal funds may have their pay slashed as much as 70 percent, according to a Nov. 6 report by Johnson Associates, a compensation consultant.

To contact the reporters on this story: Ian Katz in Washington at ikatz2@bloomberg.net; Christine Harper in New York at charper@bloomberg.net

Last Updated: November 13, 2008 13:32 EST

New wave of CDOs at risk of default

By Paul J Davies

Published: November 13 2008 23:55 | Last updated: November 13 2008 23:55

Synthetic CDOs, the risky and complex debt products that are based on pools of corporate credit derivatives, are under increasing pressure after suffering a wave of default-related losses on top of general credit market deterioration.

Synthetic collateralised debt obligations based on exposure to corporate bonds through the derivatives market have already seen $24bn of losses from the recent defaults of Lehman Brothers and other financial institutions, according to analysts at JPMorgan.

Deals worth $103bn have been left in what the analysts call a “binary” position and could see a quick descent into losses if more defaults materialise, the analysts said. Between $32bn and $56bn of these mezzanine, or middle ranking, tranche deals are at risk of high capital losses with the next default.

JPMorgan estimates there are about $757bn outstanding of synthetic CDO tranches based solely on corporate debt derivatives, many of which were created and sold during a boom in issuance through 2006-07.

Synthetic corporate CDOs were instrumental in driving down spreads, or risk premiums, on credit default swaps during the height of the credit bubble, because the banks that created these products hedged them by selling contracts for protection against default on hundreds of individual companies referenced in the CDOs.

The main concern for credit markets is that a flight by investors away from CDOs would lead to a reversal of this process, whereby banks would be forced to buy back huge volumes of protection and so push spreads dramatically wider from their already elevated levels.

The JPMorgan analysts expect the rate at which investors look to unwind their trades will remain slow and gradual for now, in part because there are no market value triggers to cause a run for the door.

“Having said that, the size of this market remains significant and investors experience of the first capital losses could be a turning point in their decisions around holding these trades,” said Yasmine Saltuk of JPMorgan.

At the moment, market value losses exceed credit losses by most estimates. Analysts at Citigroup put market value losses on an estimated $584bn of outstanding synthetic CDOs at $67bn by November 10. This is a recovery from the $81bn loss position on October 24 when CDS spreads were around their widest.

The private nature of the CDO industry makes estimating even just the size of the market difficult, hence the difference between the Citi and JPMorgan estimates.

Ms Saltuk and her team estimate market value losses on about $436bn of remaining mezzanine tranches to be in the region of 30-40 per cent, or up to $174.4bn.

Michael Hampden-Turner of Citi is more sanguine about the pace of unwinds, saying that investment grade defaults in the near future are not likely to be as numerous as during the recent weeks of extreme financial crisis. “The pace of [CDO] unwinds and restructuring has increased, but it still remains low and orderly given the overall size of the market,” he said.

Copyright The Financial Times Limited 2008

http://www.ft.com/cms/s/0/ffda8156-b1c1-11dd-b97a-0000779fd18c.html

Hedge Fund Managers Ask for a Few New Rules

By LOUISE STORY
Published: November 13, 2008

http://www.nytimes.com/2008/11/14/business/14hedge.html?ref=business

WASHINGTON — A House of Representatives committee room was transformed into a club for billionaires for a few hours on Thursday, as five of the richest men in the world testified on the role of hedge funds in financial markets.

Daniel Rosenbaum for The New York Times

Five prominent leaders of giant hedge funds testified before Congress on Thursday. From left, George Soros, James Simons, John A. Paulson, Philip A. Falcone and Kenneth C. Griffin.

Rep. Henry A. Waxman, Democrat of California, on the committee investigating hedge funds.
The billionaires were all hedge fund managers themselves, among the most prominent — and successful — in the business. Many of the people crowding the room expected a slugfest, given the growing calls on Capitol Hill for hedge funds, those private investment vehicles, to disclose their investments and business practices. So it came as something of a surprise when the managers agreed, more or less, with the lawmakers. All five managers — Philip A. Falcone, Kenneth C. Griffin, John A. Paulson, James Simons and George Soros — said they would support new rules that would require their industry, controlling nearly $2 trillion, to disclose more of its secrets.

The hearing was crammed with some of the same policy makers who have criticized people who presided over the financial boom that has become a painful bust. But aside from some grumblings about how much money hedge fund managers make, the sharpest remarks were directed not at John Paulson and the other hedge fund billionaires, but at Henry M. Paulson Jr., the secretary of the Treasury.

