The stimulus is working says The Wall Street Journal

[natina]

Could The Wall Street Journal actually be admitting that the federal stimulus is working? That certainly seems to be the case.



"Government efforts to funnel hundreds of billions of dollars into the U.S. economy appear to be helping the U.S. climb out of the worst recession in decades," the newspaper reported Wednesday. I wonder how painful this admission is for the Journal, which has been sharply critical of the stimulus package.


Economists are starting to say the worst is over, and that the economy is growing above where it would be without a stimulus. The second quarter saw a contraction of only 1%; without a stimulus, that could have been as high as 3.2%. Now, the economy looks on track for positive growth in the third quarter.

http://blogs.moneycentral.msn.com/to...20is%20working

http://blogs.moneycentral.msn.com/to...s-working.aspx

[trish]

http://www.nytimes.com/2009/09/06/ma...conomic-t.html

[hippifried]

Interesting article. I was especially amused by the idea of "the great vacation".

However... While I agree that the supply side model is irrational, I don't think purist ideological irrationality in theoretical academe is what causes the problems. Krugman falls into the same trap that he complains about, & it's not just his overestimation of his own importance & that of his profession. We can talk all day about fiscal policy, monetary policy, Keynes vs Friedman vs et al, behavioral finance, & all the rest of the purist theoretical assumptions. What doesn't get mentioned in the article, not even once, is basic graft & corruption. It doesn't get taken into account in any theses I've ever seen.

Dishonesty & theft aren't irrational. That's why it's punished, along with any other crimes that stem from it. Irrational behavior is excused. Kill someone in the heat of passion, you draw pity & a lesser charge. Kill someone for money, you get the max every time. Even if you don't do the killing, if you're involved in a theft where someone dies, even your thieving partner, you get the max. Even those who argue against the virtue of hate crime legislation don't quibble about this. Why? Because even if it isn't premeditated, theft is always a malicious & deliberate violation of the universal moral code.

I believe Krugman, along with far too many economists, is wrong about the cause of the crash. It wasn't market forces. It was fraud. The housing bubble was created by fraud in the first place, through the consolidation of services in the industry. The real estate broker handled the sale by the seller & the financing by the buyer, along with the appraisal & the inspections. One stop shopping in all directions. The recession was already starting before the bubble burst. When it popped, it opened a window that exposed the giant ponsi scheme that was the hedge bets & risk management that had captured the financial industry. The bankers had become irrational, but the insurance scammers that were ripping them, & therefore us off, were perfectly sane, malicious, & deliberate. It was hedge bets that collapsed. All that money just vanished like magic because it was all smoke & mirrors. The bankers froze like a fawn in a thicket with a bear passing by. We're still coaxing them out. The market ideologs allowed it to happen, because they were working off the assumption that not only were people rational, but honest.

I'm not impressed with economists. The theories don't work in practice. The market doesn't ferret out corruption, & economists don't account for it. I've said this before, not sure if I said it in here, but I'm beginning to think that the "law of supply & demand" itself is just a meme with no real evidence to support it. Especially on a macro scale. Capitalism is just a method of pooling collective resources to accomplish specific tasks. That makes it privatized socialism. I don't have a problem with that. I'm just tired of all the lies, theft, & ideological stupidity that allows it to continue. This shit ain't workin'. We need a rethink. Maybe if we take a hard look at our economic "faith", we'll find that Adam Smith was as big a crackpot as Karl Marx or Benito Mussolini.

[trish]

Could an academic theory have caused the housing bubble? Hippiefried says not. Surely mere words and equations couldn’t do it. But what about actions or inaction based on belief in an academic theory? I think Krugman’s claims are at least three-fold.

