Saturday Econ

I do wish I had a better grasp of the "correct path" for economic recovery. Hoiwever, I find myself concerned that Geithner and Obama are choossing a path that the people who have been right about everything find disastrous.

Cole: The Geithner Plan

The reviews are in on the leaked Geithner plan, and we are going to do something different here for a change. We are not going to listen to people who have been wrong about everything, and instead are going to listen to people who have been more right than wrong. The administration might learn from this approach. First up, Yves at Naked Capitalism:

And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!

Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.

Calculated Risk:

With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.

Oh well, I’m sure Geithner will provide details this time …

Krugman:

The Geithner plan has now been leaked in detail. It’s exactly the plan that was widely analyzed — and found wanting — a couple of weeks ago. The zombie ideas have won.

The Obama administration is now completely wedded to the idea that there’s nothing fundamentally wrong with the financial system — that what we’re facing is the equivalent of a run on an essentially sound bank. As Tim Duy put it, there are no bad assets, only misunderstood assets. And if we get investors to understand that toxic waste is really, truly worth much more than anyone is willing to pay for it, all our problems will be solved.

If this were a medical emergency, it appears it would look something like this:

The Illness- reckless and irresponsible betting led to huge losses
The Diagnosis- Insufficient gambling.
The Cure- a Trillion dollar stack of chips provided by the house.
The Prognosis- We are so screwed.

If these guys are right, this will be the undoing of the Obama administration. Better enjoy this four years, libs.

Aravosis: Senate Republicans block AIG bonus tax

The defenders of the rich come to the rescue, again.

Sen. Jon Kyl, the Republicans' vote counter, blocked Democratic efforts Thursday evening to bring up the Senate version of the tax bill to recoup most of the $165 million paid out by AIG last weekend and other bonuses in 2009. The House had swiftly approved its version of the bill earlier in the day.

Q: How do you spell AIG?

A: GOP

Yglesias: Quantitative Easing 101

Here’s a nice primer from the Financial Times on quantitative easing. When trying to understand this, it’s worth keeping in mind that the name “quantitative easing” is very non-descriptive and I have no idea how it got this label. So don’t try to think about what those words might mean, just pay attention to the description of what it is.

Meanwhile, Larry Kudlow finds the inflationary potential of this move so terrifying that he’s setting money on fire which, as Ryan Powers observes, is actually illegal:

Spurring Kudlow’s inflationary expectations is, however, actually part of the idea. One problem the US economy is having right now is that even though I’d kind of like to buy a new MacBook and have the money in my bank account to pay for a new MacBook, I’m not buying a new MacBook. Why? Well, because I don’t really need one, and I keep having this feeling that they’re going to start being discounted soon once Apple realized that nobody wants to buy their super-expensive laptops amidst a cataclysmic recession. I have, in other words, deflationary expectations. These kind of expectations, when widespread, become self-fulfilling as all kinds of spending on non-necessities collapses. Change those to inflationary expectations and I think, hey, I’d better buy that today because it’ll cost more next week. And that helps the economy grow.

Obviously, this is the kind of thing that can be taken too far. And it is true that if aggressive Fed policy succeeds in returning us to growth, we will soon enough need to deal with the prospect of problematic inflation—either in the sense that the level might get too high, or that we might see increases of an accelerating character. Which is certainly a good reason to wish we hadn’t gotten into this situation. But it’s not a good reason to eschew the methods that are most likely to get us out of it.

Benen: ABOUT THOSE CBO NUMBERS...

The conventional wisdom about the discouraging new deficit projections from the CBO is that President Obama's ambitious agenda is necessarily in jeopardy. If budget deficits are poised to spiral out of control, the argument goes, then lawmakers will have to start making significant cuts.

Indeed, the NYT's Jackie Calmes noted today that the CBO deficit numbers "complicate" Congress' efforts of "achieving the president's priorities on health care, energy policy and much more."

But Ezra Klein raised a very good point about the "costs" associated with the administration's agenda.