“The headline of this hearing is definitely Paulson v. Paulson,” joked Elijah E. Cummings, Democrat of Maryland.

For all the theatrics, a consensus seemed to be emerging. More than a year into the financial crisis, the hedge fund industry’s leaders seem to realize that regulation may be inevitable, that operating under the radar may no longer be possible, and that their riches have torn away their cloak of anonymity.

Mr. Griffin, the founder of the Citadel Investment Group, displayed the most resistance to the changing tide, at first saying that greater regulation of the industry was not needed. Then, growing flush, Mr. Griffin, who began trading bonds out of his Harvard dorm room, said he would “not be averse” to greater disclosure, so long as the information was shared only with regulators.

Mr. Soros, seated at one end of the panel with his most recent book in front of him, was the strongest advocate of greater disclosure and new rules about margin requirements and leverage, or borrowed money. But while his testimony — and willingness to sign autographs — may have pleased some Democrats, some Republicans took the opportunity to criticize him for his liberal ideas.

“Your intervention in the drug area has been appalling,” said Representative Mark E. Souder, Republican of Indiana.

Mr. Soros, well-known for his daring bet against the British pound in 1992, is used to testifying before Congress, but some of the other hedge fund titans took the hearing as an opportunity to introduce themselves.

“I was born in Chisholm, Minn., population 5,000, on the Iron Range of Northern Minnesota,” said Mr. Falcone, the co-founder of Harbinger Capital Partners. “I was the youngest of nine kids who grew up in a three-bedroom home in a working class neighborhood.”

Mr. Falcone, a stock picker, said he favored greater transparency of hedge funds and public companies. He also added, “It’s important for the committee and the public to know that not everyone who runs a hedge fund was born on Fifth Avenue.”

Even the smallest of details provided in the hearing had traders around Wall Street glued to a webcast of the hearing. Mr. Paulson, whose fund gained prominence because he correctly bet against the mortgage market, became the topic of widespread emails when he revealed that he now managed $36 billion, employed 70 people, and that 80 percent of his assets come from foreign investors.

Like several of the other managers, Mr. Paulson tried to emphasize that he not only does well, he does good. He included a press release about a donation he gave to a nonprofit organization in his written testimony. And he pointed out that he has created jobs.

“Over the last five years, our firm has increased our employee count by 10 times, creating numerous high-paying jobs for Americans,” Mr. Paulson said.

http://www.nytimes.com/2008/11/14/business/14hedge.html?ref=business

In baseball, and in politics, the numbers don’t lie By Jim Caple
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Updated: November 7, 2008, 11:32 AM ET
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Forget Cole Hamels and the Phillies. No one in baseball had a more impressive fall than Nate Silver.

Silver is the Baseball Prospectus managing partner who applied his baseball statistical analysis and forecasting models to the 2008 presidential election with his Web site, fivethirtyeight.com (the name refers to the total of 538 electoral votes). He started the site, he says, because of “an annoyance at how polls were covered by the mainstream media, cherry-picking the numbers.” Convinced he could do better, Silver used his sabermetric models to correctly forecast some Barack Obama victories in key primaries, and went on to predict that Obama would be elected president with 52.3 percent of the popular vote and 349 electoral votes. With a few votes still being counted, Obama won with 53 percent and 364.

“We worked hard to get the media to treat numbers in baseball in a serious manner and it was fives times worse in politics,” Silver said. Yet he convinced them. The site became must-reading for political fans — Silver says it had three million hits on Election Day — and was considered one of the most reliable sources of information on the campaign.

So what’s easier, predicting how Kosuke Fukudome will play in Chicago, or how John McCain will perform in Virginia?

“I think politics is easier,” Silver said. “It’s less complex. In baseball, you have 750 players who are active at any one time and each have 30 statistical categories and each have a season. If you look at the matrix of numbers, there are just so many permutations. In politics, there is only one election and a limited number of polls.”

Silver says one similarity to baseball forecasting was comparing states that had similar demographics, such as Ohio and Pennsylvania. If McCain or Obama was doing well in one state, you could expect the same trend in the other state as well. “It’s like comparing similar players and applying that algorithm,” he said. “But there is always the Ichiro Suzuki problem. He’s unlike any other player and there are certain states, like Florida, or West Virginia, that aren’t like any other state.”

