NOT ENOUGH AUDACITY TO ACT FOR THE PEOPLE?
Paul Krugman, in his June 25 New York times editorial "Not Enough Audacity", points out that: "When it comes to domestic policy, there are two Barack Obamas.. On one side there’s Barack the Policy Wonk, whose command of the issues — and ability to explain those issues in plain English — is a joy to behold. But on the other side there’s Barack the Post-Partisan, who searches for common ground where none exists, and whose negotiations with himself lead to policies that are far too weak.
Both Baracks were on display in the president’s press conference earlier this week. First, Mr. Obama offered a crystal-clear explanation of the case for health care reform, and especially of the case for a public option competing with private insurers. “If private insurers say that the marketplace provides the best quality health care, if they tell us that they’re offering a good deal,” he asked, “then why is it that the government, which they say can’t run anything, suddenly is going to drive them out of business? That’s not logical.”But when asked whether the public option was non-negotiable he waffled, declaring that there are no “lines in the sand.”... So Mr. Obama and Democrats in Congress have to hang tough — no more gratuitous giveaways in the attempt to sound reasonable. And reform advocates have to keep up the pressure to stay on track."
I have defended for years the idea to use a public health plan to out-compete the private health plans. Because of its bulk, a public health plan can negotiate lower prices from drug makers, and it is cheaper, because it does not have to make such a profit that it would attract investors. Now, clearly, the people who expect to make a fortune from the bad health of their fellow citizens, are terrified by the perspective of losing a major source of gouging. So the plutocrats are on the rope, and now is not the time to rescue them, They were already rescued by giving them a few trillions for their bankrupted banks.
But there is a more general question.
The leader of May 68, the highly successful Franco-German politician, Daniel Cohn-Bendit,has boosted ecology in France and the European parliament. Considering his great popularity, he has been pressed to run for the French presidency, but the "green giant" declined "Because to be president, one has to be a killer."
By this Daniel Cohn-Bendit meant that the French president comes across decisions where he has to decide to kill people. It is part of the job. France declared war to Hitler on September 3, 1939. During the cold war, Soviet attack plans in Europe intended to stop at the French border, because the Soviets were persuaded that France would strike with its nuclear arsenal. Same for Britain. Everybody knew that the defense of democracy, worldwide, depended upon the military resolve of the three great democracies, Britain, France, and the USA. That, in turn, depends upon them being led by killers.
To be a strong warrior, one has to have resolve. One has to believe in something beyond seduction. Of course, successful politicians, in a democracy, have to be seducers, otherwise they would not be elected. But the heads of government of the top democracies have to be more. They have such very strong beliefs that they would order whatever is necessary.
Obama believes deeply, apparently, that the truth is somewhere between yesterday's obsolete democrats, and yesterday's obsolete republicans. But, being half way lost between two wrongs does not make one right. That the USA does not have a public health plan is abysmal, and it has become a national weakness so great, it is actually a strategic threat against the USA.
Obama has enormous power and clout at his disposal right now, but he is wasting them because he seems to believe that it is wise to believe in nothing except being the interlocutor between adorers of the plutocrats on the left, and adorers of the plutocrats on the right.
Look at the gas tax: it has never been lower, because it is not adjusted for inflation. But Obama will not rise his voice about such things, he just runs a deficit that will soon paralyze him. All he seems to want is play a smile on TV. But the USA, and democracy, need, even require, to be defended by people with ultimate convictions. If one is so weak in one's conviction, that one cannot dispose of the weakest ideas of the extreme right, that have proven so completely wrong, for so long, how could one look as if one could order a nuclear strike? Because it is ultimately what it is at.
Obama's metapsychological waffling is also apparent in foreign policy. After proclaiming the Qur'an "holy" several times in Cairo, he declared: “And I consider it part of my responsibility as President of the United States to fight against negative stereotypes of Islam wherever they appear.” Apparently Obama had forgotten the blatantly secular Constitution of the USA. The consequences were immediate: Khamenei, the official "Supreme Guide" of Islam in Iran, stole the election there, within days. Khamenei had every reason to expect that Obama would fight by his side, against the "negative stereotypes of Islam wherever they appear", for example in the streets of Teheran.
Patrice Ayme
http://patriceayme.wordpress.com/
Note: For days, Obama held to the position that "The difference between Ahmadinejad and Mousavi in terms of their actual policies may not be as great as has been advertised." Maybe the noodle is al dente, maybe it is not...
Thursday, June 25, 2009
EARTHQUAKE ECONOMY NOT
A CASE WHERE VALUES OF THE ECONOMY OF THE USA ARE REVEALED:
Simon Johnson observes in his blog, "The Baseline Scenario": "You cannot design a financial system that is immune to crash – this would be like declaring earthquakes illegal. But in the aftermath of unexpectedly high damage from a serious earthquake, it makes sense to completely overhaul your building code and retrofit vulnerable buildings. In fact, if you largely ignored what the earthquake revealed in terms of structural weakness, wouldn't that be negligence?" (June 25, 2009).
Well, pondering the philosophy of earthquakes, so to speak, has been one of my preferred themes. It is very revealing of the true values of the socioeconomy of the USA, and how one got there.
Speaking of earthquakes, indeed, California is grossly unprepared (building codes are grossly inappropriate). Several big ones are expected anytime, and, if they struck in metro areas (one earthquake of more than 7 Richter is due in the central San Francisco Bay Area), they could kill many thousands (maybe up to 50,000).