One of his claims is that the Fed, legislators and economic advisors had forsaken the Keynesian interpretation of the Great Depression and over the last two decades dropped the safeguards recommended by that interpretation. The ideas that displaced the Keynesian theory, at least in the all important Chicago School, held that depressions were no longer possible, or defined them away, or interpreted them not as depressions but necessary market adjustments (akin to fault slippage that releases energy and relaxes geostatic pressure) and are not to be avoided. It seems to me that if we subscribe to any of these latter views, we aren’t doing all we can to prevent the kind of economic turmoil we’ve been experiencing for more than a year now. I would say neoclassic economic theory caused the housing bubble, but widespread belief in it by our law makers and policy makers did contribute. I also agree with Hippiefried, a lot of grief could have been avoided if politicians, bankers and realtors weren’t so greedy and corrupt. We’re now waiting to see if the same shenanigans that brought down the housing market are now going to bring down the commercial real estate market.

The second claim made by Krugman is academic. It’s simply that the events of the past year have demonstrated the failure of neoclassical economics. His claim is that the Chicago School has lost empirical contact with its subject. Okay, so it was unable to predict the housing bubble, that’s not so devastating. The market is complex. But Chicago style neoclassicism floundered to find an explanation for the housing bubble. Bubbles do not exist in neoclassical theory.

Without an explanation, there was no ready recommendation for remedy; that’s point three.

Again I agree with Hippiefried that academic theories probably underestimate the role of greed and corruption, but not being an economist I can’t say for sure. The game theoretic models of Von Neumann and Morgenstern certainly do accommodate greed and collusion. But those models are very early constructions (at least they were invented a few decades before I was born). My own perspective is that in a free market, profits drives economic disparity. Without proper regulatory constraint more than 90% of the nation’s wealth would be in the hands of 1% of the population. Since wealth converts to political and even military power, this would be a dangerous predicament.

[hippifried]

From what I can tell, corruption is never factored into any economic theory. That's why no economic theory actually works in practice. How would you do it? It's not predictable at all. There's always somebody trying to beat the system, whether legal ot not.

I'm not buying this crap that nobody saw it coming. This wasn't the first bubble. It followed right on the heels of the dot-com bubble. This wasn't even the first housing bubble since the ideological takeover, or the first bank panic. We went through this in '89 when the housing bubble burst & the savings & loan industry collapsed. The dot-com bubble followed the collapse of '89 by just a few years. The accountants, securities analysts, bankers, & whatnot aren't theorists. They're working with practical application. The number crunchers came out last October & said that we'd been in a recession for over a year. Nobody saw it coming? They had to see the forclosures happening. It takes months to forclose a house. They had to see the increase in bankrupsies. They had to see the growing credit default rate. They were selling securities based on credit defaults. They had to see the layoffs & business failures. They had to know that they were leveraged 50 times their worth. They're lying to cover their crooked asses.

What brought on this collapse was too many people cooking the books. The economic theologians enabled it by convincing the public, & especially the politicians, that the marketplace can police itself. But since they can't factor corruption into the theories, & they have no actual contact with the people who work the markets, it never occurred to them that it won't. The analysts were busy rubber stamping junk securities with triple A ratings so they could be sold to the unexpecting around the world. They sold loans to anyone in order to have more junk to put into the securities. The whole thing was a fraud, & all the participants knew they were perpetrating a fraud. Where's the indictments?

[trish]

Hippiefried asks,

From what I can tell, corruption is never factored into any economic theory. That's why no economic theory actually works in practice. How would you do it? It's not predictable at all. There's always somebody trying to beat the system, whether legal ot not.

Von Neumann and Morgenstern show that in games with N players the optimal strategy for any one player is to cooperate in loose coalitions. They argue that by following the maximally optimal strategies the play evolves so as to effectively reduce the number of players to one, two or three coalitions. In market applications, when companies collude to form effectively one or two players, you’ve got an illegal monopoly or two on your hands. On the world political stage, when a group of people join in alliance under one flag, you’ve got a nation. Or when laborers join together you’ve got solidarity. The abstract formalism of the game theoretic approach doesn’t distinguish between legal, illegal, moral or immoral cooperation. It only tells you when its advantageous in regards to maximizing your expected payoff.