[+] Enlarge

AP Photo/Pablo Martinez Monsivais
Nate Silver nailed the election results on his Web site.
Asked for baseball comparisons, he said McCain’s campaign reminded him a lot of this year’s Houston Astros. “Start out slow, get ridiculously hot in August, and then completely blow it at the end. Obama, conversely, might be the White Sox, who consistently overachieve expectations but never make it look easy.”

More importantly, what would Sarah Palin’s VORP be?

“Sarah Palin, I think, would have to have a VORP of -10 or so. Somewhere in the Neifi Perez range; she tangibly hurt that ticket. A replacement level, do-no-harm VP candidate would have been more someone like a Tim Pawlenty or an Evan Bayh.”

Silver said the fivethirtyeight site was so successful he’s going to keep it alive, even though there isn’t another presidential election for four years and another midterm election for two. “We’ll have something to say,” he said. “We’ll look at Congress. If you want to see Chase Utley’s stats, you go to ESPN.com and look at his player card. Or you look at his player card on Baseball Prospectus. But if you want to look at Ted Kennedy’s player card, where do you go? And we’ll look at random things, like why do airlines charge for bottled water?”

A Ted Kennedy player card? A Ted Stevens player card? I can’t wait. Unfortunately, we’ll have to wait, because right now Silver is exhausted. He barely slept the last couple weeks of the campaign — “By the end, it was full-time plus” — and for that matter, he says he couldn’t have kept it up had the campaign lasted two days longer. Plus, he has his Baseball Prospectus duties.

“We write our book from now through the first of the year,” he said. “I have a week to relax and then it gets just as busy again. In February of 2009 I will just have to find an island in the Caribbean and throw my BlackBerry in the ocean.”

One thing Silver hopes people learned from fivethirtyeight.com is how to more intelligently analyze polls. “If there is an outlier that doesn’t make sense, you should question it,” he said. “But people take the most unusual of the poll results and take them the most seriously. Democrats are like Cubs fans, they expect the worst.”

(By the way, Silver is a Democrat, as well as a Detroit Tigers fan by birth, and he says his team was the equivalent of Fred Thompson in 2008 — though I think they were probably more similar to Rudy Giuliani. Which begs the question: Which team was the Dennis Kucinich of baseball — the Royals or the Pirates?)

http://sports.espn.go.com/espn/page2/story?page=caple/081107

ANTITRUST
Justice Reaches $585 Million Antitrust Plea Deal with Computer and Video Screen Makers
Thomas Barnett, who has announced that he’s leaving his post as assistant attorney general for the Justice Department’s antitrust division on November 19, is certainly not slacking off in his final month on the job. Last week his office killed the Google-Yahoo advertising deal. And Wednesday, the antitrust division announced corporate guilty pleas with three manufacturers of LCD computer and video screens. The hardest hit, South Korea’s LG Display, will pay $400 million–the second-biggest criminal antitrust fine ever levied by the Justice Department.

Barnett hailed the antitrust division’s work in remarks prepared for his press conference announcing the deals. “The crimes committed by LG Display, Sharp, and Chunghwa and their coconspirators are among the largest and most far-reaching price-fixing conspiracies the antitrust division has ever detected,” he said.

The Recorder had an intriguing piece yesterday on which of the LCD companies had taken advantage of the Justice Department’s antitrust amnesty program. The likeliest candidate: Samsung, which The Recorder says is a huge player in the LCD market but was not named as a target of this investigation. The Recorder speculated that Samsung, which paid $300 million in a previous Justice Department antitrust probe, had taken advantage of Justice’s “amnesty plus” program, in which a company targeted in one antitrust case can receive a discounted fine and future immunity if it provides evidence of a separate conspiracy. Samsung’s lawyer, James McGinnis of Sheppard, Mullin, Richter & Hampton, did not return The Recorder’s call.

There’s also talk that Chunghwa Picture Tubes is an amnesty program beneficiary. The company is thought to be coughing up information in an antitrust investigation of the cathode ray tube market, which would explain why its fine in the plea deal announced Wednesday–$65 million–represents a smaller percentage of revenues than the fine LG is paying. Chunghwa was represented by Gibson, Dunn & Crutcher partner Gary Spratling, who happened to have designed the antitrust amnesty program as part of the Clinton Justice Department.

The third company to plead guilty on Wednesday, Sharp, will pay a $120 million fine. Sharp was represented by Pillsbury Winthrop Shaw Pittman. LG was represented by Cleary, Gottlieb, Steen & Hamilton.