And what is being done? Well, the city of San Francisco has admitted that many thousands homes should collapse (due to their pathetically weak garages in front and below). And one is just waiting. Although the irony is that doing something about impending vast death and immense destruction would help the economy right away (there is a 11.5% unemployment rate in California, May 2009). This is a case where a state, and, or, federal mandate for more strongly built homes, would enforce frantic construction, spurring the economy, and saving thousands tomorrow.
So why is nothing being done? Probably because construction by the people for the people does not particularly fascinate the plutocracy. What's in it for the oligarchy? Nothing much (they live somewhere else in better homes). Actually spending money on housing for normal people would be as much money not going to banks, their bankers, and their shadows.
Patrice Ayme
http://patriceayme.wordpress.com/
Simon Johnson observes in his blog, "The Baseline Scenario": "You cannot design a financial system that is immune to crash – this would be like declaring earthquakes illegal. But in the aftermath of unexpectedly high damage from a serious earthquake, it makes sense to completely overhaul your building code and retrofit vulnerable buildings. In fact, if you largely ignored what the earthquake revealed in terms of structural weakness, wouldn't that be negligence?" (June 25, 2009).
Well, pondering the philosophy of earthquakes, so to speak, has been one of my preferred themes. It is very revealing of the true values of the socioeconomy of the USA, and how one got there.
Speaking of earthquakes, indeed, California is grossly unprepared (building codes are grossly inappropriate). Several big ones are expected anytime, and, if they struck in metro areas (one earthquake of more than 7 Richter is due in the central San Francisco Bay Area), they could kill many thousands (maybe up to 50,000).
And what is being done? Well, the city of San Francisco has admitted that many thousands homes should collapse (due to their pathetically weak garages in front and below). And one is just waiting. Although the irony is that doing something about impending vast death and immense destruction would help the economy right away (there is a 11.5% unemployment rate in California, May 2009). This is a case where a state, and, or, federal mandate for more strongly built homes, would enforce frantic construction, spurring the economy, and saving thousands tomorrow.
So why is nothing being done? Probably because construction by the people for the people does not particularly fascinate the plutocracy. What's in it for the oligarchy? Nothing much (they live somewhere else in better homes). Actually spending money on housing for normal people would be as much money not going to banks, their bankers, and their shadows.
Patrice Ayme
http://patriceayme.wordpress.com/
Wednesday, June 24, 2009
FROM PLUTOCRACY TO PLUTOCRAZY.
HOW PLUTOCRACY TAKES CARE:
Krugman asked why it was that so many representatives in the USA were against the health strategy suggested by Obama, which incorporates a public health plan. I answered this:
The present day, private health care of the USA privatizes profits and socializes costs (because those who do not have insurance go to the emergency room). it is exactly the same strategy that the plutocracy follows as it does with the banks. Senators in love with the present health care are in love with the plutocracy. They love the hand that feed them. The worth of the average Senator is nearly five million dollars. Plutocracy is turning into plutocrazy. Alleluia!
On the serious side, a public health care system can only cost less to the nation than any private plan, because the later is laden with the profit motive. So any federal health care plan will out-compete any private plan.
Then the public plan will inexorably devour all the private health care plans, one after the other, state after state. That would be a tragedy for the plutocracy, really. Then the plutocracy would have increasingly to depend on gouging the public with banks and their shadows. That would be unbalanced, and would reduce the profits of politicians by reducing their sources of income, influence, and power.
Six hours later, June 22, 2009, 9:09 am on his blog, Krugman wrote this: "Competition, redefined: ... Sen. Blanche Lincoln [whines] about how terrible it would be if a government-run insurance plan undermined free-market competition, then Krugman and others observes that:
The Justice Department considers an industry to be “highly concentrated” if one company has 42 percent of the market. In Arkansas — Senator Lincoln should take note — Blue Cross Blue Shield has 75 percent of the market. If you take government self-insurance plans out of the equation, it’s higher. The state ranks as the ninth most concentrated in the country. Is it any wonder that insurance premiums have risen five times as fast as wages?
The truth is that the notion of beneficial competition in the insurance industry is all wrong in the first place: insurers mainly compete by engaging in “risk selection” — that is, the most successful companies are those that do the best job of denying coverage to those who need it most. But in any case, Arkansas is in effect a one-insurer monopoly state, with no competition at all — unless a public plan is created.
In fact, I may have a new hypothesis about the political economy of the health care fight. One thing that’s obvious, if you look at the balking Democrats I chided in the NYT 22 June column is that almost all of them come from states with small population. These are also, by and large, states in which one or at most two private insurers dominate the market.
So here’s a suggestion: while the opponents of a private plan say that they’re trying to defend market competition, what they’re actually doing is defending lucrative local monopolies.
Patrice Ayme
http://patriceayme.wordpress.com/
Krugman asked why it was that so many representatives in the USA were against the health strategy suggested by Obama, which incorporates a public health plan. I answered this:
The present day, private health care of the USA privatizes profits and socializes costs (because those who do not have insurance go to the emergency room). it is exactly the same strategy that the plutocracy follows as it does with the banks. Senators in love with the present health care are in love with the plutocracy. They love the hand that feed them. The worth of the average Senator is nearly five million dollars. Plutocracy is turning into plutocrazy. Alleluia!
On the serious side, a public health care system can only cost less to the nation than any private plan, because the later is laden with the profit motive. So any federal health care plan will out-compete any private plan.