He also writes,

What brought on this collapse was too many people cooking the books. The economic theologians enabled it by convincing the public, & especially the politicians, that the marketplace can police itself.

I like the way you put this. The word “enabled” pretty much describes the role of economic theorists in all this. My only quibble is with the word “police.” It’s not enough. I would also add “regulate.” The market is neither self-policing nor self-regulating. Many people are misled into thinking the law of supply and demand says that markets seek a kind of amicable equilibrium where all needs satisfied. Nothing could be further from the truth. The misconception, I think, is based on word “demand” which in ordinary language has a usage distinct from it use as jargon in economic theory.

[hippifried]

Look... I understand the dynamics of organization. I understand the creation of money through debt, the basic concepts of capitalism, investment, trade, & other aspects of modern economic theory, both Keynesian & antiKeynesian.

What I don't understand is this pervasive dishonesty that forgives criminal behavior by calling it an error in judgement. The only error in judgement was the same one that all criminals make. They thought they wouldn't get caught or exposed. But as it turns out, it doesn't matter because apparently there's no consequences if the fraud is big enough, or "too big to fail".

This was more than a collusion. The entire financial industry was up to their eyeballs in the fraud, & they all knew it was a fraud. The loan arrangers did anything & everything to get somebody to sign on to taking money that they knew full well would probably default, just because they knew it would be immediately sold to someone else. The people who took out the loans didn't really get the money. They just signed up to pay rent to the deed trustee until they couldn't anymore. With prices being artificially driven up, it was no big deal to the trustees because they could resell the rent contract (deed of trust) at a profit if they had to take it back (foreclose). The buyers of the loan then added to the fraud by artificially making it look like a profitable investment. The analysis companies were paid to lie about the rating on the the bundle, & an army of salemen in Armani suits flew around the world selling pie in the sky to investment funds around the world in the form of CDOs. The banks had to buy some too, to keep up the illusion. No big deal. It's not their money. With all this bogus paper floating around as collateral, these assholes were able to shuffle debt around to the tune of creating $50 trillion in electronic money & take billions of real dollars out in rakeoffs. The fraud only works if everybody involved knows what everybody else is doing. Nobody says anything as long as they're getting their cut. Where's the theoretical science?

Sorry, but by definition, this was organized crime. Now the American people are stuck paying the tab, & the same crooks are still there looking for a way to do it all again. & they will do it again because everybody's jabbering a bunch of nonsense about economic theory & brushing the criminal behavior off as error in judgement.

Oh, we're so sorry you got caught ripping us off. Here, have a bonus for a job well done.

[techi]

Good topic. The one person I'd recommend as providing a lot of clarity on the issue of fraud and bank regulation is William Black. He's not a pure academic, he's had plenty of real world experience helping to clean up the S&L mess in the 1980's and does a very good job connecting theory with the pragmatic reality of what works in the real world.

Some key points that Black makes:

- Bad practices tend to drive out honest practices in unregulated free markets. It's just very hard to honestly compete with companies that are willing to falsify thier results or sell defective products IF such activities are not identified and shut down promptly. And as we've seen, ponzi style frauds can go on for a long time before they blow up of thier own accord.

- Rating mortgage bundles without even examining samples of the underlying loan files is impossible. Neither the banks nor the ratings agencies have looked at the loan files thus there was no due diligence involved with the packaging, rating and sale of these "toxic" products. It was all a fraud. And by the same token, the bank "stress tests" are a fraud because they don't evaluate the loan files of the banks toxic holdings either.

- The real world has both it's unexpected hero's and it's villians that can have a significant impact yet do not fit particularly well into economic models. In the 1980's, the Reagan appointed regulator Ed Gray was a major hero of the S&L crisis despite being a staunch Reagan supporter(and longtime personal friend). Gray reregulated the S&L business against the wishes of the fanatically pro-deregulation Reagan administration because he understood what was going on and he was an honest "do the right thing" kind of guy. It was certainly not in Ed Gray's personal economic interest to do what he did.

