Year In Review

A "Year in Review" column, from my friend David Collum.

Piling up Risk Like Tetris

Odious debt.  He said "odious."

Paying For College?

To paraphrase the dad of one of the YYM's classmates, Jessica.

"It's a debt trap, it's a suicide rap, we've got to stay debt-free until tomorrow, 'cause baby we're too young to borrow!"

A solution?

A statement of the problem.  I'm not sure that "college is expensive, so I was forced to film porn" is a tight argument, but the article is quite persuasive.

On the other hand, as Peter Lange has pointed out, tuition does not really cover all the "costs," either.

The Can Kicks Back!

Swindled.  The "millenials" should be pissed.

Wow! P-Kroog Kicks It OLD School!

You have to give P-Kroog credit.  He is a traditionalist, resurrecting the ridiculous 1950s "debt is just money we owe to ourselves" line, arguing that the size of the debt can't possibly matter.

This piece--by my main man Burt Abrams--does a good job of responding on the merits of the immediate question.

But there is a deeper problem.  James Buchanan actually thoroughly debunked the "what me worry?" line a long time ago.  It's a settled question, and the debt is only a symptom of trouble.  LeBron explained why, quite clearly.  The problem may not be the deficit, per se, though that could eventually be trouble.  The problem is that there is a permanent disconnect between spending and revenue.  The fisc become a fishery, and we overfish common pool resources.

Ayn Rand Live?

It's as if Ayn Rand is writing history, more than 20 years after her death.  An email from Pelsmin:

Every now and then I hear someone say this entire presidency is aimed at destroying America. Personally, I think that’s extreme, and it’s really aimed at “moving us to our proper place in the world,” which is less dramatic but also directionally misguided.

But then I read this story in today’s WaPo, explaining how the Obama administration wants to encourage aggressive mortgage lending to low-credit/low income buyers. They are working to assure banks that they won’t be held responsible for failed mortgages as long as they conform to FHA guidelines, and that the government (taxpayers) will repay on defaults.

Under FHA guidelines “a borrower can get a home loan with a credit score as low as 500 or a down payment as small as 3.5 percent.” The DOJ is getting involved. The only difference I can find with 2008 is that back then the government was pushing home loans with nothing down to high-risk individuals, with an implicit backing of Fannie Mae, and now the government is pushing home loans with nothing down to high-risk individuals, with an explicit backing from FHA. I didn’t think Washington could stun me. But here we are, the ashes of the economy still warm, and they’re breaking out the matches and gasoline again. And is this possible: “since the financial crisis in 2008, the government has shaped most of the housing market, insuring between 80 percent and 90 percent of all new loans”? Do we again have banks operating under the moral hazard of making loans with government assurance of repayment? Also, what’s the logic of the statement “as young people move out of their parents’ homes and start their own households, they will be forced to rent rather than buy, meaning less construction and housing activity.” I guess this is somehow possible, but don’t they need to live somewhere besides the basement? So they will move into homes they own, or homes they rent. Construction will be needed for buildings occupied by owner or buildings occupied by renter. What am I missing? This is the most disturbing news story I have read in years. Really.

Phone call for Joe Tham.  You doubted me.  What do you say now?

Morons on Parade! Rolling Jubilee....

I wanted to wait a bit, before posting this.  It's obviously funny, but I wanted to see if it was INTENTIONALLY funny.  Apparently not.  These folks are as serious as debt.



With thanks to S. Wilson...  

Our Debt is Overhung

 And we are in deep Minsky Koo, it appears.