Then the public plan will inexorably devour all the private health care plans, one after the other, state after state. That would be a tragedy for the plutocracy, really. Then the plutocracy would have increasingly to depend on gouging the public with banks and their shadows. That would be unbalanced, and would reduce the profits of politicians by reducing their sources of income, influence, and power.
Six hours later, June 22, 2009, 9:09 am on his blog, Krugman wrote this: "Competition, redefined: ... Sen. Blanche Lincoln [whines] about how terrible it would be if a government-run insurance plan undermined free-market competition, then Krugman and others observes that:
The Justice Department considers an industry to be “highly concentrated” if one company has 42 percent of the market. In Arkansas — Senator Lincoln should take note — Blue Cross Blue Shield has 75 percent of the market. If you take government self-insurance plans out of the equation, it’s higher. The state ranks as the ninth most concentrated in the country. Is it any wonder that insurance premiums have risen five times as fast as wages?
The truth is that the notion of beneficial competition in the insurance industry is all wrong in the first place: insurers mainly compete by engaging in “risk selection” — that is, the most successful companies are those that do the best job of denying coverage to those who need it most. But in any case, Arkansas is in effect a one-insurer monopoly state, with no competition at all — unless a public plan is created.
In fact, I may have a new hypothesis about the political economy of the health care fight. One thing that’s obvious, if you look at the balking Democrats I chided in the NYT 22 June column is that almost all of them come from states with small population. These are also, by and large, states in which one or at most two private insurers dominate the market.
So here’s a suggestion: while the opponents of a private plan say that they’re trying to defend market competition, what they’re actually doing is defending lucrative local monopolies.
Patrice Ayme
http://patriceayme.wordpress.com/
Sunday, June 21, 2009
ONLY GOVERNMENT INVEST IN THE NAME OF THE PEOPLE
NO INVESTING DEMOCRACY, NO DEMOCRACY.
In the economic system as it is in the USA, bankers, by deciding who gets the money, create the economy. And the question is, once they are done, does this economy do anything the People want, or even anything the People need? The latest crisis, and the state of the present economy of the USA show that the answer to both is a resounding no. One has just to look at: decaying health care, deindustrialization, and a median income stagnant or going down for decades, and an economy that is losing its comparative advantages in so many ways that it is incapable of maintaining its independence.
Hence the economy is too important to be left to bankers. Somehow the place of the state (hopefully elected by the People, not bankers) has to grow. So the question becomes: how do you control plutocracy, once it has got out of control? It is not easy. Once the influence of private interests on government has grown enough, very little stop them.
An extraneous example: eleven French engineers were killed by a bomb in Pakistan. It was assumed that it was Al Qaeda. But yesterday two French antiterrorist judges informed the families that it was actually agents of the Pakistani government, who were unsatisfied by how much money they got under the table, that did the deed.
The point: after some degree of expectation is reached, the powerful will not be held by anything, to keep getting the power they view as their due. Back to the USA: ten days ago or so, a Congressman said in the New York Times about bankers and Congress: "They run the place".
When moral expectations are too low for the main economic actors, one gets an economy that has no morality.
To fix that, moral standards have to rise again. A place to start is by limiting compensation. In Europe, main street is asking for it, just as in Iran main street is asking for the right to change the government. But what is main street asking for in the USA? Did it get bad enough yet? In Iran, or Europe, people know that a government not representing them can make things turn immensely bad in daily life.
But the population of the USA does not have such collective painful memory. So the Obama administration is in a difficult position, trying to impose on bankers something the People did not ask for.
Plus, a major problem is that international corporations are able to declare profits in low tax jurisdictions (part of the tax heaven problem). A triage of what needs to be addressed first is of the essence. By inventing new methods for limiting the powers of rich individuals overseas first (fixing the tax heavens abroad), it may be just a question of translating them back in the USA (fixing the compensation heavens at home).
Patrice Ayme
http://patriceayme.wordpress.com/
In the economic system as it is in the USA, bankers, by deciding who gets the money, create the economy. And the question is, once they are done, does this economy do anything the People want, or even anything the People need? The latest crisis, and the state of the present economy of the USA show that the answer to both is a resounding no. One has just to look at: decaying health care, deindustrialization, and a median income stagnant or going down for decades, and an economy that is losing its comparative advantages in so many ways that it is incapable of maintaining its independence.
Hence the economy is too important to be left to bankers. Somehow the place of the state (hopefully elected by the People, not bankers) has to grow. So the question becomes: how do you control plutocracy, once it has got out of control? It is not easy. Once the influence of private interests on government has grown enough, very little stop them.
An extraneous example: eleven French engineers were killed by a bomb in Pakistan. It was assumed that it was Al Qaeda. But yesterday two French antiterrorist judges informed the families that it was actually agents of the Pakistani government, who were unsatisfied by how much money they got under the table, that did the deed.
The point: after some degree of expectation is reached, the powerful will not be held by anything, to keep getting the power they view as their due. Back to the USA: ten days ago or so, a Congressman said in the New York Times about bankers and Congress: "They run the place".
When moral expectations are too low for the main economic actors, one gets an economy that has no morality.
To fix that, moral standards have to rise again. A place to start is by limiting compensation. In Europe, main street is asking for it, just as in Iran main street is asking for the right to change the government. But what is main street asking for in the USA? Did it get bad enough yet? In Iran, or Europe, people know that a government not representing them can make things turn immensely bad in daily life.
But the population of the USA does not have such collective painful memory. So the Obama administration is in a difficult position, trying to impose on bankers something the People did not ask for.