The Am Law Litigation Daily — Nov. 14, 2008

Sunday, September 21, 2008

Bailouts for Fun and Profit

OK, this pisses me off. David Stout, writing a Q&A in The New York Times (“The Wall Street Bailout Plan, Explained”):

Q. Who, really, is going to come up with the $700 billion?

A. American taxpayers will come up with the money, although if you are bullish on America in the long run, there is reason to hope that the tab will be less than $700 billion. After the Treasury buys up those troubled mortgages, it will try to resell them to investors. The Treasury’s involvement in the crisis and the speed with which Congress is responding could generate long-range optimism and raise the value of those mortgages, although it is impossible to say by how much.

First of all, today’s taxpayers are certainly not going to come up with the money, not by any stretch of the imagination. There are no plans to raise taxes to pay for this bailout, nor, in my opinion, should there be. (That’s not necessarily to say that taxes shouldn’t be raised, just that this bailout should not be the deciding factor.) People (and institutions mostly, really) who buy Treasury securities will come up with the money. The Treasury will issue new Treasury securities to raise the money to pay for the distressed securities that it buys. Most likely the banks that sold those distressed securities will buy the new Treasury securities with the proceeds from the sale, so nobody really has to come up with the money, except for a few minutes while the deals are being done. In effect the Treasury will be paying for the distressed securities by creating its own securities to use as payment.

Someone is going to say, “Well, of course today’s taxpayers aren’t going to come up with the money, but the Treasury securities eventually mature and have to be paid off, and when that time comes, those future taxpayers will have to come up with the money.” I will attack that straw man immediately by pointing out that the debt can be rolled over. Maybe eventually, after rolling over the debt several times, the government will be forced by circumstances to raise taxes to make those payments. But maybe not. I’ll have to do another post on why the “maybe not” case is more reasonable than you might think.

But let’s suppose that those Treasury securities do eventually have to be paid off with taxes and cannot be rolled over indefinitely. Does that mean that future taxpayers will have to come up with $700 billion plus interest? There is a tiny chance that that will be the case. Which brings me to what mostly pisses me off. I repeat from above:

…if you are bullish on America in the long run, there is reason to hope that the tab will be less than $700 billion.

Reason to hope? That the tab will be less than $700 billion? Holy crap! I would sure as hell hope that at least a few of the mortgages in the pools bought by the government don’t default! OK, I’m being a little disingenuous, since much of what the government buys will be lower tranches that can become worthless even if there are only a moderate number of defaults. Some of the securities very likely will become worthless. But in all probability, unless there is a severe, prolonged recession (which is to say, a depression) and a much further decline in housing prices, the government’s whole portfolio will still be worth something.

And – here’s my main point – the Treasury will not be paying full price for these securities. It won’t be paying anything remotely close to the price that the securities were issued at. It will be paying whatever price desperate banks are willing to accept in order to get the securities off their books and replace them with things that can be easily sold when they need cash. These are motivated sellers we’re talking about. In all probability, many banks will be willing to sell these securities for less than they think the securities are really worth. Because they don’t want to take the risk that, when the government bailout is over, they will have some need for cash and won’t be able to sell the securities then.

Granted, there may be some banks that figure out ways to game the system and sell their securities for more than they are worth. But all in all, we should expect the Treasury to get these securities at something close to fair value. The Treasury is not just throwing money away; it’s buying valuable (though quite risky) assets and paying roughly what those assets are worth. [EDIT: I was wrong about this, because I didn’t take into account the moral hazard faced by bankers who can fudge their asset values. I discuss this among other topics in the post where I change my mind about the bailout. It is still true, though, that the Treasury will not be paying full price, and it is likely to recover much of its investment and possibly even turn a profit, but unfortunately not a large enough profit to justify the risk.]

And it’s important to understand that “fair value” includes the expectation of a substantial risk premium. The fair value of a junk bond is considerably less than the fair value of an otherwise similar investment grade bond, but when they mature, both bonds are redeemed at par. The junk bond has a larger chance of default, but even when you take that chance into account, the expected return on the junk bond is considerably higher. People don’t buy junk bonds because they’re stupid; they buy them because they expect, on average, a high return. Similarly, the Treasury should expect, on average, a high return from its purchases of distressed securities.

So, while there is (in theory, at least) quite a large risk to (future) taxpayers (a risk of up to $700 billion – plus the meager interest that the government has to pay), the expected return is not only positive but rather large. And since the interest paid on Treasury securities is quite small, that return, if it materializes, will be a huge windfall for whatever future taxpayers get the benefit.