[T]he $634 billion set aside for health reform doesn't contribute to the deficit at all. It's entirely offset by capping itemized deductions for the rich and squeezing private insurers in Medicare and a couple other policies. The cap and trade proposal is actually revenue-positive.

The stimulus package, by contrast, sharply increased the deficit, because there were no immediate offsets to pay for it. So too with Bush's tax cuts.

But the big new initiatives in Obama's budget don't necessarily affect the deficit at all. They're entirely paid for. There may be a political impact in which the size of the deficit saps political will for new initiatives and gives Ben Nelson a preening opportunity he can't pass on, but there's no debt-related reason that these numbers should affect those priorities. Indeed, quite the opposite: Cap and trade would raise revenue and health reform will cut the long-term deficit by about $3 trillion. It's only in the weird world that is Washington that budget projections showing the current fiscal path is unsustainable would be used to argue against policy changes that better the long-term outlook.

Exactly. The principal argument from the White House about health care and energy has been that these initiatives are necessary for long-term economic growth. That's certainly true. But critics reflexively respond that these reform efforts will have to wait until the budget deficits Obama inherited are significantly smaller. This is not only wrong, it misses the point -- the administration's health care and energy proposals save money over the long run.

It's why OMB Director Peter Orszag felt comfortable with sounding a relatively optimistic note yesterday. In a blog post, Orszag argued that the CBO report "only underscores the severity of the economic and fiscal crisis the Administration has inherited. There is need for urgent action to get our economy moving again, invest for the future, and put the nation on a sustainable fiscal path."

He presented four key challenges (invest in health care, invest in education, and invest in energy, while cutting the deficit in half by 2013), adding, "The new CBO numbers do not change our commitment to these goals or our ability to achieve them."

Lawmakers start debating the budget in earnest next week. It's bound to be interesting.

EZRA KLEIN: HOW PONZI SCHEMES HAPPEN.

What's long baffled me about Madoff's scheme is that Madoff was already rich. He began as a successful money market manager building faster, more technologically advanced, platforms. Why begin a Ponzi scheme?

Ron Chernow has an article this week that might provide an answer. He delves into the story of Ivar Kruegar, a Swedish matchmaker who began with a deviously brilliant scheme to trade countries low-interest loans in return for monopoly access to their match markets. But then the funding dried up. So he he began funding the loans with a Ponzi scheme in order to build up the monopolies so he could go back to legitimate business. But the match business never overwhelmed the fraud. Years of wild success and international stardom eventually gave way to wide suspicion. Kruegar shot himself in the heart. Chernow concludes:

Few financiers become embroiled in Ponzi schemes voluntarily, for the simple reason that such schemes are mathematically certain to fail. At some point, the incoming money cannot keep pace with the outgoing claims, and the fraud must unravel. And so the saga of Ivar Krueger presents a credible explanation of how giant Ponzi enterprises come about: not as sudden inspirations of criminal masterminds but as the gradual culmination of small moral compromises made by financiers who aren't quite as ingenious as they think. As Charles Baudelaire once said, we descend into hell by tiny steps.

Indeed, in pleading guilty last Thursday, Madoff explained that he had initially thought his fraud would be short-lived. He may well have fancied himself a brilliant money manager. Perhaps, early on, he even had a few good, legitimate years When his lucky streak suddenly ended, he might have thought that he would temporarily make whole the losses of old investors by giving them money from new ones. And then he was off and running.

In a way, the Ponzi scheme is actually more analogous to the bubble earnings than some want to admit. The Ponzi schemers didn't mean for it to go this way either. They didn't begin by trying to defraud anyone. The fundamentals of the business were unorthodox but they had reason to believe the numbers would come into alignment. In the meantime, they were just trying to keep solvent, and that required more earnings, and that meant stepping outside the acceptable risk profile. The real difference is that Madoff and Co. lost their plausible deniability earlier in the process than Citibank did.