Plus, a major problem is that international corporations are able to declare profits in low tax jurisdictions (part of the tax heaven problem). A triage of what needs to be addressed first is of the essence. By inventing new methods for limiting the powers of rich individuals overseas first (fixing the tax heavens abroad), it may be just a question of translating them back in the USA (fixing the compensation heavens at home).
Patrice Ayme
http://patriceayme.wordpress.com/
Tuesday, June 16, 2009
GOING GETS TOUGH, SO DIRIGISME STEPS IN.
THE FREE MARKET IS AMATEURISH, THE GOVERNMENT IS SERIOUS.
(Posted On NYT's Krugman blog June 13, 2009)
As consummer spending has collapsed, the government of the USA (and of many other countries), has stepped in.
It is equivalent from switching from the Anglo-Saxon laissez faire to traditional French dirigisme (notice both words, laissez faire and dirigisme are French, because the debate started in France, and anticipated Adam Smith, who went there to study). Anyway, everything right with this picture.
In a country such as France, the citizens are chronic savers, obsessed by the wool stocking (bas de laine) in which they store for the future like squirrels and various corvids. So, chronically, people borrow little.
So who make the economy turn, and strive to the future? Well, the French government tax, spends and borrows. Now, who is the government? Well, France is a genuine democracy, so the government represents the People. (In recent elections, a few days ago, Sarkozy won, but all the vote of the left and ecologists gathered a bit more).
All of this to say that there is nothing wrong with going the French way to enliven an economy rather than the Anglo-Saxon way. Where it crucially matters, for defense, the USA actually follows French methods rather than the whim of the invisible hand.
What is the difference with the so called American model? Well, in the USA, the head of JP Morgan is supposed to finance what he considers worthy, projects presented to him by individuals. In practice this is all at the whim of a few unsupervised individuals that can do whatever. Jamie Dimon may be no demon, but his predecessors in the 1920s financed IG Farben (of Zyklon B fame) and Hitler.
It may be better to do the heavy financing, one ought even to say it is clearly better, in a democracy, to have the democracy do the heaviest financing, rather than little plutocrats in the shadows, doing invisible stuff with evry body’s money.
And indeed, where it crucially matters, in defense procurement, the USA follows the French model rather than the whim of the invisible hand.
So the stimulus has to be made bigger, a VAT and a carbon tax have to be introduced in the USA (to reduce the deficit from the larger stimulus; instead of viewing taxes as taxing, view them as enforced economic activity under democratic supervision).
But, first of all, government spending has to be freed from private wealthy interests: the stimulus has to go where it will multiply maximally. France does this to some extent with a big bureaucracy (bureaucracy being tellingly a French word). But that could no doubt be reduced (as Sarkozy wants to).
Patrice Ayme
http://patriceayme.wordpress.com/
(Posted On NYT's Krugman blog June 13, 2009)
As consummer spending has collapsed, the government of the USA (and of many other countries), has stepped in.
It is equivalent from switching from the Anglo-Saxon laissez faire to traditional French dirigisme (notice both words, laissez faire and dirigisme are French, because the debate started in France, and anticipated Adam Smith, who went there to study). Anyway, everything right with this picture.
In a country such as France, the citizens are chronic savers, obsessed by the wool stocking (bas de laine) in which they store for the future like squirrels and various corvids. So, chronically, people borrow little.
So who make the economy turn, and strive to the future? Well, the French government tax, spends and borrows. Now, who is the government? Well, France is a genuine democracy, so the government represents the People. (In recent elections, a few days ago, Sarkozy won, but all the vote of the left and ecologists gathered a bit more).
All of this to say that there is nothing wrong with going the French way to enliven an economy rather than the Anglo-Saxon way. Where it crucially matters, for defense, the USA actually follows French methods rather than the whim of the invisible hand.
What is the difference with the so called American model? Well, in the USA, the head of JP Morgan is supposed to finance what he considers worthy, projects presented to him by individuals. In practice this is all at the whim of a few unsupervised individuals that can do whatever. Jamie Dimon may be no demon, but his predecessors in the 1920s financed IG Farben (of Zyklon B fame) and Hitler.
It may be better to do the heavy financing, one ought even to say it is clearly better, in a democracy, to have the democracy do the heaviest financing, rather than little plutocrats in the shadows, doing invisible stuff with evry body’s money.
And indeed, where it crucially matters, in defense procurement, the USA follows the French model rather than the whim of the invisible hand.
So the stimulus has to be made bigger, a VAT and a carbon tax have to be introduced in the USA (to reduce the deficit from the larger stimulus; instead of viewing taxes as taxing, view them as enforced economic activity under democratic supervision).
But, first of all, government spending has to be freed from private wealthy interests: the stimulus has to go where it will multiply maximally. France does this to some extent with a big bureaucracy (bureaucracy being tellingly a French word). But that could no doubt be reduced (as Sarkozy wants to).
Patrice Ayme
http://patriceayme.wordpress.com/
Monday, June 15, 2009
IS THE ECONOMY OF THE USA STALLING? (Wonkish)
LOW AND HIGH STALL SPEEDS AS A BETTER MODEL:
A Minsky moment is the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments, encouraged by a long period of prosperity and increasing values of investments using borrowed money . At this point, a major selloff begins due to the fact that no counterparty can be found to bid at the high prices previously quoted, leading to a sudden and precipitous collapse in asset prices and a sharp drop in market liquidity.