So this “bailout” is not about the Treasury paying $700 billion and hoping to recover some of it in a best case scenario. It is about the Treasury paying $700 billion dollars, risking losing up to the whole amount, but expecting not just to recover the entire amount but to emerge with a large profit. The Treasury is, in a sense, gambling with taxpayers’ money, but the gamble is a good bet, kind of like if you had inside information about the horse. Of course, making a profit is not the point of the operation, but it might be a pleasant side effect.

posted by knzn at 9/21/2008 02:13:00 AM

 http://knzn.blogspot.com/2008/09/bailouts-for-fun-and-profit.html

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« Fed Watch: Misguided Policies | Main

November 13, 2008

“Deficit Hawks are Like Protectionists”

Things are different when the economy is operating inside the production possibilities curve:

Deficit Hawks are Like Protectionists, by knzn: Everybody knows that, in the aggregate, trade increases welfare. … But protectionists argue that the redistributive effects of trade can often be bad enough to outweigh the aggregate advantage. Trade can hurt certain parties that one may wish not to hurt. The overall pie is larger, but someone’s share may be smaller.

When an economy has slack resources, as the US economy – as well as the world economy – clearly does now and likely will even more in the immediate future, there is no aggregate welfare cost to using up those resources, so any benefit society receives is, in the aggregate, free. In an aggregate welfare sense, slack resources are a free lunch, and that lunch is wasted if nobody eats it. Deficit hawks talk about the cost to taxpayers and the cost to future generations and all that. But let it be noted that fiscal stimuli during times of slack resource use make the overall pie larger, and any objections must rest on the premise that the new division of the pie leaves some particular party with a smaller slice despite the larger pie. It’s pretty much analogous to the argument for protectionism. …

[J]ust like the protectionists, the deficit hawks must be concerned about the redistributive effects of deficits, since the aggregate effect is to increase welfare. But while the protectionists actually have a pretty good argument (at least at the national level, in developed countries) as to why the redistributive effects are bad and might be expected to outweigh the aggregate effects in terms of importance, the deficit hawks’ arguments seem pretty lame to me.

The main issue would seem to be redistribution from future generations to the current generation. Here’s a point I made a couple of years ago, but I’ll repeat it: in the history of capitalism, there has been a consistent long-term trend of increasing welfare, by pretty much any reasonable measurement. You can complain about some of the things that have gotten worse, but the fact is, the19th century really sucked for most people, and the 18th century sucked even worse. And compared to the 1990s, the 1920s sucked, too. Unless we expect the trend to suddenly reverse itself, the likelihood is that future generations will be, in the relevant sense, richer than the current generation. So the deficit is a transfer from relatively rich future generations to the relatively poor current generation. I would hope that those future generations could spare a few extra pennies for such miserable folk as we. Especially since it is our blood, sweat, and tears that will have made them so rich. It is through no merit or toil of their own that they will come of age using microprocessors that run 1000 times faster than the ones we use today. …

Posted by Mark Thoma on Thursday, November 13, 2008 at 01:17 AM in Budget Deficit, Economics, Fiscal Policy

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a says…“I would hope that those future generations could spare a few extra pennies for such miserable folk as we. Especially since it is our blood, sweat, and tears that will have made them so rich. It is through no merit or toil of their own that they will come of age using microprocessors that run 1000 times faster than the ones we use today.”

What a morally bankrupt argument, all dependent on the idea that the future always has it better than the present. There have been long periods in Western Civilization where times have been worse, e.g. consider the Dark Ages versus the Roman Empire. We will have left future generations a depleted stock of oil, a polluted and overcrowded planet, nuclear waste, a diminishing number of species and eco-diversity, and so on and so on.

Posted by: a | Link to comment | November 13, 2008 at 01:37 AM

ddt says…I guess they are dumb stupid jerks just like those idiots who were skeptical of the first bailout plan, huh knzn?

“So, while there is (in theory, at least) quite a large risk to (future) taxpayers (a risk of up to $700 billion – plus the meager interest that the government has to pay), the expected return is not only positive but rather large. And since the interest paid on Treasury securities is quite small, that return, if it materializes, will be a huge windfall for whatever future taxpayers get the benefit.”
http://knzn.blogspot.com/2008/09/bailouts-for-fun-and-profit.html

knzn = fail

Posted by: ddt | Link to comment | November 13, 2008 at 02:49 AM

http://economistsview.typepad.com/economistsview/2008/11/deficit-hawks-a.html#comments

http://online.wsj.com/article/SB122659597830624827.html

NOVEMBER 13, 2008

MIT Professor Explains the Crisis to the Masses

Business school professor Simon Johnson set out to make sense of the financial mess for students and the rest of us.