Public Debt Overhangs: Advanced-Economy Episodes since 1800

Carmen Reinhart, Vincent Reinhart & Kenneth Rogoff
Journal of Economic Perspectives, Summer 2012, Pages 69–86

Abstract:
We identify the major public debt overhang episodes in the advanced economies since the early 1800s, characterized by public debt to GDP levels exceeding 90 percent for at least five years. Consistent with Reinhart and Rogoff (2010) and most of the more recent research, we find that public debt overhang episodes are associated with lower growth than during other periods. The duration of the average debt overhang episode is perhaps its most striking feature. Among the 26 episodes we identify, 20 lasted more than a decade. The long duration belies the view that the correlation is caused mainly by debt buildups during business cycle recessions. The long duration also implies that the cumulative shortfall in output from debt overhang is potentially massive. These growth-reducing effects of high public debt are apparently not transmitted exclusively through high real interest rates, as in eleven of the episodes, interest rates are not materially higher.

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Debt, Deleveraging, and the Liquidity Trap: A Fisher-Minsky-Koo Approach

Gauti Eggertsson & Paul Krugman
Quarterly Journal of Economics, forthcoming

Abstract:
In this article we present a simple new Keynesian–style model of debt-driven slumps — that is, situations in which an overhang of debt on the part of some agents, who are forced into rapid deleveraging, is depressing aggregate demand. Making some agents debt-constrained is a surprisingly powerful assumption. Fisherian debt deflation, the possibility of a liquidity trap, the paradox of thrift and toil, a Keynesian-type multiplier, and a rationale for expansionary fiscal policy all emerge naturally from the model. We argue that this approach sheds considerable light both on current economic difficulties and on historical episodes, including Japan’s lost decade (now in its 18th year) and the Great Depression itself.

With thanks to Kevin Lewis

Why Are 10 year T bonds Attractive?

So, I have been wondering.  A lot.  With the rate on 10 yr T's down to 1.6%, how can that be anything other than a sucker's bet?

I mean, do you seriously believe that there will be inflation rates of <=1% for the next ten years? 

And that the US is going to find a way to solve the rate of increase of the deficit?  I don't mean the debt, I just mean the deficit.  No plan out there to solve the debt.  We see Spain facing rates of 7%+.  If US rates go back up to just 3% or 3.5%, anyone holding 1.6% T's is going to get hammered.

However, here is an answer.  At least it gives a rational explanation.

I have a question

Is it really true that the Fed is buying upwards of half of all new net Treasury issues? That is to say, are they "funding" over half of the deficit?

I ask rather than assert because the evidence that I've found is not exactly authoritative. You can check my sources here,  here,  and here.

If this is so, how can serious people be saying that we should expand borrowing to finance more stimulus because markets are telling us there is a huge demand for more safe assets like Treasuries?

The last link above claims the Fed's share of new issues is rising and consequently private markets' share is falling.

If that is true, is it accurate to say that the low interest rate on Treasuries reflects high demand and justifies further expansion of debt?

End game for Greece?

The "Troika" (EC, ECB, IMF) is laying the smackdown on poor little Greece with demands of immediate public sector wage cuts, the closing of unprofitable publicly owned firms, and other spending cuts in exchange for the next "bailout" payment.

Supposedly, the "technocratic" (meaning unelected and troika-friendly) Greek PM can't get political buy-in, and without the "bailout" Greece could default quite soon.

While all this may just be weird Euro-posturing, I think that Germany and the EU is trying to show Greece the door.

I guess they think that the ECB's massive lending to banks has put them in a position to survive the default, but if I were them I'd be a bit more worried about what will happen in Portugal if Greece defaults and what might happen in Spain or Italy when Portugal defaults.

I think that if the Troika wants to keep the Eurozone intact, they should be putting much fewer conditions and burdens on Greece, not adding them.

Your Euro Death Watch update

Spanish 10 year bond yields hit 6.975% today.

YIKES!

With no growth in sight for Greece Italy and Spain, high re-financing costs like this will make their debt ratios grow even if they manage to balance their budgets. Only large surpluses will stabilize those debt ratios if their cost of funds is 7% or above and economic growth is weak.

Balancing Budget Should Be Progressive Priority

Not all progs are goofy.

My man Don Taylor makes considerable sense, in fact, in his new book.

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My Dinner with Tyler

Sure, I'm riffing on the movie title.

But this was very, very interesting: dinner at Chutny, breaking the Ramadan fast, along with Chug R.