Paul Krugman is on a quest to develop a model (see the note below). But I propose a different model for what is going on now, encouraged by a possible cause for the fall off the sky of AF 447.
The longer going into leverage works, the safer it looks, and the more profitable it "proves" to be, and thus the more the overall Highly Leverage Investing augments (both because there are more HLI individuals, and more leverage used individually).
So, being profitable, this keeps on augmenting until the system is so leveraged that a small downward fluctuation will cause impossible losses, and the system breaks down.
There is something a bit similar in aviation, called the "coffin corner". This is what happens when planes fly at very high altitude (to save fuel). The higher the plane goes, the less dense the air is, so the less support the plane gets, hence the higher goes the low speed stalling speed.
Augmenting the speed ever more as one goes ever higher does not work, because parts of the wings may experience supersonic flow, hence shock, and detachment, causing a loss of support: this is the high speed stall.
Both speeds, the low speed stall, and the high speed stall, eventually meet, as a plane goes higher. In commercial operations, they can be uncomfortably close (typically 100 mph, but sometimes as little as 20 mph), putting planes at the mercy of a strong gust (more frequent these days at high altitude).
The lack of industrialization in the USA is causing the low speed stall to augment, and then, the increased leverage to extract profits nevertheless is creating the shocks. Soon the entire contraption may head straight down towards the ocean... Lest an industry be recovered in time...
Patrice Ayme
http://patriceayme.wordpress.com/
***
From Krugman's blog, June 15, 2009:
"I’m on a continuing quest to develop a tractable model of Minsky moments. Why? you may ask. Why not go with verbal intuition? Well, I’m enough of a conventional economist to think that there’s no substitute for a model with dotted i’s and crossed t’s; it’s not THE TRUTH, but it really does help clarify your thinking.
So here’s where I am right now. There is a class of models — Shleifer and Vishny is my main inspiration, although other models, like Kiyotaki and Moore, are in the same spirit — in which you can get something like a Minsky moment. The story goes something like this (this isn’t quite how Shleifer-Vishny does it, but not too different):
There are three kinds of investors: ordinary investors who buy when the price is low and sell when it’s high; noise traders, who buy and sell randomly*; and highly leveraged informed investors (HLIs), who try to buy low and sell high with other peoples’ money. On average, the HLIs should earn a high rate of return.
However, Shleifer-Vishny assume that there are two periods before the goodness of investments is revealed to all — and in period 2 even good investments can look bad thanks to selling by those noise traders. And if the noise traders drive the price down sufficiently, HLIs can face margin calls, forcing them to liquidate and push prices even lower. This is more or less the Minsky moment.
But how do we make Minsky moments endogenous? Think about playing this game repeatedly, with the number of HLIs varying based on past performance. If there are very few HLIs, expected returns are high and the probability of a Minsky moment (and its severity if it happens) are low; this will tend to bring more HLIs into the picture, until the system is highly vulnerable. A bad draw on noise traders, and there’s an asset price plunge that hits the HLIs very hard. People decide that leverage is a bad thing, and for a while those who do go into leverage do very well. And the cycle begins again.
It’s crude. But I think it does get the nonlinearity Brad DeLong was looking for (though I’d better work up the actual algebra to make sure!).
*In his new book The Myth of the Rational Market Justin Fox traces the lineage of the noise-trade assumption to an unpublished paper by Larry Summers that began, THERE ARE IDIOTS."
A Minsky moment is the point in a credit cycle or business cycle when investors have cash flow problems due to spiraling debt they have incurred in order to finance speculative investments, encouraged by a long period of prosperity and increasing values of investments using borrowed money . At this point, a major selloff begins due to the fact that no counterparty can be found to bid at the high prices previously quoted, leading to a sudden and precipitous collapse in asset prices and a sharp drop in market liquidity.
Paul Krugman is on a quest to develop a model (see the note below). But I propose a different model for what is going on now, encouraged by a possible cause for the fall off the sky of AF 447.
The longer going into leverage works, the safer it looks, and the more profitable it "proves" to be, and thus the more the overall Highly Leverage Investing augments (both because there are more HLI individuals, and more leverage used individually).
So, being profitable, this keeps on augmenting until the system is so leveraged that a small downward fluctuation will cause impossible losses, and the system breaks down.
There is something a bit similar in aviation, called the "coffin corner". This is what happens when planes fly at very high altitude (to save fuel). The higher the plane goes, the less dense the air is, so the less support the plane gets, hence the higher goes the low speed stalling speed.
Augmenting the speed ever more as one goes ever higher does not work, because parts of the wings may experience supersonic flow, hence shock, and detachment, causing a loss of support: this is the high speed stall.
Both speeds, the low speed stall, and the high speed stall, eventually meet, as a plane goes higher. In commercial operations, they can be uncomfortably close (typically 100 mph, but sometimes as little as 20 mph), putting planes at the mercy of a strong gust (more frequent these days at high altitude).
The lack of industrialization in the USA is causing the low speed stall to augment, and then, the increased leverage to extract profits nevertheless is creating the shocks. Soon the entire contraption may head straight down towards the ocean... Lest an industry be recovered in time...
Patrice Ayme
http://patriceayme.wordpress.com/
***
From Krugman's blog, June 15, 2009:
"I’m on a continuing quest to develop a tractable model of Minsky moments. Why? you may ask. Why not go with verbal intuition? Well, I’m enough of a conventional economist to think that there’s no substitute for a model with dotted i’s and crossed t’s; it’s not THE TRUTH, but it really does help clarify your thinking.