 By ALINA DIZIK

While some business-school professors were busy planning emergency panels to deal with the economic crisis, MIT Sloan School of Management professor Simon Johnson helped launch the Baseline Scenario, a month-old blog with the tagline “what happened to the global economy and what we can do about it.” A few weeks later, Mr. Johnson devised a two-month-long Global Crisis lecture series, open to anyone at the university, as a way to discuss developing economic events. The noncredit course launched last month and Mr. Johnson estimates that about 60 to 70 students attend his lectures, most of them from the business school. For the next few months, he hopes to marry the two with course readings and discussions accessible through the blog.

Courtesy IMF

MIT Sloan School of Business professor Simon Johnson, speaking at an International Monetary Fund conference last spring. Mr. Johnson was director of research.

Until August, Mr. Johnson was the director of research at the International Monetary Fund. He says that after spending 20 years working on crisis prevention and economic growth issues he felt strongly that he should start a dialogue for everyone from policy makers to nonbusiness types. “There’s a big thirst for listening to accessible discussions,” says Mr. Johnson. By accessible, he says he means “nontechnical, nonjargon and written for non-economists.” Reporter Alina Dizik spoke with Mr. Johnson about his role as an educator in the economic crisis. Edited excerpts follow.

Q: How did you decide to launch the Baseline Scenario?

A: I wasn’t planning to do this. When you leave an official position [as director of research at the International Monetary Fund], it’s usually supposed to be quiet for six months, but on September 17, we came to this scary view that there was a massive crisis on confidence…My friends (blog co-authors Peter Boone and James Kwak) and I felt that this was not a time to stand idly by, that this is something we know a lot about and we had relevant experience and understand how to express our views. We are also nonpartisan, which is a good thing right now.

Q: What’s the main thing that you would say what went wrong and how can we fix it?

A: The big mistake made in the U.S., was to create a crisis of confidence by not saving Lehman and saving A.I.G. Now you have to focus of restoring confidence. In Western Europe they didn’t understand the vulnerability (of) the banking system. Owning up to those mistakes and coming up with coordinated responses — which include emerging markets – is important.

Q: Who is the target audience for the blog?

A: I think it’s written for those interested in the global crisis no matter who they are. Initially, we were trying to engage anyone who wanted to engage — media people, policymakers, government and industry leaders. It’s a natural means of communication and we actually have readers from all around the world.

Q: Why do you think it’s important for all of these people to learn about the crisis?

A:  In order to understand what’s happening in your life and the world around you, you need to get a grip on knowledge on the economic situation. I think it’s everywhere and it’s affecting the whole world.

Q: Your new course, which you designed in a matter of weeks, started last month. What prompted you to put it together so quickly?

A: We are in very new and uncharted territory and needed to be able to respond before our second semester which starts in February.

Q:Will the course be similar to the blog in terms of mass appeal?

A: The point is to make it a very open course, with the same sort of format. It’s a noncredit course and anyone can come with their concerns or issues and the reading will all be on the Web site on a weekly basis. Mostly (it’s) MIT Sloan students but other (university) students can come.

Q: After a little over a month of publishing the blog, you have about 110,000 page views. How did you start?

A: We decided to write it and just jumped in the deep end. We started off with some policy descriptions that were very radical and we were among the first people who articulated a big policy agenda.

Q: What has the reaction been to the blog?

A: We are pleasantly surprised as to how broadly it appeals to people. They like to look at it as more of an in-depth analysis of things coming down the road.

Q: The blog doesn’t have an introductory post or page – how do readers get up to speed on the current economic turmoil?

A: It’s like throwing people in the deep end. The Web site is there as a support mechanism. If you don’t understand, you can start with “Financial Crisis for Beginners” – our most popular page.

Q: What else makes this course stand out?

A: Usually, you slip a session (on such issues) into your existing macro (economics) class, but the course will be fairly in-depth and focused on all of these issues. It’s a deep dive and it’s also completely unfolding before our eyes.

Q: How are you going to marry the dialogue in the classroom and on the site?

A: What I’d like (students) to do is post on the Web site. I want to get them to get enthused. I hope that everything will run through the Web site. There are no stupid questions — even I’m confused about some things — but the point is to get the students engaged.

Write to Alina Dizik at alina.dizik@dowjones.com