And, while I can't speak for Tyler formally, I can quote from MR: "There are plenty of good arguments that taxes have to go up." We agree on that, completely. At dinner, we came to the conclusion that the actual solutions we expect, which do NOT involve taxes going up in a sensible way, are probably worse than other solutions we can imagine.

If you are not going to cut spending, you have to raise taxes, because DAFT. And nobody wants to cut spending.

The point is this: the BEST case for something that is actually feasible looks like this:

1. Cut military spending
2. Solve Soc Sec with combination of means testing and delayed retirement age
3. Health care reform, with most preferable outcome being a Singapore-light system. Even a German style system, which preserves considerable competition, and controls cost.
4. Medicare reform. But #3 solves #4, automatically. We can't solve Medicare, we have to finesse it.
5. Mild inflation, 5%, for 5 years
6. Tax increases and cutting deductions

Do I favor the above policies? I do not, in an unconstrained world where I was dictator.* Do I think that the actual package of stupid s**t we are going to pick is substantially WORSE than the above package? I do.

*Non-doughy samosas for everyone!

GM Volt Fail

Wow. This is pretty devastating.

Look, we have a pretty good way of finding out whether a company is succeeding: stock price. Plenty of folks are saying that the auto bailout was a big success. Well, let's see! Now, sure, there is a recession. But is the recession WORSE than it was a year ago? So that can't be the reason that stock price is falling. The stock price is an evaluation of future profitability. And it does not look good...

And yet, we get idiots like this guy saying what a success it all was. There are plenty of other examples of half-wits saying auto bailout was a success because the administration SAYS it was a succes. (GAO says maybe not, but what do THEY know, bunch of sharp pencil idiots?)

Let's review:

1. MSM says bailout success, because Prez Obama SAYS it was a success, and why would he lie?
2. But no one wants to buy crappy cars now, just like they didn't want to buy crappy cars three years ago, or ten years ago
3. GM is tanking and is going to "need" another bailout.

We'd be MUCH better off directly paying all those workers their full salaries to stay home. The success of the auto bailout is a myth.

Uncle Sugar

Sometimes I say that great videos are the reason the interwebs were created.

This video is NOT the reason the interwebs were created. Still, it is so bad it is good.

Uncle Sugar!

Some Thoughts on the Deal

Some Duke profs professed about the deal.

No one is impressed. But they are unimpressed for different reasons than P-kroog and bed-wetters are unimpressed.

It's the final countdown!

The fake vote will take place on the fake deal at 6:45 EDT.

For some reason, made me think of this video, which is also pretty fake. Superhair Supergroup Europe lays down some synthetic music.

Waiting For It To Drop

This is a picture of our government, waiting for someone to do something.

Can I have a deal now? Now? How about NOW?

(UPDATE: Not yet! Repubs just blocked a vote in the Senate)

What? WHAT?

We are through the looking glass.

Fears of a default have caused the prices of US Treasury bills to skyrocket.

No, wait, you are not paying attention, look at that again: P*R*I*C*E*S*. Not yields. If prices go way up, yields go way down (though not below zero, really).

So, the market is still predicting zero chance of a default on t-bonds. All the market is predicting is that there will be a shortage of new t-bonds after we hit the debt ceiling. The anticipated shortage is driving prices up.

If we expected a default, or inflation there would be a sharply rising term structure in t-bonds. But if anything the terms structure is falling and getting flatter.

Check this out:

What kind of world do we live in? Nobody in the financial world is worried that the US will not pay its t-bonds. They are only worried that, if we hit the debt ceiling, there won't be enough new debt manufactured by our government to meet demand. Debt is our chief export, the only thing that balances our trade balance with China.

Professional wrestling, by comparison, has some elements of realism. NO ONE BELIEVES DEFAULT IS POSSIBLE.

(nod to @tylercowen , who tweeted the link)

The Takeaway

Got to be on The Takeaway this morning.

Are new jobs numbers good news? Not so fast, there, Dusty!