So here’s where I am right now. There is a class of models — Shleifer and Vishny is my main inspiration, although other models, like Kiyotaki and Moore, are in the same spirit — in which you can get something like a Minsky moment. The story goes something like this (this isn’t quite how Shleifer-Vishny does it, but not too different):
There are three kinds of investors: ordinary investors who buy when the price is low and sell when it’s high; noise traders, who buy and sell randomly*; and highly leveraged informed investors (HLIs), who try to buy low and sell high with other peoples’ money. On average, the HLIs should earn a high rate of return.
However, Shleifer-Vishny assume that there are two periods before the goodness of investments is revealed to all — and in period 2 even good investments can look bad thanks to selling by those noise traders. And if the noise traders drive the price down sufficiently, HLIs can face margin calls, forcing them to liquidate and push prices even lower. This is more or less the Minsky moment.
But how do we make Minsky moments endogenous? Think about playing this game repeatedly, with the number of HLIs varying based on past performance. If there are very few HLIs, expected returns are high and the probability of a Minsky moment (and its severity if it happens) are low; this will tend to bring more HLIs into the picture, until the system is highly vulnerable. A bad draw on noise traders, and there’s an asset price plunge that hits the HLIs very hard. People decide that leverage is a bad thing, and for a while those who do go into leverage do very well. And the cycle begins again.
It’s crude. But I think it does get the nonlinearity Brad DeLong was looking for (though I’d better work up the actual algebra to make sure!).
*In his new book The Myth of the Rational Market Justin Fox traces the lineage of the noise-trade assumption to an unpublished paper by Larry Summers that began, THERE ARE IDIOTS."
Friday, June 12, 2009
NAZISM, AND DENIERS, ALIVE AND WELL.
BE NICE TO BANKERS, OR ELSE..."WE ARE ALL DEAD"...
(An expanded version of this essay below will, hopefully, be on wordpress some day soon).
***
Henri Pirenne had a new version of history: Western Europe encountered severe economic difficulties because of the Muslim invasion and embargo, he opined. That was really the break with, and the break of, the Roman empire. Aspects of this thesis are increasingly supported by archeological evidence (which increasingly shows wealth, and even increasing wealth, until savage invasions of the 6C and 7C: these invasions are not the famous German invasions around 400 CE, but a full 200 to 300 years later).
Earlier Gibbon (born 1737) had his own version of the Dark Ages; mostly caused by Christianism, he said. In truth, emperor Julianus had anticipated that situation, and tried mightily to stop it. But, mysteriously, a lance pierced his lung, and he died (363 CE).
This does not contradict Pirenne's thesis. Curiously and a mark of the power of religion, both points of view are still controversial, although the evidence for both, in first approximation, is as big as evidence can be.
When the Arab Muslims attacked (630 CE to 750 CE), they pretty much used total war (the milder Persians killed the Umayyads, and took control in 750 CE).
The Muslim embargo cut off paper to Europe (from papyrus), so the Europeans had to learn to write on animal hides, and learning took a big blow (books became very difficult to make, and got recycled). That is just one example of the impact of the Muslim embargo. Spices, which were obtained by the trade routes through the Middle East is another (they were life saving, because they protected foods from spoilage). Suddenly more than half of the Roman empire was missing, and the world was at war, total war (a telling anecdote: the Roman emperor visited Rome to take the metallic roofs of the capital away, to melt them and make weapons, to fight the Arabs). Cut off from more than half of its own country, the GDP of Europe got devastated.
Christian enthusiasm (363 CE: first burning of a large library under emperor Jovian) led to the destruction of nearly all books of Greco-Roman Antiquity, including basic knowledge, and making the surviving roman intellectuals flee to Persia, and the treacherous denial of their rights by the Roman Catholics, even after an international accord with the Persians about the right of return of Romans intellectuals into the Roman empire, led to a massive war between Rome (verily Constantinople) and Persia. Hence Gibbon's vision of what caused the Dark Ages is just as obvious, in first approximation. The Jews barely survived, every body else got eliminated (except on the fringes of the Roman Catholic empire). Antijudaism is the echo of that holocaust, throughout history.
I got great hostility from a European web site, the European Tribune, for suggesting some of the preceding (it was viewed as "Islamophobia", and an attack against this treasure for mankind, Christianity). Today I got banned from that site because I asserted that plutocrats had supported Hitler (never mind that the Dawes plan and that a USA bank such as JP Morgan in the 1920s, and the anti Jew Ford, financed the cartel IG Farben, of Zyklon B fame, or that Hitler was notoriously financed by many top industrialists; for example the magnate Thyssen wrote the famous book: "I paid Hitler").
One editor there violently disagreed with me about the number of people the Nazis had killed, before 1933,by more than an order of magnitude. He quoted what were obviously Nazi influenced numbers, and called my work "crap". Apparently he is German, and a pretty good expert at misquoting (me, at the very least). But I did not tell him he was overly sympathetic to Nazi reasonings, for once, I did not reply, because he and other people were using obcenities and were evoking human waste at this point.
The insulters asked for references. When I took the pain to give some, including the historian and USA defense advisor Carrol Quigley, my comments were removed from the site, and then another editor, Mr. Guillet, advised me that:"please go away or stop posting your junk. You're polluting the site with hateful or incoherent crap and you kill all possibility of dialogue by your inability/refusal to listen. Behave, or you'll be banned. This is the one and only warning you'll get. In the long run, we're all dead." Thu Jun 11th, 2009 at 04:22:23 PM EST.