- The longer a fraud is allowed to continue the greater the losses. And in the case of financial frauds, the losses tend to grow exponentially because they are usually some sort of ponzi scheme.

- Good regulatory reform is usually the product of a solid investigation of problems when they occur. A new Pecora style investigation into the current crisis would provide our best hope of creating a springboard toward solid regulatory reform. Congressional hearings with 5 minute Q&A sound-bytes for politicians does not usually produce much of anything.

William Black presentaion with Q&A, June 11th:
http://hammer.ucla.edu/watchlisten/w...show_id/129363

On a related note, it'll be interesting to see the findings of President's Working Group on Financial Markets. It's report is due out in a couple days.

[techi]

Sorry, but by definition, this was organized crime. Now the American people are stuck paying the tab, & the same crooks are still there looking for a way to do it all again. & they will do it again because everybody's jabbering a bunch of nonsense about economic theory & brushing the criminal behavior off as error in judgement.

Yes, and for some reference to events in recent history the S&L scandal of the 1980's produced many convictions despite being a much smaller scandal(in dollar terms). 1,072 Savings&Loan officals were put in jail as well as an additional 2,558 bankers.

Granted, even when run properly, the wheels of justice can take many years to catch up to events. But it doesn't appear that our government is even trying to seriously investigate the events that brought on the collapse. Outside of Angelo Mozilo, most of the big players seem untouched by recent events.

Has the FBI been allowed to restaff it's financial fraud unit? Bush largely destaffed and defunded the unit.

Is a solid Pecora style investigation underway? So far it seems like Pelosi&Co are putting together a bipartisan coverup panel rather than a solid investigation.

Is a full FED audit needed? I'd say yes, but not for the reasons that Ron Paul pushes it. It's needed because we need a complete understanding of the scale and nature of the crisis. And we also need a true understanding of the conditions of the banks. I'm concerned that much of the dirt has been swept into the FED where it remains outside of public view.

And then we have Geithner, Summers & Bernanke. So far thier actions primarily smack of a coverup. While disappointing, I guess it shouldn't be too surprising. The Reagan Admin certainly didn't intentionally support an investigation of the S&L mess in the 1980's. At best, they viewed such things as crowding out policy objectives. They just lucked out on a couple key points:
- one of the regulators they appointed(Ed Gray) did perform his duty and crack down on S&L ponzi schemes
- Charles Keating bought off a bipartisan crew of politicians so the heat didn't come down squarely on Republicans when the shit hit the fan.

Anyway, if the Obama admin is viewed as covering up frauds, it could seriously damage his Presidency. Personally I think it already has. The bailouts are a great recruiting tool for right wing anti-government groups like the anti-tax teabaggers. And it's not entirely irrational, who wants to pay taxes if said money is directly going to pay the massive bonus's of a bunch of Wallstreet crooks?

Obama could still recover. But he needs to ditch Summers and Geithner. And he also needs to push Congress to fund a solid investigation of the crisis. Public outrage can trump corrupt insider influence but the public needs the facts.

As for the stimulous, it was good but it treats the symptom as opposed to treating the problem (Fraud & failed regulation). The stimulous hasn't fixed the economy, it's merely provided us some breathing room. The banksters will be back to thier economy collapsing tricks in no time if we let them.

[hippifried]

I don't know if there's a Pecora/Starr style investigation happening right now, but I think it would be counterproductive. Save it for the prosecution phase. They're still trying to get everything audited & analyzed, as well as stabilized. All financial transactions leave a paper trail, & it's going to take a few years to go through it all before the perps start getting dragged before commissions to make their excuses.

While we know that there was a total breakdown of ethics & the actions of the financial institutions was a conscious malicious ripoff, I'm not really sure if there was actually any codified laws broken. The SEC didn't seem to give a rat's ass, & this was a bigger ponsi scheme than Madoff ever dreamed of. First things first. Make sure the regulations have teeth from here out.