It turns out that the admonishing not so gentle man, Jerome Guillet, is a banker in Paris in charge of financing renewable energy ("You make them, I finance them" is his motto). He seems to have beenn irritated by some comments of mine on the dearth of financing in renewable energy in 2009 (which I deplore, by the way). Or may be it was my observation that bankers are still in charge of saving the world, but that is not their calling (the quote above was at the end of a version of a post on banking, "Lesson Not Learned", which is on wordpress)
I did not react. Hours later, I got an email informing me that I was banned from the European Tribune.
So this is, 2009, 64 years after the defeat of Nazism, and philosophers get banned for presenting bankers with evidence about who financed Nazism. On croit rever... (One feels one is surely dreaming...) I wonder what that means, some Americans would say ironically. Can one relate such hysterical attitudes to holocaust denial? Should one do so? Do not media have a fiduciary duty of honesty relative to truth?
I guess Europe is not as advanced as one ought to hope...
Patrice Ayme
http://patriceayme.wordpress.com/
(An expanded version of this essay below will, hopefully, be on wordpress some day soon).
***
Henri Pirenne had a new version of history: Western Europe encountered severe economic difficulties because of the Muslim invasion and embargo, he opined. That was really the break with, and the break of, the Roman empire. Aspects of this thesis are increasingly supported by archeological evidence (which increasingly shows wealth, and even increasing wealth, until savage invasions of the 6C and 7C: these invasions are not the famous German invasions around 400 CE, but a full 200 to 300 years later).
Earlier Gibbon (born 1737) had his own version of the Dark Ages; mostly caused by Christianism, he said. In truth, emperor Julianus had anticipated that situation, and tried mightily to stop it. But, mysteriously, a lance pierced his lung, and he died (363 CE).
This does not contradict Pirenne's thesis. Curiously and a mark of the power of religion, both points of view are still controversial, although the evidence for both, in first approximation, is as big as evidence can be.
When the Arab Muslims attacked (630 CE to 750 CE), they pretty much used total war (the milder Persians killed the Umayyads, and took control in 750 CE).
The Muslim embargo cut off paper to Europe (from papyrus), so the Europeans had to learn to write on animal hides, and learning took a big blow (books became very difficult to make, and got recycled). That is just one example of the impact of the Muslim embargo. Spices, which were obtained by the trade routes through the Middle East is another (they were life saving, because they protected foods from spoilage). Suddenly more than half of the Roman empire was missing, and the world was at war, total war (a telling anecdote: the Roman emperor visited Rome to take the metallic roofs of the capital away, to melt them and make weapons, to fight the Arabs). Cut off from more than half of its own country, the GDP of Europe got devastated.
Christian enthusiasm (363 CE: first burning of a large library under emperor Jovian) led to the destruction of nearly all books of Greco-Roman Antiquity, including basic knowledge, and making the surviving roman intellectuals flee to Persia, and the treacherous denial of their rights by the Roman Catholics, even after an international accord with the Persians about the right of return of Romans intellectuals into the Roman empire, led to a massive war between Rome (verily Constantinople) and Persia. Hence Gibbon's vision of what caused the Dark Ages is just as obvious, in first approximation. The Jews barely survived, every body else got eliminated (except on the fringes of the Roman Catholic empire). Antijudaism is the echo of that holocaust, throughout history.
I got great hostility from a European web site, the European Tribune, for suggesting some of the preceding (it was viewed as "Islamophobia", and an attack against this treasure for mankind, Christianity). Today I got banned from that site because I asserted that plutocrats had supported Hitler (never mind that the Dawes plan and that a USA bank such as JP Morgan in the 1920s, and the anti Jew Ford, financed the cartel IG Farben, of Zyklon B fame, or that Hitler was notoriously financed by many top industrialists; for example the magnate Thyssen wrote the famous book: "I paid Hitler").
One editor there violently disagreed with me about the number of people the Nazis had killed, before 1933,by more than an order of magnitude. He quoted what were obviously Nazi influenced numbers, and called my work "crap". Apparently he is German, and a pretty good expert at misquoting (me, at the very least). But I did not tell him he was overly sympathetic to Nazi reasonings, for once, I did not reply, because he and other people were using obcenities and were evoking human waste at this point.
The insulters asked for references. When I took the pain to give some, including the historian and USA defense advisor Carrol Quigley, my comments were removed from the site, and then another editor, Mr. Guillet, advised me that:"please go away or stop posting your junk. You're polluting the site with hateful or incoherent crap and you kill all possibility of dialogue by your inability/refusal to listen. Behave, or you'll be banned. This is the one and only warning you'll get. In the long run, we're all dead." Thu Jun 11th, 2009 at 04:22:23 PM EST.
It turns out that the admonishing not so gentle man, Jerome Guillet, is a banker in Paris in charge of financing renewable energy ("You make them, I finance them" is his motto). He seems to have beenn irritated by some comments of mine on the dearth of financing in renewable energy in 2009 (which I deplore, by the way). Or may be it was my observation that bankers are still in charge of saving the world, but that is not their calling (the quote above was at the end of a version of a post on banking, "Lesson Not Learned", which is on wordpress)
I did not react. Hours later, I got an email informing me that I was banned from the European Tribune.
So this is, 2009, 64 years after the defeat of Nazism, and philosophers get banned for presenting bankers with evidence about who financed Nazism. On croit rever... (One feels one is surely dreaming...) I wonder what that means, some Americans would say ironically. Can one relate such hysterical attitudes to holocaust denial? Should one do so? Do not media have a fiduciary duty of honesty relative to truth?
I guess Europe is not as advanced as one ought to hope...
Patrice Ayme
http://patriceayme.wordpress.com/
Wednesday, June 3, 2009
CARBON TAX TO FOLLOW HIV TAX?
Hot, and self absorbed debate in Washington about the "Cap and Trade" scheme proposed by Obama, which duplicates a system set up a long time ago in the European Union (with a carbon market exchange localized in Paris). That later system worked in reverse for quite a few years (not an intended effect), as the crafty polluters claimed to be polluting even more than they were, so as to get more credits, that they then made money from, while polluting even more in all legality. (We can fully expect American polluters to be just as crafty, a point that no doubt escaped the Obama adminstration... since it is following European errors step by step, so far. Sometimes apparent naivety's inner voice is greed, of course.)
***
In a strange fit of blessed naivety, Paul Krugman in his blog (June 3, 2009) opines that:"The only chance we have of a global agreement [on carbon emissions] is if the United States moves first; it will quickly be followed by other advanced countries, and then we sit down and use a combination of carrots and the threat of big sticks to get developing countries into the fold."
It's amusing how Americans can get to preach to others what they have been begged to do for decades by those exact same others. But what to do when the ignorant child gives the lesson to his mom she has been trying to teach him since ever? Smile and listen seriously?
***
France uses less than one-third of CO2 emission per unit of GDP that the USA uses. It may be an Anglo-Saxon free market capitalism thing: Australia, or Canada pollute just as much as the USA. (OK, some will say these are big countries, the giant CO2 orgy comes from that; but that does not resist examination: most of the transportation in these countries would be made tremendously more efficient by using European technology, and, by the way, Europe is just as big...)
All the talk about a commitment from “China” and “India” is putting the cart before the horse. China and India are trying to catch up technologically, and need to sell their wares, so they have been forced to raise their efficiency, just to follow the European Union (China duplicates the car CO2 emission of the EU, for example).
A lot of China is just delocalized industry of the USA, anyway; the products are sold in the USA, and a carbon tax would whip them into shape overnight.
So it’s all in the court of the USA.
The Obama administration has so far followed the easy way out, printing money it does not have, using China to foster its strange masochistic addiction to its own plutocracy. China does not mind: it views the USA as its greatest threat, and is quite happy to help in its deindustrialization every day.
The carbon tax is a radical way out. France has been mulling going for it alone (it would tax all products according to carbon content, including IMPORTS). “Cap and Trade” (another French idea enacted in the EU with extreme difficulty and adverse effects) is, at this point, just a delaying tactic. (Although it should turn worthy in the fullness of time.)
Silly? Well, France imposed a unilateral tax on air travel to pay for treatment of children for HIV. It was an idea of Chirac. Now 17 countries have adopted this tax, and most of treatment of children with HIV, worldwide, is paid by it.
Free market capitalism is a path to prosperity, but each of the words “free”, “market” and “capitalism” have to be defined by soul and smarts first.
If the USA were serious, the USA would go for a carbon tax. Right now.
PA
http://patriceayme.wordpress.com/
***
In a strange fit of blessed naivety, Paul Krugman in his blog (June 3, 2009) opines that:"The only chance we have of a global agreement [on carbon emissions] is if the United States moves first; it will quickly be followed by other advanced countries, and then we sit down and use a combination of carrots and the threat of big sticks to get developing countries into the fold."
It's amusing how Americans can get to preach to others what they have been begged to do for decades by those exact same others. But what to do when the ignorant child gives the lesson to his mom she has been trying to teach him since ever? Smile and listen seriously?
***
France uses less than one-third of CO2 emission per unit of GDP that the USA uses. It may be an Anglo-Saxon free market capitalism thing: Australia, or Canada pollute just as much as the USA. (OK, some will say these are big countries, the giant CO2 orgy comes from that; but that does not resist examination: most of the transportation in these countries would be made tremendously more efficient by using European technology, and, by the way, Europe is just as big...)
All the talk about a commitment from “China” and “India” is putting the cart before the horse. China and India are trying to catch up technologically, and need to sell their wares, so they have been forced to raise their efficiency, just to follow the European Union (China duplicates the car CO2 emission of the EU, for example).
A lot of China is just delocalized industry of the USA, anyway; the products are sold in the USA, and a carbon tax would whip them into shape overnight.
So it’s all in the court of the USA.
The Obama administration has so far followed the easy way out, printing money it does not have, using China to foster its strange masochistic addiction to its own plutocracy. China does not mind: it views the USA as its greatest threat, and is quite happy to help in its deindustrialization every day.
The carbon tax is a radical way out. France has been mulling going for it alone (it would tax all products according to carbon content, including IMPORTS). “Cap and Trade” (another French idea enacted in the EU with extreme difficulty and adverse effects) is, at this point, just a delaying tactic. (Although it should turn worthy in the fullness of time.)
Silly? Well, France imposed a unilateral tax on air travel to pay for treatment of children for HIV. It was an idea of Chirac. Now 17 countries have adopted this tax, and most of treatment of children with HIV, worldwide, is paid by it.
Free market capitalism is a path to prosperity, but each of the words “free”, “market” and “capitalism” have to be defined by soul and smarts first.
If the USA were serious, the USA would go for a carbon tax. Right now.
PA
http://patriceayme.wordpress.com/
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